Professional Documents
Culture Documents
Solman of Cost Accounting
Solman of Cost Accounting
Solman of Cost Accounting
MAS by Cabrera
Chapter 1:
1. D 11. D 21. B 31. D 41. A 51. B
2. D 12. D 22. B 32. C 42. C 52. B
3. D 13. D 23. A 33. D 43. D 53. A
4. B 14. A 24. A 34. B 44. B 54. C
5. D 15. A 25. B 35. D 45. C 55. D
6. A 16. A 26. C 36. B 46. B 56. C
7. B 17. D 27. B 37. C 47. A 57. C
8. D 18. A 28. D 38. B 48. B 58. C
9. D 19. D 29. B 39. A 49. C 59. A
10. A 20. D 30. C 40. A 50. D 60. B
Chapter 2: Chapter 3:
11. B 21. A 31. B 1. D 11. B 21. B 31. B
12. A 22. B 32. C 2. D 12. C 22. C 32. D
13. D 23. C 33. C 3. D 13. D 23. A 33. D
14. A 24. D 4. B 14. A 24. B 34. D
15. D 25. A 5. A 15. D 25. A 35. C
16. A 26. A 6. B 16. A 26. D 36. A
17. C 27. B 7. D 17. A 27. B 37. A
18. B 28. C 8. C 18. B 28. B 38. C
19. D 29. B 9. B 19. C 29. D
20. B 30. A 10. C 20. C 30. C
Chapter 4:
1. D 11. A, C, D
2. A 12. B*
3. A 13. D
4. B
5. D
6. C
7. C
8. A
9. D
10. C
Chapter 5:
1. A 11. C 21. B 31. C 41. C
2. C 12. A 22. D 32. D
3. D 13. C 23. A 33. C
4. B 14. B 24. C 34. A
5. A 15. D 25. A 35. A
6. D 16. B 26. C 36. C
7. C 17. A 27. D 37. A
8. D 18. C 28. A 38. A
9. A 19. A 29. D 39. C
10. B 20. C 30. A 40. C
Chapter 6:
1. D 4. D 7. C 10. B
2. C 5. B 8. B 11. A
3. D 6. D 9. A 12. D
Chapter 7:
1. B 5. A 9. A 13. A 17. A 21. C
2. B 6. B 10. A 14. D 18. B 22. A
3. C 7. B 11. D* 15. C 19. C 23. B
4. D 8. B 12. C 16. A 20. D
* Controllable costs are those costs that can be influenced by a specified manager within a given time period.
** The answer assumes absorption costing method is used.
†
Supporting Computations
14. P60 + P10 + P18 + P4 = P92 16. P60+P10+P18+P32=P120
15. P32 + P16 = P48 17. P4 + P16 = P20
Chapter 9:
1. A 11. C* 21. C 31. D 41. B
2. D 12. C* 22. D 32. B 42. D
3. B 13. C 23. C 33. A 43. C
4. A 14. A 24. A 34. B
5. B 15. D 25. D 35. A
6. B 16. C 26. B 36. D
7. C 17. D 27. D 37. B
8. D 18. B 28. B 38. C
9. C 19. C 29. A 39. B
10. A 20. C 30. D 40. D
* Supporting Computations:
11. (10,000 x 2) – (P3,000 x 2) – P5,000 = P9,000
12. [(P20 + P3 + P6) x 2,000 units] + (P10 x 1,000 units) = P68,000
Chapter 10:
1. D 6. D 11. A 16. A
2. D 7. A 12. D 17. D
3. D 8. C 13. B 18. A
4. C 9. C 14. D 19. C
5. D 10. B 15. C 20. D
Chapter 13:
1. B 6. B 11. B 16. D 21. A 26. A
2. B 7. D 12. A 17. D 22. D 27. B
3. B 8. B 13. A 18. D 23. C 28. C
4. C 9. A 14. C 19. C 24. B 29. B
5. C 10. D 15. D 20. D 25. C 30. A
Payments of Purchases
60% - month of purchase P874,368 P 952,776
40% - following month 582,912
Total (18) P1,535,688
(19) February
Cash
Gross Discount Net
Current month’s sales (with
discount) 35% P595,000 P11,900 P583,100
Current month’s sales (without
discount) 15% 255,000 0 255,000
Previous month’s sales (with
discount) 4.5% 67,500 1,350 66,150
Previous month’s sales (without
discount) 40.5% 607,500 607,500
P1,525,000 P13,250 P1,511,750
(25)Accounts Payable on February 28, 2005 will be the unpaid purchases in February - (75% x P120,000) = P90,000.
Questions 26 to 29:
Schedule I
Chapter 16:
1. C 11. B 21. A 31. A 41. B
2. C 12. A 22. C 32. B 42. C
3. A 13. B 23. C 33. B 43. D
4. B 14. C 24. C 34. D 44. A
5. A 15. A 25. C 35. B 45. B
6. B 16. D 26. D 36. B
7. C 17. D 27. E 37. C
8. C 18. A 28. B 38. D
9. B 19. D 29. B 39. D
10. B 20. B 30. A 40. A
Chapter 17:
6. A 6. C 31. B 41. B 46. B
7. A 7. B 32. D 42. C 47. D
8. B 8. D 33. C 43. D 48. B
9. B 9. A 34. B 44. D 49. B
10. B 10. D 35. A 45. A 50. D
Chapter 18:
1. C 11. D 21. D 31. C
2. B 12. C 22. C 32. D
3. D 13. A 23. C 33. A
4. B 14. A 24. D 34. C
5. D 15. A 25. D 35. D
6. C 16. C 26. B 36. C
7. A 17. C 27. D 37. D
8. A 18. D 28. E 38. D
9. A 19. C 29. B
10. C 20. D 30. A
Chapter 19:
1. C 11. D 21. D 31. A
2. C 12. A 22. A 32. D
3. B 13. D 23. D 33. C
4. B 14. A 24. E 34. A
5. A 15. D 25. B 35. C
6. B 16. C 26. D
7. C 17. A 27. D
8. B 18. C 28. C
9. A 19. B 29. A
10. B 20. C 30. A
20. R S T
Sales (10,000 x P20) P200,000 P200,000 P200,000
Less: Variable costs
R (P12 x 10,000) 120,000
S (P 8 x 10,000) 80,000
T (P 4 x 10,000) 40,000
Contribution margin P 80,000 P120,000 P160,000
21. R S T
Sales (P16 x 15,000) P240,000 P240,000 P240,000
Less: Variable costs
R (P12 x 15,000) 180,000
S (P 8 x 15,000) 120,000
T (P 4 x 15,000) 60,000
Contribution margin P 60,000 P120,000 P180,000
Less: Fixed costs 40,000 80,000 120,000
Operating income P 20,000 P 40,000 P 60,000
22. Old operating income:
Contribution margin P80,000
Less: Fixed cost 40,000
P40,000
New operating income 20,000
Difference - decrease P20,000
Chapter 20:
1. D 11. D 21. C 31. D
2. C 12. D 22. B 32. C
3. B 13. D 23. C 33. C
4. B 14. C 24. D 34. D
5. A 15. C 25. C 35. D
6. C 16. D 26. C 36. B
7. D 17. D 27. D 37. B
8. B 18. B 28. B 38. B
9. B 19. A 29. D 39. D
10. A 20. A 30. A 40. B
Chapter 23:
6. D 11. C
7. D 12. D
8. C 13. C
9. A 14. D
10. A 15. A
Chapter 24:
1. A 11. B 21. C 31. A
2. B 12. D 22. D 32. A
3. C 13. C 23. C 33. B
4. C 14. A 24. A 34. A
5. D 15. C 25. C 35. C
6. B 16. C 26. D 36. B
7. A 17. A 27. A 37. D
8. C 18. C 28. C
9. B 19. B 29. D
10. A 20. A 30. D
Chapter 25:
1. A 11. A 21. A
2. C 12. B 22. D
3. B 13. A 23. C
4. D 14. B 24. D
5. A 15. C
6. C 16. D
7. C 17. B
8. B 18. C
9. C 19. A
10. D 20. D
Supporting Computations:
Operational partial productivity
2005 2006
Input Partial Input Partial
Resource Productivit Resource Productivit
Output Used y Output Used y
X-45 60,000 75,000 = 0.8 64,000 89,600 = 0.7143
Direct
labor 60,000 10,000 = 6.0 64,000 10,847 = 5.9002
Direct
labor 60,000 300,000 = 0.2 64,000 P347,104 = 0.1844
Total productivity in units
2005 2006
(a) Total units manufactured 60,000 64,000
(b) Total variable manufacturing costs
incurred P840,000 P956,384
(c) Total productivity (a) (b) 0.071429 (5) 0.066919
(d) Decrease in productivity 0.071429 – 0.066919 = 0.00451 (6)
Market Share
(14)
Product A Product B Total
Actual units sold 35,000 65,000
Budgets sales unit – 30,000 – 60,000
Differences in sales units 5,000 5,000
Budgeted contribution margin per
unit x P4.00 x P10.00
Sales volume contribution margin
variance P20,000 F P50,000 F P70,000 F
Sales mixes:
Budgeted Actual
Unit % Unit %
Product A 30,000 1/3 35,000 35
Product B 60,000 2/3 65,000 65
TOTAL 90,000 100 100,000 100
CHAPTER 1
I. Questions
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Chapter 1 Management Accounting: An Overview
4. Yes. Planning is really much more vital than control; that is, superior
control is fruitless if faulty plans are being implemented. However,
planning and control are so intertwined that it seems artificial to draw
rigid lines of separation between them.
5. Yes. The controller has line authority over the personnel in his own
department but is a staff executive with respect to the other departments.
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Management Accounting: An Overview Chapter 1
8. Bettina Company
President
Controller Treasurer
Assistant Assistant
Controller Treasurer
11. Three guidelines that help management accountants increase their value
to managers are (a) employ a cost-benefit approach, (b) recognize
behavioral as well as technical considerations, and (c) identify different
costs for different purposes.
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Chapter 1 Management Accounting: An Overview
14. By reporting and interpreting relevant data, the controller exerts a force
or influence that impels management toward making better-informed
decisions.
15.
Financial Accounting
Audience: External: shareholders, creditors, tax
authorities
Purpose: Report on past performance to external
parties; basis of contracts with owners and
lenders
Timeliness: Delayed; historical
Restrictions: Regulated; rules driven by generally accepted
accounting principles and government
authorities
Type of Information: Financial measurements only
Nature of Information: Objective, auditable, reliable, consistent,
precise
Scope: Highly aggregate; report on entire
organization
Managerial Accounting
Audience: Internal: Workers, managers, executives
Purpose: Inform internal decisions made by employees
and managers; feedback and control on
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Management Accounting: An Overview Chapter 1
operating performance
Timeliness: Current, future oriented
Restrictions: No regulations; systems and information
determined by management to meet strategic
and operational needs
Type of Information: Financial, plus operational and physical
measurements on processes, technologies,
suppliers customers, and competitors
Nature of Information: More subjective and judgmental; valid,
relevant, accurate
Scope: Disaggregate; inform local decisions and
actions
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Chapter 1 Management Accounting: An Overview
II. Exercises
Exercise 1
Exercise 2
a. (4) Marketing
b. (3) Production
c. (6) Customer service
d. (5) Distribution
Exercise 3
a. (4) Marketing
b. (3) Production
c. (5) Distribution
d. (4) Marketing
e. (5) Distribution
f. (3) Production
g. (1) Research and development
h. (2) Design
III. Problems
Because the accountant’s duties are often not sharply defined, some of these
answers might be challenged:
1. Scorekeeping
2. Attention directing
3. Scorekeeping
4. Problem solving
5. Attention directing
6. Attention directing
7. Problem solving
1-6
Management Accounting: An Overview Chapter 1
1. Inputs: b, g, i, m
2. Processes: a, d, f, j
3. Outputs: e, k, n
4. System objectives: c, h, l
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Chapter 1 Management Accounting: An Overview
Jamie Reyes is staff. She is in a support role – she prepares reports and
helps explain and interpret them. Her role is to help the line managers more
effectively carry out their responsibilities.
Requirement 1
The possible motivations for the snack foods division wanting to play end-
of-year games include:
(a) Management incentives. Yummy Foods may have a division bonus
scheme based on one-year reported division earnings. Efforts to front-
end revenue into the current year or transfer costs into the next year can
increase this bonus.
(b) Promotion opportunities and job security. Top management of Yummy
Foods likely will view those division managers that deliver high reported
earnings growth rates as being the best prospects for promotion.
Division managers who deliver “unwelcome surprises” may be viewed
as less capable.
(c) Retain division autonomy. If top management of Yummy Foods adopts
a “management by exception” approach, divisions that report sharp
reductions in their earnings growth rates may attract a sizable increase in
top management supervision.
Requirement 2
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Management Accounting: An Overview Chapter 1
The other “end-of-year games” occur in many organizations and may fall
into the “gray” to “acceptable” area. However, much depends on the
circumstances surrounding each one:
(a) If the independent contractor does not do maintenance work in
December, there is no transaction regarding maintenance to record. The
responsibility for ensuring that packaging equipment is well maintained
is that of the plant manager. The division controller probably can do
little more than observe the absence of a December maintenance charge.
(d) In many organizations, sales are heavily concentrated in the final weeks
of the fiscal year-end. If the double bonus is approved by the division
marketing manager, the division controller can do little more than
observe the extra bonus paid in December.
(e) If TV spots are reduced in December, the advertising cost in December
will be reduced. There is no record falsification here.
(g) Much depends on the means of “persuading” carriers to accept the
merchandise. For example, if an under-the-table payment is involved, it
is clearly unethical. If, however, the carrier receives no extra
consideration and willingly agrees to accept the assignment, the
transaction appears ethical.
Each of the (a), (d), (e) and (g) “end-of-year games” may well disadvantage
Yummy Foods in the long run. For example, lack of routine maintenance
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Chapter 1 Management Accounting: An Overview
Requirement 3
If Tan believes that Ryan wants her to engage in unethical behavior, she
should first directly raise her concerns with Ryan. If Ryan is unwilling to
change his request, Tan should discuss her concerns with the Corporate
Controller of Yummy Foods. Tan also may well ask for a transfer from the
snack foods division if she perceives Ryan is unwilling to listen to pressure
brought by the Corporate Controller, CFO, or even President of Yummy
Foods. In the extreme, she may want to resign if the corporate culture of
Yummy Foods is to reward division managers who play “end-of-year games”
that Tan views as unethical and possibly illegal.
Problem 6
James Torres has come up with a scheme that involves a combination of data
falsification and smoothing! Not only has he made up the revenue numbers,
but also he has had the gall to defer some of them to the next period.
Making up such numbers is clearly illegal. Smoothing, in this example is
also illegal because the numbers are fictitious.
Problem 7
Clearly the vice-president will lose his or her job if you turn him or her in.
Given that this is a major violation of the code of ethics and a violation
patent law, the vice-president could go to jail. Your best course of action is
to check your information and if the vice-president is definitely involved, go
immediately to the VP’s superior (who is probably a senior VP or the
company president). The organization’s attorneys will take over from there.
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Management Accounting: An Overview Chapter 1
Problem 8
One option is to do nothing and ignore what you saw, however, this may
violate your own code of ethics and your ethical responsibilities under the
organization’s code of ethics. Given that you want to do something, it is
probably best to start by talking to employees in your organization whose job
it is to deal with ethical issues. If no such employees exist or are available,
you might start by using a decision model. This model incorporated the
following steps:
1. Determine the Facts – What, Who, Where, How
2. Define the Ethical Issue
3. Identify Major Principles, Rule, Values
4. Specify the Alternatives.
5. Compare Values and Alternatives, See if Clear Decision
6. Assess the Consequences.
7. Make Your Decision.
IV. Cases
Requirement (a)
Other forward looking information desired in addition to the income
statement information are
1. Disclosure of the components of financial performance, i.e., nature
and source of revenues, various activities, transactions, and other
relevant events affecting the company.
2. Nature and function of the components of income and expenses
Requirement (b)
No. GAAP does not allow capitalization of employee training and
advertising costs even if management feels that they increase the value of the
company’s brand name. The reasons are uncertainty of the future benefits
that may be derived therefrom and difficulty and reliability of their
measurement.
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Chapter 1 Management Accounting: An Overview
Requirement (c)
Detailed information that managers would likely request are analysis of the
significant increases in
1. Sales
2. Cost of sales
3. Payroll
4. Stock and option based compensation
5. Advertising and promotion.
Requirement (d)
Nonmonetary measures:
1. Change in number and profile of customers
2. Share in the market
3. Who, what and how many are the competitors
4. Product lines offered by the entity vs. Product lines of competitors
5. Sales promotion and advertising activities
Requirement (e)
1. Competitors
2. Employees
3. Prospective creditors
Requirement (a)
Increase in sales to new customers to sales
Too much emphasis on this ratio may lead the sales manager to spend more
time developing business with new customers and disregard the needs of
existing customers. It is therefore possible to lose the business of several
key accounts.
Requirement (b)
Decrease in cost of goods sold to sales
This performance measure could create the following problems:
1. Purchasing goods with poor quality at lower cost and selling them
for the same price.
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Management Accounting: An Overview Chapter 1
Requirement (c)
Decrease in selling and administrative expense to sales
Cost-cutting is generally advisable for as long as the quality of goods and
services are not compromised. Likewise, certain cost-saving measures could
demotivate sales people and other employees and could lead to counter-
productive activities.
1-13
Chapter 1 Management Accounting: An Overview
if you can’t trust the cashiers to give honest change, can you trust the cooks
to take the time to follow health precautions such as washing their hands? If
you can’t trust anyone at the restaurant would you even want to eat out?
Generally, when we buy goods and services in the free market, we assume
we are buying from people who have a certain level of ethical standards. If
we could not trust people to maintain those standards, we would be reluctant
to buy. The net result of widespread dishonesty would be a shrunken
economy with a lower growth rate and fewer goods and services for sale at a
lower overall level of quality.
Requirement 1
Failure to report the obsolete nature of the inventory would violate the
Standards of Ethical Conduct as follows:
Competence
Perform duties in accordance with relevant technical standards.
Prepare complete reports using reliable information.
By failing to write down the value of the obsolete inventory, Perez would not
be preparing a complete report using reliable information. In addition,
generally accepted accounting principles (GAAP) require the write-down of
obsolete inventory.
Integrity
Avoid conflicts of interest.
Refrain from activities that prejudice the ability to perform duties
ethically.
Refrain from subverting the legitimate goals of the organization.
Refrain from discrediting the profession.
Members of the management team, of which Perez is a part, are responsible
for both operations and recording the results of operations. Since the team
will benefit from a bonus, increasing earnings by ignoring the obsolete
inventory is clearly a conflict of interest. Perez would also be concealing
unfavorable information and subverting the goals of the organization.
Furthermore, such behavior is a discredit to the profession.
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Management Accounting: An Overview Chapter 1
Objectivity
Communicate information fairly and objectively.
Disclose all relevant information.
Hiding the obsolete inventory impairs the objectivity and relevance of
financial statements.
Requirement 2
As discussed above, the ethical course of action would be for Perez to insist
on writing down the obsolete inventory. This would not, however, be an
easy thing to do. Apart from adversely affecting her own compensation, the
ethical action may anger her colleagues and make her very unpopular.
Taking the ethical action would require considerable courage and self-
assurance.
Requirement 1
See the organization chart on page 17.
Requirement 2
Line positions would include the university president, academic vice-
president, the deans of the four colleges, and the dean of the law school. In
addition, the department heads (as well as the faculty) would be in line
positions. The reason is that their positions are directly related to the basic
purpose of the university, which is education. (Line positions are shaded on
the organization chart.)
All other positions on the organization chart are staff positions. The reason
is that these positions are indirectly related to the educational process, and
exist only to provide service or support to the line positions.
Requirement 3
All positions would have need for accounting information of some type. For
example, the manager of central purchasing would need to know the level of
current inventories and budgeted allowances in various areas before doing
any purchasing; the vice president for admissions and records would need to
know the status of scholarship funds as students are admitted to the
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Chapter 1 Management Accounting: An Overview
university; the dean of the business college would need to know his/her
budget allowances in various areas, as well as information on cost per
student credit hour; and so forth.
Requirement 1
No, Santos did not act in an ethical manner. In complying with the
president’s instructions to omit liabilities from the company’s financial
statements he was in direct violation of the IMA’s Standards of Ethical
Conduct for Management Accountants. He violated both the “Integrity” and
“Objectivity” guidelines on this code of ethical conduct. The fact that the
president ordered the omission of the liabilities is immaterial.
Requirement 2
No, Santos’ actions can’t be justified. In dealing with similar situations, the
Securities and Exchange Commission (SEC) has consistently ruled that
“…corporate officers…cannot escape culpability by asserting that they acted
as ‘good soldiers’ and cannot rely upon the fact that the violative conduct
may have been condoned or ordered by their corporate superiors.” (Quoted
from: Gerald H. Lander, Michael T. Cronin, and Alan Reinstein, “In
Defense of the Management Accountant,” Management Accounting, May,
1990, p. 55) Thus, Santos not only acted unethically, but he could be held
legally liable if insolvency occurs and litigation is brought against the
company by creditors or others. It is important that students understand this
point early in the course, since it is widely assumed that “good soldiers” are
justified by the fact that they are just following orders. In the case at hand,
Santos should have resigned rather than become a party to the fraudulent
misrepresentation of the company’s financial statements.
1-16
Case 6
Requirement 1
President
Vice
Vice Vice Vice
Academic Vice President,
President, President, President,
President Financial
Auxiliary Admissions & Physical
Services
Services Records Plant
(Controller)
Dean,
Dean, Business Dean, Dean, Dean,
Engineering &
Humanities Fine Arts Law School
Quantitative
1-17
Chapter 1 Management Accounting: An Overview
Requirement 1
Andres Romero has an ethical responsibility to take some action in the
matter of PhilChem, Inc. and the dumping of toxic wastes. The Standards of
Ethical Conduct for Management Accountants specifies that management
accountants should not condone the commission of acts by their organization
that violate the standards of ethical conduct. The specific standards that
apply are as follows.
• Competence. Management accountants have a responsibility to
perform their professional duties in accordance with relevant laws
and regulations.
• Confidentiality. Management accountants must refrain from
disclosing confidential information unless legally obligated to do so.
However, Andres Romero may have a legal responsibility to take
some action.
• Integrity. Management accountants have a responsibility to:
- refrain from either actively or passively subverting the
attainment of the organization’s legitimate and ethical
objectives.
- communicate favorable as well as unfavorable information and
professional judgments or opinions.
• Objectivity. Management accountants must fully disclose all
relevant information that could reasonably be expected to influence
an intended user’s understanding of the reports, comments, and
recommendations.
Requirement 2
The Standards of Ethical Conduct for Management Accountants indicates
that the first alternative being considered by Andres Romero, seeking the
advice of his boss, is appropriate. To resolve an ethical conflict, the first
step is to discuss the problem with the immediate superior, unless it appears
that this individual is involved in the conflict. In this case, it does not
appear that Romero’s boss is involved.
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Management Accounting: An Overview Chapter 1
Requirement 3
Andres Romero should follow the established policies of the organization
bearing on the resolution of such conflict. If these policies do not resolve
the ethical conflict, Romero should report the problem to successively
higher levels of management up to the Board of Directors until it is
satisfactorily resolved. There is no requirement for Romero to inform his
immediate superior of this action because the superior is involved in the
conflict. If the conflict is not resolved after exhausting all courses of
internal review, Romero may have no other recourse than to resign from the
organization and submit an informative memorandum to an appropriate
member of the organization.
(CMA Unofficial Solution, adapted)
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MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 2
MANAGEMENT ACCOUNTING
AND THE BUSINESS ENVIRONMENT
I. Questions
2-1
Chapter 2 Management Accounting and the Business Environment
7. If customers who provide a company with the most profits are attracted,
satisfied, and retained, profits will increase as a result.
Quality: Customers are expecting higher levels of quality and are less
tolerant of low quality than in the past.
Time: Time has many components: the time taken to develop and
bring new products to market; the speed at which an
organization responds to customer requests; and the
reliability with which promised delivery dates are met.
Organizations are under pressure to complete activities
faster and to meet promised delivery dates more reliably
than in the past in order to increase customer satisfaction.
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Management Accounting and the Business Environment Chapter 2
11. Four themes for managers to attain success are customer focus, value-
chain and supply-chain analysis, key success factors, and continuous
improvement and benchmarking.
13. This phrase means that people will direct their attention to work
primarily on those tasks that management monitors and measures.
Employees may not pay as much attention (or no attention) to tasks that
are not measured. Often management will reward people based on how
well they perform relative to a specific measure. As an example, in a
manufacturing organization, if people are measured and rewarded based
on the number of outputs per hour, regardless of quality, employees will
focus their attention on producing as many units of output as possible. A
negative consequence is that the quality of output may suffer.
14. Some of these new measures are quality, speed to market, cycle time,
flexibility, complexity and productivity.
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Chapter 2 Management Accounting and the Business Environment
16.
Stakeholders Contribution Requirements
Employees Effort, skills, Rewards, interesting
information jobs, economic
security, proper
treatment
Partners Goods, services, Financial rewards
information commensurate with
the risk taken
Owners Capital Financial rewards
Community Allows the Conformance to laws,
organization to good corporate
operate and does not citizenship and,
oppose its operation perhaps, leadership
2-4
Management Accounting and the Business Environment Chapter 2
f. Nonvalue-added
g. Value-added
h. Value-added
i. Nonvalue-added
j. Value-added
19. Just-in-time means making a good or service only when the customer,
internal or external, requires it. Just-in-time requires a product layout
with a continuous flow (no delays) once production starts. It means that
setup costs must be reduced substantially to eliminate the need to
produce in batches, and it means that processing systems must be
reliable. Just-in-time production is based on the elimination of all
nonvalue-added activities to reduce cost and time. It is an approach to
improvement that is continuous and involves employee empowerment
and involvement.
1. B 11. A 21. B
2. A 12. B 22. C
3. D 13. C 23. C
4. A 14. D
5. D 15. A
6. A 16. A
7. C 17. B
8. B 18. C
9. D 19. B
10. B 20. A
2-5
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 3
I. Questions
3-1
Chapter 3 Understanding Financial Statements
5. The cost principle indicates that many assets are included in the
financial records, and therefore, in the statement of financial position, at
their original cost to the reporting enterprise. This principle affects
accounting for assets in several ways, one of which is that the amount of
most assets is not adjusted periodically for changes in the market value
of the assets. Instead, cost is retained as the basic method of accounting,
regardless of changes in the market value of those assets.
3-2
Understanding Financial Statements Chapter 3
10. A strong statement of cash flows is one that shows significant amounts
of cash generated from operating activities. This means that the
enterprise is generating cash from its ongoing activities and is not
required to rely on continuous debt and equity financing, or the sale of
its major assets.
1.
1. d 3. a 5. e 7. f 9. c
2. g 4. j 6. h 8. b 10. i
3-3
Chapter 3 Understanding Financial Statements
2.
1. d 3. i 5. m 7. h 9. f 11. b 13. e
2. a 4. g 6. c 8. n 10. k 12. j 14. l
3.
a. F c. F e. I g. F I. I k. F
b. I d. I f. F h. F j. F l. I
III. Problems
Requirement (a)
SM Farms
Balance Sheet
September 30, 2005
* Total assets, P961,470, minus total liabilities, P618,050, less share capital,
P250,000.
Requirement (b)
The loss of an asset, Barns and Sheds, from a typhoon would cause a
decrease in total assets. When total assets are decreased, the balance sheet
total of liabilities and equity must also decrease. Since there is no change in
liabilities as a result of the destruction of an asset, the decrease on the right-
hand side of the balance sheet must be in the retained earnings account. The
amount of the decrease in Barns and Sheds, in the equity, and in both
balance sheet totals, is P23,800.
3-4
Understanding Financial Statements Chapter 3
Requirement (a)
The Tasty Bakery
Balance Sheet
August 1, 2005
Requirement (b)
The Tasty Bakery
Balance Sheet
August 3, 2005
3-5
Chapter 3 Understanding Financial Statements
Requirement (c)
The Tasty Bakery is in a stronger financial position on August 3 than it was
on August 1.
On August 1, the highly liquid assets (cash and accounts receivable) total
only P18,200, but the company has P25,100 in debts due in the near future
(accounts payable plus salaries payable).
On August 3, after additional infusion of cash from the sale of stock, the
liquid assets total P25,750, and debts due in the near future amount to
P16,100.
3-6
Understanding Financial Statements Chapter 3
Requirement (a)
The First Malt Shop
Balance Sheet
September 30, 2005
* Total assets, P132,590, less equity, P54,090, less accounts payable, P8,500, equals
notes payable.
Requirement (b)
The First Malt Shop
Balance Sheet
October 6, 2005
3-7
Chapter 3 Understanding Financial Statements
Revenues P 5,500
Expenses (4,000)
Net income P 1,500
Requirement (c)
The First Malt Shop is in a stronger financial position on October 6 than on
September 30. On September 30, the company had highly liquid assets (cash
and accounts receivable) of P8,650, which barely exceeded the P8,500 in
liabilities (accounts payable) due in the near future. On October 6, after the
additional investment of cash by shareholders, the company’s cash alone
exceeded its short-term obligations.
3-8
Understanding Financial Statements Chapter 3
Requirement (1)
Fil-Cinema Scripts
Balance Sheet
November 30, 2005
Requirement (2)
(1) The cash in Cruz’s personal savings account is not an asset of the
business entity Fil-Cinema Scripts and should not appear in the balance
sheet of the business. The money on deposit in the business bank
account (P3,400) and in the company safe (P540) constitute cash owned
by the business. Thus, the cash owned by the business at November 30
totals P3,940.
(2) The years-old IOU does not qualify as a business asset for two reasons.
First, it does not belong to the business entity. Second, it appears to be
uncollectible. A receivable that cannot be collected is not viewed as an
asset, as it represents no future economic benefit.
(3) The total amount to be included in “Office furniture” for the rug is
P9,400, the total cost, regardless of whether this amount was paid in
cash. Consequently, “Office furniture” should be increased by P6,500.
The P6,500 liability arising from the purchase of the rug came into
existence prior to the balance sheet date and must be added to the “Notes
payable” amount.
3-9
Chapter 3 Understanding Financial Statements
(5) The P22,400 described as “Other assets” is not an asset, because there is
no valid legal claim or any reasonable expectation of recovering the
income taxes paid. Also, the payment of income taxes by Cruz was not a
business transaction by Fil-Cinema Scripts. If a refund were obtained
from the government, it would come to Cruz personally, not to the
business entity.
(6) The proper valuation for the land is its historical cost of P39,000, the
amount established by the transaction in which the land was purchased.
Although the land may have a current fair value in excess of its cost, the
offer by the friend to buy the land if Cruz would move the building
appears to be mere conversation rather than solid, verifiable evidence of
the fair value of the land. The “cost principle,” although less than
perfect, produces far more reliable financial statements than would result
if owners could “pull figures out of the air” in recording asset values.
(7) The accounts payable should be limited to the debts of the business,
P32,700, and should not include Cruz’s personal liabilities.
3-10
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 4
I. Questions
4-1
Chapter 4 Financial Statements Analysis - I
4-2
Financial Statements Analysis - I Chapter 4
Measuring the change in sales over a period of several years would call
for use of trend percentages. The sales in the base year are assigned a
weight of 100%. The percentage for each later year is computed by
dividing that year’s sales by the sales in the base year.
13. Expenses (including the cost of goods sold) have been increasing at an
even faster rate than net sales. Thus Premiere is apparently having
difficulty in effectively controlling its expenses.
4-3
Chapter 4 Financial Statements Analysis - I
III. Problems
Requirement (a)
Computation of percentage changes:
1. Net sales increased 10% (P200,000 increase P2,000,000 = 10%
increase).
2. Total expenses increased 11% (P198,000 increase P1,800,000 = 11%
increase).
4-4
Financial Statements Analysis - I Chapter 4
Requirement (b)
1. Total expenses grew faster than net sales. Net income cannot also have
grown faster than net sales, or the sum of the parts would exceed the size
of the whole.
2. Net income must represent a smaller percentage of net sales in 2006 than
it did in 2005. Again, the reason is that the expenses have grown at a
faster rate than net sales. Thus, total expenses represent a larger
percentage of total sales in 2006 than in 2005, and net income must
represent a smaller percentage.
Requirement 1
XYZ Corporation
Balance Sheet
As of December 31
Change
Peso %
2005 2006
Assets
Cash and equivalents 14,000 16,000 2,000 14.29%
Receivables 28,800 55,600 26,800 93.06%
Inventories 54,000 85,600 31,600 58.52%
Prepayments and others 4,800 7,400 2,600 54.17%
Total current assets 101,600 164,600 63,000 62.01%
Property, plant & equipment - net
of dep. 30,200 73,400 43,200 143.05%
Total assets 131,800 238,000 106,200 80.58%
4-5
Chapter 4 Financial Statements Analysis - I
Income Statement
Years ended December 31
(P thousands)
Change
Peso %
2005 2006
Net sales 266,400 424,000 157,600 59.16%
Cost of goods sold 191,400 314,600 123,200 64.37%
Gross profit 75,000 109,400 34,400 45.87%
Selling, general and administrative
expenses 35,500 58,400 22,900 64.51%
Income before income taxes 39,500 51,000 11,500 29.11%
Income taxes 12,300 16,400 4,100 33.33%
Net income 27,200 34,600 7,400 27.21%
Requirement 2
8. Net Selling,
Sales increased by 59.16% while General & increased by 64.51%
4-6
Financial Statements Analysis - I Chapter 4
Administrative
Expenses
Unfavorable
9. Net Net
increased by 59.16% while increased by 27.21%
Sales Income
Unfavorable
10. Net Total
increased by 27.21% while increased by 80.58%
Income Assets
Unfavorable
Requirement (1)
The trend percentages are:
Year 5 Year 4 Year 3 Year 2 Year 1
Sales 125.0 120.0 110.0 105.0 100.0
Requirement (2)
Sales: The sales are increasing at a steady rate, with a particularly
strong gain in Year 4.
Assets: Cash declined from Year 3 through Year 5. This may have
been due to the growth in both inventories and accounts
receivable. In particular, the accounts receivable grew far
faster than sales in Year 5. The decline in cash may reflect
delays in collecting receivables. This is a matter for
management to investigate further.
4-7
Chapter 4 Financial Statements Analysis - I
4-8
Financial Statements Analysis - I Chapter 4
1. D 11. A, C, D
2. A 12. B*
3. A 13. D
4. B
5. D
6. C
7. C
8. A
9. D
10. C
4-9
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 5
I. Questions
5-1
Chapter 5 Financial Statement Analysis –II
6. How a shareholder would feel would depend in large part on the stability
of the firm and its industry. If the firm is in an industry that experiences
wide fluctuations in earnings, then shareholders might be very pleased
that no interest-paying debt exists in the firm’s capital structure. In hard
times, interest payments might be very difficult to meet, or earnings
might be so poor that negative leverage would result.
7. No, the stock is not necessarily overpriced. Book value represents the
cumulative effects on the balance sheet of past activities evaluated using
historical prices. The market value of the stock reflects investors’
beliefs about the company’s future earning prospects. For most
companies market value exceeds book value because investors anticipate
future growth in earnings.
10. The current ratio would probably be highest during January, when both
current assets and current liabilities are at a minimum. During peak
operating periods, current liabilities generally include short-term
5-2
Financial Statement Analysis –II Chapter 5
11. A 2-to-1 current ratio might not be adequate for several reasons. First,
the composition of the current assets may be heavily weighted toward
slow-turning inventory, or the inventory may consist of large amounts of
obsolete goods. Second, the receivables may be large and of doubtful
collectibility, or the receivables may be turning very slowly due to poor
collection procedures.
12. Expenses (including the cost of goods sold) have been increasing at an
even faster rate than net sales. Thus Sunday is apparently having
difficulty in effectively controlling its expenses.
13. If the company’s earnings are very low, they may become almost
insignificant in relation to stock price. While this means that the p/e
ratio becomes very high, it does not necessarily mean that investors are
optimistic. In fact, they may be valuing the company at its liquidation
value rather than a value based upon expected future earnings.
5-3
Chapter 5 Financial Statement Analysis –II
16. The investor is calculating the rate of return by dividing the dividend by
the purchase price of the investment (P5 P50 = 10%). A more
meaningful figure for rate of return on investment is determined by
relating dividends to current market price, since the investor at the
present time is faced with the alternative of selling the stock for P100
and investing the proceeds elsewhere or keeping the investment. A
decision to retain the stock constitutes, in effect, a decision to continue
to invest P100 in it, at a return of 5%. It is true that in a historical sense
the investor is earning 10% on the original investment, but this is
interesting history rather than useful decision-making information.
17. A corporate net income of P1 million would be unreasonably low for a
large corporation, with, say, P100 million in sales, P50 million in assets,
and P40 million in equity. A return of only P1 million for a company of
this size would suggest that the owners could do much better by
investing in insured bank savings accounts or in government bonds
which would be virtually risk-free and would pay a higher return.
On the other hand, a profit of P1 million would be unreasonably high for
a corporation which had sales of only P5 million, assets of, say, P3
million, and equity of perhaps one-half million pesos. In other words,
the net income of a corporation must be judged in relation to the scale of
operations and the amount invested.
III. Problems
5-4
Financial Statement Analysis –II Chapter 5
The changes from 2005 to 2006 are all favorable. Sales increased and the
gross profit per peso of sales also increased. These two factors led to a
substantial increase in gross profit. Although operating expenses increased
in peso amount, the operating expenses per peso of sales decreased from 29
cents to 28 cents. The combination of these three favorable factors caused
net income to rise from 4 cents to 6 cents out of each peso of sales.
Requirement (a)
Current assets:
Cash P 47,600
Marketable securities 175,040
Accounts receivable 230,540
Inventory 179,600
Unexpired insurance 4,500
Total current assets P637,280
Current liabilities:
Notes payable P 70,000
Accounts payable 125,430
Salaries payable 7,570
Income taxes payable 14,600
Unearned revenue 10,000
Total current liabilities P227,600
Requirement (b)
5-5
Chapter 5 Financial Statement Analysis –II
Requirement 1
2006 2005
Sales ................................................................................................
100.0 % 100.0 %
Less cost of goods sold ................................................................
63.2 60.0
Gross margin................................................................36.8 40.0
Selling expenses................................................................ 18.0 17.5
Administrative expenses ................................................................
13.6 14.6
Total expenses................................................................ 31.6 32.1
Net operating income................................................................
5.2 7.9
Interest expense ................................................................ 1.4 1.0
Net income before taxes................................................................
3.8 % 6.9 %
Requirement 2
Requirement (a)
Ms. Freeze, Industry
Inc. Average
Sales (net) 100% 100%
Cost of goods sold 49 57
Gross profit on sales 51% 43%
5-6
Financial Statement Analysis –II Chapter 5
Operating expenses:
Selling 21% 16%
General and administrative 17 20
Total operating expenses 38% 36%
Operating income 13% 7%
Income taxes 6 3
Net income........................................ 7% 4%
Requirement (b)
Ms. Freeze’s operating results are significantly better than the average
performance within the industry. As a percentage of sales revenue, Ms.
Freeze’s operating income and net income after nearly twice the average for
the industry. As a percentage of total assets, Ms. Freeze’s profits amount to
an impressive 23% as compared to 14% for the industry.
The key to Ms. Freeze’s success seems to be its ability to earn a relatively
high rate of gross profit. Ms. Freeze’s exceptional gross profit rate (51%)
probably results from a combination of factors, such as an ability to
command a premium price for the company’s products and production
efficiencies which lead to lower manufacturing costs.
As a percentage of sales, Ms. Freeze’s selling expenses are five points higher
than the industry average (21% compared to 16%). However, these higher
expenses may explain Ms. Freeze’s ability to command a premium price for
its products. Since the company’s gross profit rate exceeds the industry
average by 8 percentage points, the higher-than-average selling costs may be
part of a successful marketing strategy. The company’s general and
administrative expenses are significantly lower than the industry average,
which indicates that Ms. Freeze’s management is able to control expenses
effectively.
Requirement 1
5-7
Chapter 5 Financial Statement Analysis –II
2006 2005
Current assets:
Cash................................................... 2.0% 5.1%
Accounts receivable, net ................... 15.0 10.1
Inventory ........................................... 30.1 15.2
Prepaid expenses ............................... 1.0 1.3
Total current assets ..................... 48.1 31.6
Plant and equipment ................................ 51.9 68.4
Total assets .............................................. 100.0% 100.0%
Liabilities:
Current liabilities............................... 25.1% 12.7%
Bonds payable, 12%.......................... 20.1 25.3
Total liabilities............................ 45.1 38.0
Equity:
Preference shares, 8%, P10 par ......... 15.0 19.0
Ordinary shares, P5 par ..................... 10.0 12.7
Retained earnings .............................. 29.8 30.4
Total equity................................. 54.9 62.0
Total liabilities and equity ....................... 100.0% 100.0%
Note: Columns do not total down in all cases due to rounding differences.
Requirement 2
The company’s cost of goods sold has increased from 60 percent of sales in
2005 to 65 percent of sales in 2006. This appears to be the major reason the
company’s profits showed so little increase between the two years. Some
benefits were realized from the company’s cost-cutting efforts, as evidenced
by the fact that operating expenses were only 26.3 percent of sales in 2006 as
compared to 30.4 percent in 2005. Unfortunately, this reduction in operating
5-8
Financial Statement Analysis –II Chapter 5
expenses was not enough to offset the increase in cost of goods sold. As a
result, the company’s net income declined from 5.6 percent of sales in 2005
to 5.3 percent of sales in 2006.
Requirement (a)
(Pesos in
Millions)
Current assets:
Cash P 74.8
Receivables 152.7
Merchandise inventories 1,191.8
Prepaid expenses 95.5
Total current assets P1,514.8
Quick assets:
Cash P 74.8
Receivables 152.7
Total quick assets P 227.5
Requirement (b)
5-9
Chapter 5 Financial Statement Analysis –II
Requirement (c)
Requirement (d)
Requirement (e)
Note to Instructor: Prior to the year in which the data for this problem was
collected, Alabang Supermarket had reported a negative retained earnings
balance in its balance sheet for several consecutive periods. The fact that
Alabang Supermarket has only recently removed the deficit from its
financial statements is also worrisome.
5-10
Financial Statement Analysis –II Chapter 5
Requirement (a)
Requirement (b)
5-11
Chapter 5 Financial Statement Analysis –II
Requirement (c)
(2) Long-term creditors also have little to worry about. Not only is the
company highly liquid, but creditors’ claims amount to only 23.1% of
total assets. If Bonbon Sweets’ were to go out of business and liquidate
its assets, it would have to raise only 23 cents from every peso of assets
for creditors to emerge intact.
Requirement 1
5-12
Financial Statement Analysis –II Chapter 5
Requirement 2
Cash + Marketable securities + Accounts receivable
Acid-test ratio =
Current liabilities
P80,000 + P0 + P460,000
Acid-test ratio = = 1.04 to 1 (rounded)
P520,000
Requirement 3
2. Current ratio:
Current assets P490,000
= = 2.45 to 1
Current liabilities P200,000
3. Acid-test ratio:
Quick assets P181,000
= = 0.91 to 1 (rounded)
Current liabilities P200,000
5-13
Chapter 5 Financial Statement Analysis –II
Sales P2,100,000
= = 14 times
Average accounts receivables P150,000
365 days
= 26.1 days (rounded)
14 times
5. Inventory turnover:
Cost of goods sold P1,260,000
= = 4.5 times
Average inventory P280,000
365 days
= 81.1 days to turn (rounded)
4.5 times
6. Debt-to-equity ratio:
Total liabilities P500,000
= = 0.63 to 1 (rounded)
Total equity P800,000
5-14
Financial Statement Analysis –II Chapter 5
4. Price-earnings ratio:
Market price per share P63.00
= = 12.0
Earnings per share P5.25
P105,000
=
½ (P725,000 + P800,000)
P105,000
= = 13.8% (rounded)
P762,500
5-15
Chapter 5 Financial Statement Analysis –II
3. Financial leverage was positive, since the rate of return to the ordinary
shareholders (13.8%) was greater than the rate of return on total assets
(10.5%). This positive leverage is traceable in part to the company’s
current liabilities, which may carry no interest cost, and to the bonds
payable, which have an after-tax interest cost of only 7%.
10% interest rate × (1 – 0.30) = 7% after-tax cost.
IV. Cases
Requirement 1
5-16
Financial Statement Analysis –II Chapter 5
Requirement 2
Liabilities:
Current liabilities ................................................................
27.5 % 18.2 %
Bonds payable, 12%................................ 18.8 22.7
Total liabilities................................................................
46.3 40.9
Equity:
Preference shares, P50 par, 8%................................ 5.0 6.1
Ordinary shares, P10 par ................................12.5 15.2
Retained earnings................................................................
36.3 37.9
Total equity................................................................
53.8 59.1
Total liabilities and equity................................100.0 % 100.0 %
5-17
Chapter 5 Financial Statement Analysis –II
Requirement 3
The following points can be made from the analytical work in parts (1) and
(2) above:
The company has improved its profit margin from last year. This is
attributable to an increase in gross margin, which is offset somewhat by an
increase in operating expenses. In both years the company’s net income as a
percentage of sales equals or exceeds the industry average of 4%.
Although the company’s working capital has increased, its current position
actually has deteriorated significantly since last year. Both the current ratio
and the acid-test ratio are well below the industry average, and both are
trending downward. (This shows the importance of not just looking at the
working capital in assessing the financial strength of a company.) Given the
present trend, it soon will be impossible for the company to pay its bills as
they come due.
The drain on the cash account seems to be a result mostly of a large buildup
in accounts receivable and inventory. This is evident both from the
common-size balance sheet and from the financial ratios. Notice that the
average age of the receivables has increased by 5 days since last year, and
5-18
Financial Statement Analysis –II Chapter 5
that it is now 9 days over the industry average. Many of the company’s
customers are not taking their discounts, since the average collection period
is 27 days and collection terms are 2/10, n/30. This suggests financial
weakness on the part of these customers, or sales to customers who are poor
credit risks. Perhaps the company has been too aggressive in expanding its
sales.
The inventory turned only 5 times this year as compared to over 6 times last
year. It takes three weeks longer for the company to turn its inventory than
the average for the industry (71 days as compared to 50 days for the
industry). This suggests that inventory stocks are higher than they need to
be.
In the authors’ opinion, the loan should be approved on the condition that
the company take immediate steps to get its accounts receivable and
inventory back under control. This would mean more rigorous checks of
creditworthiness before sales are made and perhaps paring out of slow
paying customers. It would also mean a sharp reduction of inventory levels
to a more manageable size. If these steps are taken, it appears that sufficient
funds could be generated to repay the loan in a reasonable period of time.
Requirement 1
5-19
Chapter 5 Financial Statement Analysis –II
Investors regard Metro Building Supply less favorably than other firms
in the industry. This is evidenced by the fact that they are willing to pay
only 7.3 times current earnings for a share of the company’s stock, as
compared to 9 times current earnings for the average of all stocks in the
industry. If investors were willing to pay 9 times current earnings for
Metro Building Supply’s stock, then it would be selling for about P55
per share (9 × P6.16), rather than for only P45 per share.
A market price in excess of book value does not mean that the price of a
stock is too high. Market value is an indication of investors’ perceptions
of future earnings and/or dividends, whereas book value is a result of
already completed transactions and is geared to the past.
Requirement 2
5-20
Financial Statement Analysis –II Chapter 5
Requirement 3
We would recommend keeping the stock. The stock’s downside risk seems
small, since it is selling for only 7.3 times current earnings as compared to 9
times earnings for the average firm in the industry. In addition, its earnings
are strong and trending upward, and its return on ordinary equity (16.6%) is
extremely good. Its return on total assets (10.4%) compares favorably with
that of the industry.
The risk, of course, is whether the company can get its cash problem under
control. Conceivably, the cash problem could worsen, leading to an
eventual reduction in profits through inability to operate, a reduction in
5-21
Chapter 5 Financial Statement Analysis –II
Requirement 1
This Year Last Year
a. Net income ................................................................
P 280,000 P 168,000
Add after-tax cost of interest:
P120,000 × (1 – 0.30) ................................ 84,000
P100,000 × (1 – 0.30) ................................ 70,000
Total (a)................................................................
P 364,000 P 238,000
c. Leverage is positive for this year, since the return on ordinary equity
(9.2%) is greater than the return on total assets (6.8%). For last year,
leverage is negative since the return on the ordinary equity (4.9%) is less
than the return on total assets (5.1%).
Requirement 2
5-22
Financial Statement Analysis –II Chapter 5
Notice from the data given in the problem that the average P/E ratio for
companies in Helix’s industry is 10. Since Helix Company presently has
a P/E ratio of only 7.8, investors appear to regard it less well than they
do other companies in the industry. That is, investors are willing to pay
only 7.8 times current earnings for a share of Helix Company’s stock, as
compared to 10 times current earnings for a share of stock for the
average company in the industry.
e. Equity................................................................
P3,200,000 P3,040,000
Less preference shares ................................ 600,000 600,000
Ordinary equity (a)................................................................
P2,600,000 P2,440,000
Note that the book value of Helix Company’s stock is greater than the
market value for both years. This does not necessarily indicate that the
stock is selling at a bargain price. Market value is an indication of
investors’ perceptions of future earnings and/or dividends, whereas book
value is a result of already completed transactions and is geared to the
past.
5-23
Chapter 5 Financial Statement Analysis –II
Requirement 3
This Year Last Year
a. Current assets ................................................................
P2,600,000 P1,980,000
Current liabilities................................................................
1,300,000 920,000
Working capital ................................................................
P1,300,000 P1,060,000
5-24
Financial Statement Analysis –II Chapter 5
Requirement 4
As stated by Meri Ramos, both net income and sales are up from last year.
The return on total assets has improved from 5.1% last year to 6.8% this
year, and the return on ordinary equity is up to 9.2% from 4.9% the year
before. But this appears to be the only bright spot in the company’s
operating picture. Virtually all other ratios are below the industry average,
and, more important, they are trending downward. The deterioration in the
gross margin percentage, while not large, is worrisome. Sales and
inventories have increased substantially, which should ordinarily result in an
improvement in the gross margin percentage as fixed costs are spread over
more units. However, the gross margin percentage has declined.
In the author’s opinion, what the company needs is more equity—not more
debt. Therefore, the loan should not be approved. The company should be
encouraged to make another issue of ordinary stock in order to provide a
broader equity base on which to operate.
Bulacan Company
Income Statement
For the Year Ended December 31, 2005
Sales P140,800
Less: Cost of Sales (4) 84,480
Gross Profit P 56,320
5-25
Chapter 5 Financial Statement Analysis –II
Bulacan Company
Balance Sheet
December 31, 2005
Assets
Current Assets:
Cash P 27,720
Accounts Receivable (5) 28,160
Merchandise Inventory (3) 21,120
Total Current Assets (2) P 77,000
Fixed Assets (8) 55,000
Total Assets P132,000
Current Liabilities:
Accounts Payable (2) P 44,000
Equity:
Share Capital (issued 20,000
shares) (6) P40,000
Retained Earnings 48,000 88,000
Total Liabilities and Equity P132,000
Supporting Computations:
Net Income
(1) Earnings Per Share =
Ordinary Shares Outstanding
X
P0.50 =
20,000
5-26
Financial Statement Analysis –II Chapter 5
= P44,000
Current Assets
(3) Current Ratio =
Current Liabilities
X
1.27 =
44,000
X (Current Assets) = P77,000
Quick Assets
Quick Ratio =
Current Liabilities
X
1.27 =
44,000
X (Current Assets) = P55,880
Cost of Sales
(4) Inventory turnover = Ave. Inventory
X
4 =
P21,120
X (Cost of Sales) = P84,480
Quick Assets
(5) Average age of outstanding =
Current Liabilities
Accounts Receivable
365
= 73 days (Average age of
5
5-27
Chapter 5 Financial Statement Analysis –II
receivables)
Net Sales
Average Receivables = 5
P140,800
X = 5
X (Receivables) = P28,160
Another Method:
P140,800
365 = 73 days = P28,160 Accounts receivable
0.375X = P33,000
X = P88,000 Equity
Requirement 1
5-28
Financial Statement Analysis –II Chapter 5
The loan officer stipulated that the current ratio prior to obtaining the loan
must be higher than 2.0, the acid-test ratio must be higher than 1.0, and the
interest on the loan must be no more than four times net operating income.
These ratios are computed below:
Current assets
Current ratio =
Current liabilities
P290,000
Current rate = = 1.8 (rounded)
P164,000
The company would fail to qualify for the loan because both its current ratio
and its acid-test ratio are too low.
Requirement 2
By reclassifying the P45 thousand net book value of the old machine as
inventory, the current ratio would improve, but there would be no effect on
the acid-test ratio. This happens because inventory is considered to be a
current asset but is not included in the numerator when computing the acid-
test ratio.
Current assets
Current ratio =
Current liabilities
P290,000 + P45,000
Current rate = = 2.0 (rounded)
P164,000
Even if this tactic had succeeded in qualifying the company for the loan, we
5-29
Chapter 5 Financial Statement Analysis –II
strongly advise against it. Inventories are assets the company has acquired
for the sole purpose of selling them to outsiders in the normal course of
business. Used production equipment is not considered to be inventory—
even if there is a clear intention to sell it in the near future. Since the loan
officer would not expect used equipment to be included in inventories, doing
so would be intentionally misleading.
Nevertheless, the old equipment is an asset that could be turned into cash. If
this were done, the company would immediately qualify for the loan since
the P45 thousand in cash would be included in the numerator in both the
current ratio and in the acid-test ratio.
Current assets
Current ratio =
Current liabilities
P290,000 + P45,000
Current rate = = 2.0 (rounded)
P164,000
5-30
Financial Statement Analysis –II Chapter 5
5-31
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 6
I. Questions
1. Purposes of the Statement of Cash Flows
a. To predict future cash flows
b. To evaluate management decisions
c. To determine the ability to pay dividends to shareholders and
interest and principal to creditors
d. To show the relationship of net income to changes in the
business’s cash.
2. Comparative balance sheets present the financial position of the
enterprise at two points in time. The income statement for the period
between the two balance sheets describes how the income-producing
activities affected the financial position. Because cash flows from
operating activities may differ substantially from net income, and
because numerous other financing and investing activities have an
impact on financial position, the statement of cash flows is necessary.
The statement emphasizes changes in the cash balances that result from
changes in assets, liabilities and equity accounts caused by operating,
investing and financing activities.
3. The most important source of cash for many successful companies is
from operating activities. A large positive operating cash flow is a good
sign because it means funds have been internally generated with no fixed
obligations or commitment to return such to anybody.
4. It is possible for cash to decrease during a year when income is high
because cash may be used not only for operating activities but also for
investing and financing activities.
5. Transactions involving accounts payable are not considered to be
financing activities because such transactions are used to obtain goods
and services rather than to obtain cash. Furthermore, purchases of goods
and services relate to a company’s day-to-day operating activities.
6-1
Chapter 6 Cash Flow Analysis
6. The loss is added back to net income to avoid double counting since the
entire proceeds from the sale (net book value minus loss on sale) will
appear as a cash inflow from investing activities.
7. Three categories of transactions that may result in increases in cash are
a. Operating activities
b. Investing activities (e.g., sale of investments or other assets).
c. Financing activities (e.g., borrowing or sale of stock).
These activities are sources of cash when cash is increased as a result of
the particular activity.
8. Three categories of transactions that may result in decreases in cash are
a. Operating activities
b. Investing activities (e.g., purchase of investments or other assets).
c. Financing activities (e.g., repayment of debt or retirement of stock).
These activities are uses of cash when cash is decreased as a result of the
particular activity.
9. Noncash transactions do not provide or consume cash even though they
may result in significant changes in financial position. Examples are the
issuance of share capital for plant assets and the conversion of debt or
preference shares into ordinary shares. Such transactions are not
presented in the body of the statement of cash flows but rather disclosed
in a separate schedule as financing or investing activities.
10. While net loss is usually associated with a decrease in cash, it may be a
source of cash if noncash expenses are greater than the amount of the net
loss. For example, if a net loss of P100,000 included amortization and
depreciation of P125,000 and no noncash revenues existed, cash
provided by operating activities would be P25,000, computed as follows:
6-2
Cash Flow Analysis Chapter 6
6-3
Chapter 6 Cash Flow Analysis
II. Problems
Problem 1
Requirement (a)
6-4
Cash Flow Analysis Chapter 6
flows from expenses. The cash flows from the transaction giving rise to
the extraordinary loss is reclassified as an investing activity.
2. The acquisition of intangibles is a negative cash flow from investing
activities. The amortization is a noncash expense in determining cash
flows from operating activities.
3. The payment of a cash dividend is a negative cash flow that is presented
in the financing activities section of the statement.
4. The purchase of treasury stock is a negative cash flow in the financing
activities section of the statement.
5. The depreciation expense recognized during the year is a noncash
expense in determining cash flows from operating activities.
6. The conversion of convertible bonds into ordinary shares is a noncash
financing activity that requires disclosure in a separate schedule.
7. The changes in plant asset accounts – land, equipment, and building –
represent activities whose cash flow effects are presented in the
investing activities section of the statement.
8. The increase in working capital also represents the change in cash
because all other current assets and current liabilities remained constant.
The net of all cash flows from operating, investing and financing
activities must reconcile with the change in cash in the statement of cash
flows.
Requirement (b)
6-5
Chapter 6 Cash Flow Analysis
6-6
Cash Flow Analysis Chapter 6
Computations:
1. Revenue from sales P5,432,000
Less: Note receivable (120,000)
Land (75,000)
P5,237,000
*
Increase in retained earnings (P20,000 – P13,000) P7,000
Dividends declared 1,500
Net income P8,500
6-7
Chapter 6 Cash Flow Analysis
Requirement (a)
6-8
Cash Flow Analysis Chapter 6
Computations:
Cash received from customers:
Revenues P107,000
Deduct: Increase in accounts receivable
(P78,000 – P45,000) 33,000
P 74,000
Cash paid for expenses:
Expenses P 92,000
Add: Decrease in accrued expenses
(P7,500 – P7,000) 500
Deduct: Depreciation expense
(P33,600 – P27,100 + P18,000) (24,500)
Amortization (1,000)
P 67,000
Cash from sale of equipment:
Cost P 27,500
Deduct: Accumulated depreciation (18,000)
Cash received on sale at book value P 9,500
Cash paid to acquire equipment:
Increase in property, plant and equipment
(P118,100 – P92,600) P 25,500
Cost of machinery sold 27,500
P 53,000
Cash received on sale of stock:
Increase in ordinary shares amount
(P100,000 – P75,000) P 25,000
Increase in additional paid-in capital account
(P55,000 – P40,000) 15,000
P 40,000
*
Net increase during 2005 (P33,600 – P27,100) P 6,500
Accumulated depreciation on assets sold 18,000
Depreciation expense for 2005 P24,500
6-9
Chapter 6 Cash Flow Analysis
Cash dividends:
Increase in retained earnings (P21,000 – P14,500) P 6,500
Net income (P107,000 – P92,000) (15,000)
P 8,500
Requirement (b)
Requirement (a)
Range, 2002-2005
Cash Provided Cash Used
Ebony Company P125,000 – P168,000 P115,000 – P170,000
Ivory Company P135,000 – P160,000 P125,000 – P165,000
Requirement (b)
The two companies are dissimilar in the makeup of the sources of cash, as
indicated in the following analysis:
6-10
Cash Flow Analysis Chapter 6
Ebony Company has relied much more heavily on operations to provide cash
and to a very limited extent on debt and equity financing and asset
disposition. On the other hand, Ivory Company has not been able to provide
cash from operations and has been required to rely on the alternatives of debt
and equity financing and asset disposition.
Requirement (c)
1. D 4. D 7. C 10. B
2. C 5. B 8. B 11. A
3. D 6. D 9. A 12. D
6-11
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 7
I. Problems
Problem I
Increase in Sales:
Quantity Factor [(24,000) x P8] P(192,000)
Price Factor (105,000 x P3) 315,000
Quantity/Price Factor [(24,000) x P3] (72,000) P 51,000
Less: Increase (decrease) in Cost of Sales:
Quantity Factor [(24,000) x P9] P(216,000)
Cost Factor [105,000 x (P.50)] (52,500)
Quantity/Cost Factor [(24,000) x (P.50)] 12,000 (256,500)
Increase in Gross Profit P 307,500
Problem II
2. Cost Factor
Cost of Sales in 2006 P164,000
Less: Cost of Sales in 2006 at 2005 costs 176,000
Favorable P(12,000)
7-1
Chapter 7 Gross Profit Variation Analysis and Earnings Per Share Determination
3. Quantity Factor
Increase in Sales
Sales in 2006 at 2005 prices P200,000
Less: Sales in 2005 150,000
Favorable P 50,000
Less: Increase in Cost of Sales
Cost of Sales in 2006 at 2005 costs
(P132,000 x 133-1/3%) P176,000
Less: Cost of Sales in 2005 132,000
Unfavorable P 44,000
Net favorable quantity factor 6,000*
Increase in Gross Profit P 28,000
Problem III
Requirement A:
Tony Corporation
Statement Accounting for Gross Profit Variation
For 2006
7-2
Gross Profit Variation Analysis and Earnings Per Share Determination Chapter 7
Cost Factor
Cost of Sales this year P 165,400
Less: Cost of Sales this year at last
year’s costs 161,700
(Favorable) Unfavorable P 3,700
Quantity Factor
Cost of Sales this year at last year’s
costs (115,500 x 140%) P 161,700
Less: Cost of Sales last year 115,500
(Favorable) Unfavorable P 46,200
Requirement B:
Problem IV
Quantity Factor
1. Decrease in Sales due to decrease in the number
of customers [(1,000) x 18 MCF x P2.50)] P(45,000)
2. Increase in Sales due to increase in consumption
rate per customer (26,000 x 2 MCF x P2.50) 130,000
Net Increase P 85,000
7-3
Chapter 7 Gross Profit Variation Analysis and Earnings Per Share Determination
Price Factor
3. Decrease in Sales due to the decrease in rate per
MCF [P(.05) x 520,000] (26,000)
Increase in operating revenues
P 59,000
Supporting Computations:
Average Consumption:
(a) 2006 = 520,000 26,000 = 20 MCF/customer
2005 = 486,000 27,000 = 18 MCF/customer
Increase in Consumption
per customer 2 MCF/customer
Problem V
XYZ Corporation
Gross Profit Variation Analysis
For 2006
Price Factor
Sales in 2006 P 1,750
Less: Sales in 2006 at 2005 prices
A (25 x P10) P 250
B (75 x P20) 1,500 1,750
Increase (decrease) in gross profit P -
Cost Factor:
Cost of sales in 2006 P 875
Less: Cost of sales in 2006 at 2005 costs:
A (25 X P5) P 125
B (75 x P10) 750 875
Increase (decrease) in gross profit P -
7-4
Gross Profit Variation Analysis and Earnings Per Share Determination Chapter 7
Quantity Factor:
Increase (decrease) in total quantity
Multiplied by: Average gross profit
per unit in 2005 (P750 100) P 7.50
Increase (decrease) in gross profit P -
P875 = P8.75
100 (volume in 2006)
Number of Shares
Adjustment
for 25%
stock As Weighted
Date Unadjusted dividend Adjusted Multiplier Shares
1/1/2006 16,000 4,000 20,000 12/12 20,000
2/15/2006 3,200 800 4,000 10.5/12 3,500
4/1/2006 (3,000) (750) (3,750) 9/12 (2,812)
6/1/2006 1,400 350 1,750 7/12 1,020
9/1/2006 6,400 1,600 8,000 4/12 2,667
12/1/2006 6,000 (6,000) - - -
Total 30,000 - 30,000 24,375
7-5
Chapter 7 Gross Profit Variation Analysis and Earnings Per Share Determination
= P0.90
Problem VIII
a
P122,000 = P150,500 (net income) - P28,500 (preference dividends)
b
Weighted average shares: 25,000 x 1.20 = 30,000 x 7/12 = 17,500
32,000 x 1.20 = 38,400 x 4/12 = 12,800
38,400 - 2,000 = 36,400 x 1/12 = 3,033
Weighted average shares 33,333
7-6
Gross Profit Variation Analysis and Earnings Per Share Determination Chapter 7
c
Increment due to stock options:
Issued 4,000
4,000 x ( P33 + P5 )
Reacquired = (3,707)
P41
Increment in shares 293
d
Impact on diluted earnings per share and ranking:
Impact Ranking
e
Dilutive effect on diluted earnings per share:
10% bonds: P3.02 impact < P3.63 (DEPS1), therefore dilutive
7.5% preference: P3.06 impact < P3.56 (DEPS2), therefore dilutive
5.8% bonds: P3.50 impact > P3.46 (DEPS3), therefore exclude from EPS
Requirement 3
Fuego Company would report basic earnings per share of P3.66 and diluted
earnings per share of P3.46 on its 2005 income statement.
7-7
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 8
I. Questions
1. The phrase “different costs for different purposes” refers to the fact that
the word “cost” can have different meanings depending on the context in
which it is used. Cost data that are classified and recorded in a
particular way for one purpose may be inappropriate for another use.
5. a. Uncontrollable cost
b. Controllable cost
c. Uncontrollable cost
6. Product costs are costs that are associated with manufactured goods until
the time period during which the products are sold, when the product
8-1
Chapter 8 Cost Concepts and Classifications
costs become expenses. Period costs are expensed during the time
period in which they are incurred.
8. Product costs are also called inventoriable costs because they are
assigned to manufactured goods that are inventoried until a later period,
when the products are sold. The product costs remain in the finished
goods inventory account until the time period when the goods are sold.
9. A sunk cost is a cost that was incurred in the past and cannot be altered
by any current or future decision. A differential cost is the difference in
a cost item under two decision alternatives.
8-2
Cost Concepts and Classifications Chapter 8
14. Direct materials include the materials in the product and a reasonable
allowance for scrap and defective units, while indirect materials are
materials used in manufacturing that are not physically part of the
finished product.
II. Exercises
Requirement 1
Direct material:
Raw-material inventory, January 1 ............. P 60,000
Add: Purchases of raw material ................. 250,000
Raw material available for use.................... P310,000
Deduct: Raw-material inventory,
December 31......................................... 70,000
Raw material used....................................... P240,000
Direct labor........................................................ 400,000
Manufacturing overhead:
Indirect material .......................................... P 10,000
Indirect labor............................................... 25,000
Depreciation on plant and equipment ......... 100,000
Utilities ....................................................... 25,000
Other ........................................................... 30,000
Total manufacturing overhead .................... 190,000
Total manufacturing costs ................................. P830,000
8-3
Chapter 8 Cost Concepts and Classifications
Requirement 2
Requirement 3
Exercise 2
8-4
Cost Concepts and Classifications Chapter 8
inventories V R
d. Salaries of top executives in the F P
company
e. Overtime premium for assembly workers V R
f. Sales commissions V P
g. Sales personnel office rental F P
h. Production supervisory salaries F R
i. Controller’s office supplies F P
j. Executive office heat and air F P
conditioning
k. Executive office security personnel F P
l. Supplies used in assembly work V R
m. Factory heat and air conditioning F R
n. Power to operate factory equipment V R
o. Depreciation on furniture for sales staff F P
p. Varnish used for finishing product V R
q. Marketing personnel health insurance F P
r. Packaging materials for finished product V R
s. Salary of the quality control manager
who checks work on the assembly line F R
t. Assembly-line workers’ dental insurance F R
1. a, d, g, i
2. a, d, g, j
3. b, f
4. b, d, g, k
5. a, d, g, k
6. a, d, g, j
7. b, c, f
8. b, d, g, k
9. b, c and d*, e and f and g*, k*
* The building is used for several purposes.
10. b, c, f
11. b, c, h
12. b, c, f
8-5
Chapter 8 Cost Concepts and Classifications
13. b, c, e
14. b, c and d†, e and f and g†, k†
†
The building that the furnace heats is used for several purposes.
15. b, d, g, k
1. marginal cost
2. sunk cost
3. average cost
4. opportunity cost
5. differential cost
6. out-of-pocket cost
1. a, c, e, k
2. b, d, e, k
3. d, e, i
4. d, e, i
5. a, d, e, k
6. a, d, e, k
7. d, e, k
8. b, d†, e, k
†
Unless the dishwasher has been used improperly.
9. h
10. a, d, e*, j
* The hotel general manager may have some control over the total space
allocated to the kitchen.
11. i
12. j
13. a, c, e
14. e, k
8-6
Cost Concepts and Classifications Chapter 8
Exercise 6
III. Problems
Problem 1
The relevant costs for this decision are the differential costs. These are:
Room and board, clothing, car, and incidentals are not relevant because these
are presumed to be the same whether or not Francis goes to school. The
possibility of part-time work, summer jobs, or scholarship assistance could
be considered as reductions to the cost of school. If students are familiar
with the time value of money, then they should recognize that the analysis
calls for a comparison of the present value of the differential after-tax cash
inflows with the present value of differential costs of getting the education
(including the opportunity costs of lost income).
8-7
Chapter 8 Cost Concepts and Classifications
Problem 2
Requirement (a)
Only the differential outlay costs need be considered. The travel and other
variable expenses of P22 per hour would be the relevant costs. Any amount
received in excess would be a differential, positive return to Pat.
Requirement (b)
Requirement (c)
In this situation Pat would have to consider the present value of the contract
and compare that to the present value of the existing consulting business.
The final rate may be more or less than the normal P100 rate depending on
the outcome of Pat’s analysis.
Problem 3
8-8
Cost Concepts and Classifications Chapter 8
Problem 4
Problem 5
Requirement (a)
Sunk costs not shown could include lost book value on traded assets,
depreciation estimates for new investment, and interest costs on capital
needed during facilities construction.
Requirement (b)
The client might be used to differential cost as a decision tool, and believes
(correctly) that use of differential analyses has several advantages --- it is
quicker, requires less data, and tends to give a better focus to the decision.
The banker might suspect the client of hiding some material data in order to
make the proposal more acceptable to the financing agency.
8-9
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 9
I. Questions
4. Although the accountant recognizes that many costs are not linear in
relationship to volume at some points, he concentrates on their behavior
within narrow bands of activity known as the relevant range. The
relevant range can be defined as that range of activity within which
assumptions as relative to variable and fixed cost behavior are valid.
Generally, within this range an assumption of strict linearity can be used
with insignificant loss of accuracy.
9-1
Chapter 9 Cost Behavior: Analysis and Use
6. The fixed cost element is represented by the point where the regression
line intersects the vertical axis on the graph. The variable cost per unit
is represented by the slope of the line.
8. No. High correlation merely implies that the two variables move
together in the data examined. Without economic plausibility for a
relationship, it is less likely that a high level of correlation observed in
one set of data will be found similarly in another set of data.
10. The relevant range is the range of the cost driver in which a specific
relationship between cost and cost driver is valid. This concept enables
the use of linear cost functions when examining CVP relationships as
long as the volume levels are within that relevant range.
11. A unit cost is computed by dividing some amount of total costs (the
numerator) by the related number of units (the denominator). In many
cases, the numerator will include a fixed cost that will not change
despite changes in the denominator. It is erroneous in those cases to
multiply the unit cost by activity or volume change to predict changes in
total costs at different activity or volume levels.
9-2
Cost Behavior: Analysis and Use Chapter 9
9-3
Chapter 9 Cost Behavior: Analysis and Use
15. The dependent variable is the cost object of interest in the cost
estimation. An important issue in selecting a dependent variable is the
level of aggregation in the variable. For example, the company, plant, or
department may all be possible levels of data for the cost object. The
choice of aggregation level depends on the objectives for the cost
estimation, data availability, reliability, and cost/benefit considerations.
If a key objective is accuracy, then a detailed level of analysis is often
preferred. The detail cost estimates can then be aggregated if desired.
16. Nonlinear cost relationships are cost relationships that are not
adequately explained by a single linear relationship for the cost driver(s).
In accounting data, a common type of nonlinear relationship is trend and
seasonality. For a trend example, if sales increase by 8% each year, the
plot of the data for sales with not be linear with the driver, the number of
years. Similarly, sales which fluctuate according to a seasonal pattern
will have a nonlinear behavior. A different type of nonlinearity is where
the cost driver and the dependent variable have an inherently nonlinear
relationship. For example, payroll costs as a dependent variable
estimated by hours worked and wage rates is nonlinear, since the
9-4
Cost Behavior: Analysis and Use Chapter 9
18. High correlation exists when the changes in two variables occur
together. It is a measure of the degree of association between the two
variables. Because correlation is determined from a sample of values,
there is no assurance that it measures or describes a cause and effect
relationship between the variables.
II. Exercises
1. b
2. f
3. e
4. i
5. e
6. h
7. l
8. a
9. j
10. k
11. c or d
12. g
9-5
Chapter 9 Cost Behavior: Analysis and Use
Requirement (1)
Variable costs:
P4,700 – P2,800
= P1.134
4,050 – 2,375
Fixed costs:
There are two choices for the High-Low points when using openings for the
cost driver. At 11 openings there is a cost of P2,800 and at 10 openings
there is a cost of P2,875.
Variable costs:
P4,700 – P2,800
= P237.50
19 – 11
Fixed costs:
9-6
Cost Behavior: Analysis and Use Chapter 9
Variable costs:
P4,700 – P2,875
= P202.78
19 – 10
Fixed costs:
Predicted total cost for a 3,200 square foot house with 14 openings using
equation one:
Predicted total cost for a 3,200 square foot house with 14 openings using
equation two:
Predicted total cost for a 3,200 square foot house with 14 openings using
equation three:
Predicted cost for a 2,400 square foot house with 8 openings, using equation
one:
9-7
Chapter 9 Cost Behavior: Analysis and Use
Requirement 2
Figure 9-A shows that the relationship between costs and square feet is
relatively linear without outliers, while Figure 9-B shows a similar result for
the relationship between costs and number of openings. From this
perspective, both variables are good cost drivers.
Figure 9-A
P5,000
P4,500
P4,000
P3,500
P3,000
Cost
P2,500
P2,000
P1,500
P1,000
P500
P0
2,375
2,450
2,600
2,600
2,650
2,700
2,800
2,850
3,010
3,550
3,700
4,050
Square Feet
9-8
Cost Behavior: Analysis and Use Chapter 9
Figure 9-B
P5,000
P4,500
P4,000
P3,500
P3,000
Cost
P2,500
P2,000
P1,500
P1,000
P500
P0
10 11 11 12 12 13 13 13 15 16 16 19
Num ber of Openings
Requirement 1
Fixed Costs:
Rent P10,250
Depreciation 400
Insurance 750
Advertising 650
Utilities 1,250
Mr. Black’s salary 18,500
Total P31,800
Variable Costs:
Wages P17,800
CD Expense 66,750
Shopping Bags 180
Total P84,730
9-9
Chapter 9 Cost Behavior: Analysis and Use
Requirement 2
Requirement 3
9-10
Cost Behavior: Analysis and Use Chapter 9
Requirement 1
P160,000
P140,000
P120,000
P100,000
Sales
P80,000
P60,000
P40,000
P20,000
P0
P2,500
P3,000
P3,500
P4,000
P4,500
P5,000
P5,500
Advertising Expense
Requirement 2
There seems to be a positive linear relationship for the data between P2,500
and P4,000 of advertising expense. Llanes’ analysis is correct within this
relevant range but not outside of it. Notice that the relationship between
advertising expense and sales changes at P4,000 of expense.
III. Problems
Problem 1
9-11
Chapter 9 Cost Behavior: Analysis and Use
Problem 2
Requirement 1
Requirement 2
9-12
Cost Behavior: Analysis and Use Chapter 9
P36,000
Salaries and comm. expense: 1,500 units = P24 per unit.
Requirement 3
LILY COMPANY
Income Statement
For the Month Ended June 30
9-13
Chapter 9 Cost Behavior: Analysis and Use
Problem 3
Requirement 1
a = (Y) - b(X)
n
(54,500) - 1,700 (20)
=
5
= P4,100
Therefore, the variable cost per league is P1,700 and the fixed cost
is P4,100 per year.
9-14
Cost Behavior: Analysis and Use Chapter 9
Requirement 2
Y = P4,100 + P1,700X
Requirement 3
The problem with using the cost formula from (2) to derive this total cost
figure is that an activity level of 7 sections lies outside the relevant range
from which the cost formula was derived. [The relevant range is represented
by a solid line on the graph in requirement 4 below.]
Although an activity figure may lie outside the relevant range, managers will
often use the cost formula anyway to compute expected total cost as we have
done above. The reason is that the cost formula frequently is the only basis
that the manager has to go on. Using the cost formula as the starting point
should not present a problem so long as the manager is alert for any unusual
problems that the higher activity level might bring about.
Requirement 4
P16,000 Y
P14,000
P12,000
P10,000
P8,000
P6,000
P4,000
P2,000
X
P-
0 1 2 3 4 5 6 7 8
9-15
Chapter 9 Cost Behavior: Analysis and Use
Requirement 1
Figure 9-C plots the relationship between labor-hours and overhead costs
and shows the regression line.
y = P48,271 + P3.93 X
Goodness of fit. The vertical differences between actual and predicted costs
are extremely small, indicating a very good fit. The good fit indicates a
strong relationship between the labor-hour cost driver and overhead costs.
Slope of regression line. The regression line has a reasonably steep slope
from left to right. The positive slope indicates that, on average, overhead
costs increase as labor-hours increase.
Requirement 2
The regression analysis indicates that, within the relevant range of 2,500 to
7,500 labor-hours, the variable cost per person for a cocktail party equals:
Food and beverages P15.00
Labor (0.5 hrs. x P10 per hour) 5.00
Variable overhead (0.5 hrs. x P3.93 per labor-hour) 1.97
Total variable cost per person P21.97
Requirement 3
9-16
Cost Behavior: Analysis and Use Chapter 9
Of course, Bobby Gonzales will consider other factors in developing his bid
including (a) an analysis of the competition – vigorous competition will limit
Gonzales’ ability to obtain a higher price (b) a determination of whether or
not his bid will set a precedent for lower prices – overall, the prices Bobby
Gonzales charges should generate enough contribution to cover fixed costs
and earn a reasonable profit, and (c) a judgment of how representative past
historical data (used in the regression analysis) is about future costs.
Figure 9-C
Regression Line of Labor-Hours on Overhead Costs for Bobby Gonzales’
Catering Company
P90,000
P80,000
P70,000
P60,000
Overhead Costs
P50,000
P40,000
P30,000
P20,000
P10,000
P0
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
Cost Driver: Labor-Hours
Requirement 1
Difference in cost
Slope coefficient (b) =
Difference in labor-hours
P529,000 – P400,000
= = P43.00
7,000 – 4,000
9-17
Chapter 9 Cost Behavior: Analysis and Use
No, the constant component of the cost function does not represent the fixed
overhead cost of the ABS Group. The relevant range of professional labor-
hours is from 3,000 to 8,000. The constant component provides the best
available starting point for a straight line that approximates how a cost
behaves within the 3,000 to 8,000 relevant range.
Requirement 2
The data are shown in Figure 9-D. The linear cost function overstates costs
by P8,000 at the 5,000-hour level and understates costs by P15,000 at the
8,000-hour level.
Requirement 3
Based on
Based on Linear Cost
Actual Function
Contribution before deducting incremental
overhead P38,000 P38,000
Incremental overhead 35,000 43,000
Contribution after incremental overhead P 3,000 P (5,000)
9-18
Cost Behavior: Analysis and Use Chapter 9
Figure 9-D
Linear Cost Function Plot of Professional Labor-Hours
on Total Overhead Costs for ABS Consulting Group
P700,000
P600,000
Total Overhead Costs
P500,000
P400,000
P300,000
P200,000
P100,000
P0
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000
Professional Labor-Hours Billed
* Supporting Computations:
11. (10,000 x 2) – (P3,000 x 2) – P5,000 = P9,000
12. [(P20 + P3 + P6) x 2,000 units] + (P10 x 1,000 units) = P68,000
9-19
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 10
I. Questions
1. Job-order costing is used in those manufacturing situations where there
are many different products produced each period. Each product or job
is different from all others and requires separate costing. Process
costing is used in those manufacturing situations where a single,
homogeneous product, such as cement, bricks, or gasoline, is produced
for long periods at a time.
2. The job cost sheet is used in accumulating all costs assignable to a
particular job. These costs would include direct materials cost traceable
to the job, and manufacturing overhead cost allocable to the job. When
a job is completed, the job cost sheet is used to compute the cost per
completed unit. The job cost sheet is then used as a control document
for: (1) determining how many units have been sold and determining the
cost of these units; and (2) determining how many units are still in
inventory at the end of a period and determining the cost of these units
on the balance sheet.
3. Many production costs cannot be traced directly to a particular product
or job, but rather are incurred as a result of overall production activities.
Therefore, in order to be assigned to products, such costs must be
allocated to the products in some manner. Examples of such costs would
include utilities, maintenance on machines, and depreciation of the
factory building. These costs are indirect production costs.
4. A firm will not know its actual manufacturing overhead costs until after
a period is over. Thus, if actual costs were used to cost products, it
would be necessary either (1) to wait until the period was over to add
overhead costs to jobs, or (2) to simply add overhead cost to jobs as the
overhead cost was incurred day by day. If the manager waits until after
the period is over to add overhead cost to jobs, then cost data will not be
available during the period. If the manager simply adds overhead cost
to jobs as the overhead cost is incurred, then unit costs may fluctuate
from month to month. This is because overhead cost tends to be
10-1
Chapter 10 Systems Design: Job-Order Costing and Process Costing
II. Exercises
10-2
Systems Design: Job-Order Costing and Process Costing Chapter 10
* Some of the listed companies might use either a process costing or a job-
order costing system, depending on how operations are carried out and
how homogeneous the final product is. For example, a plywood
manufacturer might use job-order costing if plywoods are constructed of
different woods or come in markedly different sizes.
Requirement 1
Company X:
Requirement 2
10-3
Chapter 10 Systems Design: Job-Order Costing and Process Costing
Requirement 1
Milling Department:
Assembly Department:
Requirement 2
Overhead Applied
Milling Department: 90 MHs × P8.50 per MH P765
Assembly Department: P160 × 125% 200
Total overhead cost applied P965
Requirement 3
Yes; if some jobs required a large amount of machine time and little labor
cost, they would be charged substantially less overhead cost if a plantwide
rate based on direct labor cost were being used. It appears, for example, that
this would be true of job 123 which required considerable machine time to
complete, but required only a small amount of labor cost.
10-4
Systems Design: Job-Order Costing and Process Costing Chapter 10
Requirement 1
Weighted-Average Method
Quantity
Schedule
Gallons to be accounted for:
Work in process, May 1 (materials 80%
complete, labor and overhead 75%
complete) ................................................................
80,000
Started into production ................................................................
760,000
Total gallons accounted for ................................................................
840,000
Equivalent Units
Materials Labor Overhead
Gallons accounted for as follows:
Transferred to the next department ............... 790,000 790,000 790,000 790,000
Work in process, May 31 (materials 60%
complete, labor and overhead 20%
complete) ................................................... 50,000 30,000 10,000 10,000
Total gallons accounted for ................................ 840,000 820,000 800,000 800,000
10-5
Chapter 10 Systems Design: Job-Order Costing and Process Costing
Requirement 2
Requirement 1
FIFO Method
Quantity
Schedule
Gallons to be accounted for:
Work in process, May 1 (materials 80%
complete, labor and overhead 75%
complete) ................................................................
80,000
Started into production ................................................................
760,000
Total gallons accounted for ................................................................
840,000
Equivalent Units
Materials Labor Overhead
Gallons accounted for as follows:
Transferred to the next department:
From the beginning inventory .................. 80,000 16,000* 20,000* 20,000*
Started and completed this month**........ 710,000 710,000 710,000 710,000
Work in process, May 31 (materials 60%
complete, labor and overhead 20%
complete) ................................................... 50,000 30,000 10,000 10,000
Total gallons accounted for ................................ 840,000 756,000 740,000 740,000
10-6
Systems Design: Job-Order Costing and Process Costing Chapter 10
Requirement 2
III. Problems
Problem 1
Requirement 1
10-7
Chapter 10 Systems Design: Job-Order Costing and Process Costing
Requirement 2
Problem 2
Requirement 1
The costing problem does, indeed, lie with manufacturing overhead cost, as
suggested. Since manufacturing overhead is mostly fixed, the cost per unit
increases as the level of production decreases. The problem can be solved
by use of predetermined overhead rates, which should be based on expected
activity for the entire year. Many students will use units of product in
computing the predetermined overhead rate, as follows:
Estimated manufacturing overhead cost, P840,000
= P4.20 per unit.
Estimated units to be produced, 200,000
The predetermined overhead rate could also be set on the basis of either
direct labor cost or direct materials cost. The computations are:
Estimated manufacturing overhead cost, P840,000 350% of direct
=
Estimated direct labor cost, P240,000 labor cost
Requirement 2
Problem 3
Weighted-Average Method
Quantity
Schedule
Pounds to be accounted for:
Work in process, May 1
(all materials, 55% labor and
overhead added last month) ......... 30,000
Started into production during
May............................................... 480,000
Total pounds ........................... 510,000
Equivalent Units
Labor &
Materials Overhead
Pounds accounted for as follows:
Transferred to Department 2............ 490,000* 490,000 490,000
Work in process, May 31
(all materials, 90% labor and
overhead added this month) ......... 20,000 20,000 18,000
Total pounds ........................... 510,000 510,000 508,000
10-9
Chapter 10 Systems Design: Job-Order Costing and Process Costing
Requirement 1
Weighted-Average Method
Requirement 2
Equivalent units of
production (b).................... – 220,000 214,000
Cost per EU (a) (b) ............ – P2.94 + P1.30 = P4.24
Requirement 3
10-10
Systems Design: Job-Order Costing and Process Costing Chapter 10
Requirement 4
No, the manager should not be rewarded for good cost control. The reason
for the Mixing Department’s low unit cost for April is traceable to the fact
that costs of the prior month have been averaged in with April’s costs in
computing the lower, P2.94 per unit figure. This is a major criticism of the
weighted-average method in that the figures computed for product costing
purposes can’t be used to evaluate cost control or measure performance for
the current period.
Requirement 1
Weighted-Average Method
Quantity
Schedule
Pounds to be accounted for:
Work in process, May 1
(materials all complete, labor
and overhead 4/5 complete) ..... 35,000
Started into production................ 280,000
Total pounds to be accounted for .... 315,000
10-11
Chapter 10 Systems Design: Job-Order Costing and Process Costing
Cost Reconciliation
Requirement 2
10-12
Systems Design: Job-Order Costing and Process Costing Chapter 10
1. D 6. D 11. A 16. A
2. D 7. A 12. D 17. D
3. D 8. C 13. B 18. A
4. C 9. C 14. D 19. C
5. D 10. B 15. C 20. D
10-13
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 11
I. Questions
1. The three levels available are: Level 1, in which a company uses a
plantwide overhead rate; Level 2, in which a company uses departmental
overhead rates; and Level 3, in which a company uses activity-based
costing.
2. New approaches to costing are needed because events of the last few
decades have made drastic changes in many organizations. Automation
has greatly decreased the amount of direct labor required to manufacture
products; product diversity has increased in that companies are
manufacturing a wider range of products and these products differ
substantially in volume, lot size, and complexity of design; and total
overhead cost has increased to the point in some companies that a
correlation no longer exists between it and direct labor.
3. The departmental approach to assigning overhead cost to products relies
solely on volume as an assignment base. Where diversity exists between
products (that is, where products differ in terms of number of units
produced, lot size, or complexity of production), volume alone is not
adequate for overhead costing. Overhead costing based on volume will
systematically overcost high-volume products and undercost low-volume
products.
4. Process value analysis (PVA) is a systematic approach to gaining an
understanding of the steps associated with a product or service. It
identifies all resource-consuming activities involved in the production
process and labels these activities as being either value-added or non-
value-added. Thus, it is the beginning point in designing an activity-
based costing system since management must know what activities are
involved with each product before activity centers can be designated and
cost drivers established. Also, PVA helps management to eliminate any
non-value-added activities and thereby streamline operations and
minimize costs.
11-1
Chapter 11 Systems Design: Activity-Based Costing and Management
11-2
Systems Design: Activity-Based Costing and Management Chapter 11
III. Exercises
Exercise 1
Examples of Examples of
Activity Traceable Cost
Activity Classification Costs Drivers
a. Materials are moved Batch-level Labor cost; Number of
from the receiving depreciation receipts;
dock to product of equipment; pounds
flow lines by a space cost handled
material-handling
crew
b. Direct labor Unit-level Direct labor Direct labor-
workers assemble cost; indirect hours
various products labor cost;
labor benefits
c. Ongoing training is Facility-level* Space cost; Hours of
provided to all training costs; training time;
employees in the administration number
company costs trained
d. A product is Product-level Space cost; Hours of
designed by a supplies used; design time;
specialized design depreciation of number of
team design engineering
equipment change orders
11-3
Chapter 11 Systems Design: Activity-Based Costing and Management
Exercise 2
IV. Problems
Problem 1
11-4
Systems Design: Activity-Based Costing and Management Chapter 11
P24,020
Problem 2
Requirement 1
(a)
Total overhead = P200,000 + P32,000 + P100,000 + P120,000
= P452,000
Requirement 2
11-5
Chapter 11 Systems Design: Activity-Based Costing and Management
1. A 11. B 21. D
2. D 12. D 22. A
3. C 13. C 23. B
4. B 14. A 24. A
5. A 15. C 25. B
6. D 16. D 26. D
7. A 17. D 27. B
8. B 18. C 28. C
9. D 19. B 29. A
10. C 20. A 30. C
11-6
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 12
VARIABLE COSTING
I. Questions
1. The variable costing technique does not consider fixed costs as
unimportant or irrelevant, but it maintains that the distinction between
behaviors of different costs is crucial for certain decisions.
2. The central issue in variable costing is what is the proper timing for
release of fixed manufacturing overhead as expense: at the time of
incurrence, or at the time the finished units to which the fixed overhead
relates are sold.
3. Direct costing would be more accurately called variable or marginal
costing because in substance it is the inventory costing method which
applies only variable production costs to product; fixed factory overhead
is not assigned to product.
4. Marketing and administrative costs are treated as period costs under both
variable costing and absorption costing methods of product costing.
5. Under absorption costing, as a company manufactures units of product,
the fixed manufacturing overhead costs of the period are added to the
units, along with direct materials, direct labor, and variable
manufacturing overhead. If some of these units are not sold by the end
of the period, then they are carried into the next period as inventory.
The fixed manufacturing overhead cost attached to the units in ending
inventory follow the units into the next period as part of their inventory
cost. When the units carried over as inventory are finally sold, the fixed
manufacturing overhead cost that has been carried over with the units is
included as part of that period’s cost of goods sold.
6. Many accountants and managers believe absorption costing does a better
job of matching costs with revenues than variable costing. They argue
that all manufacturing costs must be assigned to products to properly
match the costs of producing units of product with the revenues from the
units when they are sold. They believe that the fixed costs of
depreciation, taxes, insurance, supervisory salaries, and so on, are just as
essential to manufacturing products as are the variable costs.
12-1
Chapter 12 Variable Costing
II. Exercises
Requirement 1
12-2
Variable Costing Chapter 12
Requirement 2
12-3
Chapter 12 Variable Costing
Requirement 1
Requirement 2
12-4
Variable Costing Chapter 12
Requirement 1
Under variable costing, only the variable manufacturing costs are included
in product costs.
Direct materials......................................................................... P 60
Direct labor ............................................................................... 30
Variable manufacturing overhead .............................................. 10
Unit product cost....................................................................... P100
Note that selling and administrative expenses are not treated as product
costs; that is, they are not included in the costs that are inventoried. These
expenses are always treated as period costs and are charged against the
current period’s revenue.
Requirement 2
12-5
Chapter 12 Variable Costing
* The variable cost of goods sold could be computed more simply as: 9,000 units
sold × $100 per unit = $900,000.
Requirement 3
The break-even point in units sold can be computed using the contribution
margin per unit as follows:
Selling price per unit ............................................................................................
P200
Variable cost per unit............................................................................................
120
Contribution margin per unit ................................................................ P 80
Fixed expenses
Break-even unit sales =
Unit contribution margin
P750,000
=
P80 per unit
= 9,375 units
III. Problems
Problem 1
Sales P20,700,000
Less: Variable Cost of Sales
12-6
Variable Costing Chapter 12
Sales P26,100,000
Less Cost of goods sold:
Inventory, Jan. 1 P 1,380,000
Current Production 16,100,000
Total Available for Sale P17,480,000
Inventory, Dec. 31 747,500
Cost of Sales - Standard P16,732,500
Favorable Capacity Variance 900,000 15,832,500
Income from Manufacturing P10,267,500
Sales P26,100,000
Less Variable Cost of Sales:
Inventory, Jan. 1 P 805,000
Production 9,800,000
Total Available for Sale P10,605,000
Inventory, Dec. 31 455,000 10,150,000
Contribution Margin - Manufacturing P15,950,000
Less Fixed Cost 5,400,000
Income from Manufacturing P10,550,000
12-7
Chapter 12 Variable Costing
Reconciliation
Problem 2
Requirement 1
Honey Company
Income Statement - Direct Costing
For the Year Ended December 31, 2005
Sales P280,000
Less Variable Cost of Sales:
Finished Goods Inventory, 1/1 P 4,000
Current Production 120,000
Total Available for Sale P124,000
Finished Goods Inventory, 12/31 12,000
Variable Cost of Sale - Standard P112,000
Unfavorable Variance 5,000 117,000
12-8
Variable Costing Chapter 12
Requirement 2
Honey Company
Income Statement - Absorption Costing
For the Year Ended December 31, 2005
Sales P280,000
Less: Cost of Sales
Finished goods inventory, Jan. 1 (1,000 x P5.50) P 5,500
Current production costs
Variable (30,000 x P4.00) P120,000
Fixed (30,000 x P1.50) 45,000 165,000
P170,500
Less: Finished goods inventory, Dec. 31
(3,000 x P5.50) 16,500
Cost of Sales - at Standard P154,000
Add (Deduct) Variance
Unfavorable variable manufacturing
costs variances 5,000
Underapplied fixed factory overhead
(6,000 x P1.50) 9,000
Cost of Sales - Actual P168,000
Gross Profit P112,000
Less: Selling and administrative expenses
Variable 28,000
Fixed 20,000
P 48,000
Net Income P 64,000
Requirement 1
The unit product cost under the variable costing approach would be
computed as follows:
Direct materials ................................................................................................
P 8
Direct labor................................................................................................
10
Variable manufacturing overhead ................................................................
2
12-9
Chapter 12 Variable Costing
Year 1 Year 2
Sales ................................................................................................
P1,000,000 P1,500,000
Less variable expenses:
Variable cost of goods sold @ P20 per unit ................................ 400,000 600,000
Variable selling and administrative
@ P3 per unit ................................................................60,000 90,000
Total variable expenses ................................................................
460,000 690,000
Contribution margin ................................................................
540,000 810,000
Less fixed expenses:
Fixed manufacturing overhead................................ 350,000 350,000
Fixed selling and administrative ................................ 250,000 250,000
Total fixed expenses................................................................
600,000 600,000
Net operating income (loss) ................................................................
P (60,000) P 210,000
Requirement 2
Requirement 1
12-10
Variable Costing Chapter 12
Requirement 2
a.
Year 1 Year 2 Year 3
Variable manufacturing cost................................
P 4 P 4 P 4
Fixed manufacturing cost:
P600,000 ÷ 50,000 units................................ 12
P600,000 ÷ 60,000 units................................ 10
P600,000 ÷ 40,000 units................................ 15
Unit product cost ................................................................
P16 P14 P19
b.
Variable costing net operating income
(loss) ................................................................
P30,000 P(110,000) P 30,000
Add (Deduct): Fixed manufacturing
overhead cost deferred in inventory
from Year 2 to Year 3 under
absorption costing (20,000 units ×
P10 per unit)................................................................
200,000 (200,000)
Add: Fixed manufacturing overhead
cost deferred in inventory from Year
3 to the future under absorption
costing (10,000 units × P15 per
unit)................................................................ 150,000
Absorption costing net operating
income (loss) ................................................................
P30,000 P 90,000 P(20,000)
Requirement 3
Production went up sharply in Year 2 thereby reducing the unit product cost,
12-11
Chapter 12 Variable Costing
as shown in (2a). This reduction in cost, combined with the large amount of
fixed manufacturing overhead cost deferred in inventory for the year, more
than offset the loss of revenue. The net result is that the company’s net
operating income rose even though sales were down.
Requirement 4
Requirement 5
a. Several things would have been different if the company had been using
JIT inventory methods. First, in each year production would have been
geared to sales so that little or no inventory of finished goods would
have been built up in either Year 2 or Year 3. Second, unit product costs
probably would have been the same in all three years, since these costs
would have been established on the basis of expected sales (50,000
units) for each year. Third, since only 40,000 units were sold in Year 2,
the company would have produced only that number of units and
therefore would have had some underapplied overhead cost for the year.
(See the discussion on underapplied overhead in the following
paragraph.)
b. If JIT had been in use, the net operating income under absorption
costing would have been the same as under variable costing in all three
years. The reason is that with production geared to sales, there would
have been no ending inventory on hand, and therefore there would have
been no fixed manufacturing overhead costs deferred in inventory to
other years. Assuming that the company expected to sell 50,000 units in
each year and that unit product costs were set on the basis of that level
of expected activity, the income statements under absorption costing
would have appeared as follows:
12-12
Variable Costing Chapter 12
1. D 11. B
2. B 12. A
3. B 13. C
4. B 14. D
5. B 15. B
6. C 16. A
7. A 17. C
8. B 18. C
9. A 19. B
10. A 20. C
12-13
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 13
COST-VOLUME-PROFIT RELATIONSHIPS
I. Questions
1. The total “contribution margin” is the excess of total revenue over total
variable costs. The unit contribution margin is the excess of the unit
price over the unit variable costs.
2. Total contribution margin:
Selling price - manufacturing variable costs expensed -
nonmanufacturing variable costs expensed = Total contribution margin.
Gross margin:
Selling price - variable manufacturing costs expensed - fixed
manufacturing costs expensed = Gross margin.
3. A company operating at “break-even” is probably not covering costs
which are not recorded in the accounting records. An example of such a
cost is the opportunity cost of owner-invested capital. In some small
businesses, owner-managers may not take a salary as large as the
opportunity cost of forgone alternative employment. Hence, the
opportunity cost of owner labor may be excluded.
4. In the short-run, without considering asset replacement, net operating
cash flows would be expected to exceed net income, because the latter
includes depreciation expense, while the former does not. Thus, the
cash basis break-even would be lower than the accrual break-even if
asset replacement is ignored. However, if asset replacement costs are
taken into account, (i.e., on a “cradle to grave” basis), the long-run net
cash flows equal long-run accrual net income, and the long-run break-
even points are the same.
5. Both unit price and unit variable costs are expressed on a per product
basis, as:
= (P1 - V1) X1 + (P2 - V2) X2 + + (Pn - Vn) Xn - F,
for all products 1 to n where:
13-1
Chapter 13 Cost-Volume-Profit Relationships
= operating profit,
P = average unit selling price,
V = average unit variable cost,
X = quantity of units,
F = total fixed costs for the period.
6. If the relative proportions of products (i.e., the product “mix”) is not
held constant, products may be substituted for each other. Thus, there
may be almost an infinite number of ways to achieve a target operating
profit. As shown from the multiple product profit equation, there are
several unknowns for one equation:
= (P1 - V1) X1 + (P2 - V2) X2 + + (Pn - Vn) Xn - F,
for all products 1 to n.
7. A constant product mix is assumed to simplify the analysis. Otherwise,
there may be no unique solution.
8. Operating leverage measures the impact on net operating income of a
given percentage change in sales. The degree of operating leverage at a
given level of sales is computed by dividing the contribution margin at
that level of sales by the net operating income.
9. Three approaches to break-even analysis are (a) the equation method, (b)
the contribution margin method, and (c) the graphical method. In the
equation method, the equation is: Sales = Variable expenses + Fixed
expenses + Profits, where profits are zero at the break-even point. The
equation is solved to determine the break-even point in units or peso
sales.
10. The margin of safety is the excess of budgeted (or actual) sales over the
break-even volume of sales. It states the amount by which sales can
drop before losses begin to be incurred.
11. The sales mix is the relative proportions in which a company’s products
are sold. The usual assumption in cost-volume-profit analysis is that the
sales mix will not change.
12. A higher break-even point and a lower net operating income could result
if the sales mix shifted from high contribution margin products to low
contribution margin products. Such a shift would cause the average
contribution margin ratio in the company to decline, resulting in less
total contribution margin for a given amount of sales. Thus, net
operating income would decline. With a lower contribution margin
13-2
Cost-Volume-Profit Relationships Chapter 13
ratio, the break-even point would be higher since it would require more
sales to cover the same amount of fixed costs.
II. Exercises
Requirement 1
Total Per Unit
Sales (30,000 units × 1.15 = 34,500 units) ................................P172,500 P5.00
Less variable expenses ................................................................
103,500 3.00
Contribution margin................................................................
69,000 P2.00
Less fixed expenses................................................................
50,000
Net operating income................................................................
P 19,000
Requirement 2
Requirement 3
Requirement 4
13-3
Chapter 13 Cost-Volume-Profit Relationships
Requirement 1
The fixed expenses of the Extravaganza total P8,000; therefore, the break-
even point would be computed as follows:
Alternative solution:
Break-even Fixed expenses
point =
Unit contribution margin
in unit sales
P8,000
=
P20 per person
= 400 persons
Requirement 2
13-4
Cost-Volume-Profit Relationships Chapter 13
Requirement 3
Cost-volume-profit graph:
P22,000
P20,000
P18,000
Total Sales
P16,000
P12,000
Pesos
P6,000
P4,000
P2,000
P0
0 100 200 300 400 500 600
Number of Persons
Requirement 1
13-5
Chapter 13 Cost-Volume-Profit Relationships
Alternative solution:
Break-even Fixed expenses
point =
Unit contribution margin
in unit sales
P1,350,000
=
P270 per lantern
= 5,000 lanterns
or at P900 per lantern, P4,500,000 in sales
Requirement 2
Requirement 3
Present: Proposed:
8,000 Lanterns 10,000 Lanterns*
Total Per Unit Total Per Unit
Sales ................................................................
P7,200,000 P900 P8,100,000 P810 **
Less variable expenses ................................
5,040,000 630 6,300,000 630
Contribution margin................................ 2,160,000 P270 1,800,000 P180
Less fixed expenses................................ 1,350,000 1,350,000
Net operating income................................
P 810,000 P 450,000
13-6
Cost-Volume-Profit Relationships Chapter 13
Requirement 4
Alternative solution:
Unit sales to Fixed expenses + Target profit
attain target profit =
Unit contribution margin
P1,350,000 + P720,000
=
P180 per lantern
= 11,500 lanterns
Requirement 1
= 6
Requirement 2
13-7
Chapter 13 Cost-Volume-Profit Relationships
Requirement 1
Model E700 Model J1500 Total Company
Amount % Amount % Amount %
Sales P700,000 100 P300,000 100 P1,000,000 100
Less variable expenses................................
280,000 40 90,000 30 370,000 37
Contribution margin ................................
P420,000 60 P210,000 70 630,000 63 *
Less fixed expenses ................................ 598,500
Net operating income ................................ P 31,500
Requirement 2
Requirement 3
13-8
Cost-Volume-Profit Relationships Chapter 13
This answer assumes no change in selling prices, variable costs per unit,
fixed expenses, or sales mix.
Requirement 1
Alternatively:
Requirement 2
Requirement 3
Unit sales to Fixed expenses + Target profit
attain target profit =
Unit contribution margin
P150,000 + P18,000
=
P12 per unit
= 14,000 units
13-9
Chapter 13 Cost-Volume-Profit Relationships
Total Unit
Sales (14,000 units × P40 per unit)................................ P560,000 P40
Less variable expenses
(14,000 units × P28 per unit) ................................................................
392,000 28
Contribution margin
(14,000 units × P12 per unit) ................................................................
168,000 P12
Less fixed expenses................................................................
150,000
Net operating income ................................................................
P 18,000
Requirement 4
= 16.7% (rounded)
Requirement 5
13-10
Cost-Volume-Profit Relationships Chapter 13
Alternative solution:
Since in this case the company’s fixed expenses will not change, monthly
net operating income will increase by the amount of the increased
contribution margin, P24,000.
III. Problems
Requirement 1
Contribution margin P15
CM ratio = = = 25%
Selling price P60
Variable expense P45
Variable expense ratio = = = 75%
Selling price P60
Requirement 2
Alternative solution:
X = 0.75X + P240,000 + P0
0.25X = P240,000
X = P240,000 ÷ 0.25
X = P960,000; or at P60 per unit, 16,000 units
Requirement 3
13-11
Chapter 13 Cost-Volume-Profit Relationships
Since the fixed expenses are not expected to change, net operating income
will increase by the entire P100,000 increase in contribution margin
computed above.
Requirement 4
Requirement 5
Requirement 6
Contribution margin P300,000
a. Degree of operating leverage = = 5
Net operating P60,000
=
income
b. Expected increase in sales........................................ 8%
Degree of operating leverage ................................... x 5
Expected increase in net operating income............... 40%
c. If sales increase by 8%, then 21,600 units (20,000 x 1.08 = 21,600) will
be sold next year. The new income statement will be as follows:
13-12
Cost-Volume-Profit Relationships Chapter 13
Percent of
Total Per Unit Sales
Sales (21,600 units) ............... P1,296,000 P60 100%
Less variable expenses........... 972,000 45 75%
Contribution margin .............. 324,000 P15 25%
Less fixed expenses ............... 240,000
Net operating income ............ P 84,000
Thus, the P84,000 expected net operating income for next year
represents a 40% increase over the P60,000 net operating income earned
during the current year:
P84,000 – P60,000 P24,000
= = 40% increase
P60,000 P60,000
Note from the income statement above that the increase in sales from
20,000 to 21,600 units has resulted in increases in both total sales and
total variable expenses. It is a common error to overlook the increase in
variable expense when preparing a projected income statement.
Requirement 7
a. A 20% increase in sales would result in 24,000 units being sold next
year: 20,000 units x 1.20 = 24,000 units.
Percent of
Total Per Unit Sales
Sales (24,000 units) ............... P1,440,000 P60 100%
Less variable expenses........... 1,152,000 48* 80%
Contribution margin .............. 288,000 P12 20%
Less fixed expenses ............... 210,000†
Net operating income ............ P 78,000
Note that the change in per unit variable expenses results in a change in
both the per unit contribution margin and the CM ratio.
c. Yes, based on these data the changes should be made. The changes will
increase the company’s net operating income from the present P60,000
to P78,000 per year. Although the changes will also result in a higher
break-even point (17,500 units as compared to the present 16,000 units),
the company’s margin of safety will actually be wider than before:
Requirement 1
13-14
Cost-Volume-Profit Relationships Chapter 13
Alternative solution:
= 15,000 units
= P300,000 in sales
Requirement 2
Since the company presently has a loss of P9,000 per month, if the changes
are adopted, the loss will turn into a profit of P4,000 per month.
Requirement 3
13-15
Chapter 13 Cost-Volume-Profit Relationships
Requirement 4
Alternative solution:
= 17,500 units
Requirement 5
13-16
Cost-Volume-Profit Relationships Chapter 13
= 16,000 units
c. Whether or not one would recommend that the company automate its
operations depends on how much risk he or she is willing to take, and
depends heavily on prospects for future sales. The proposed changes
would increase the company’s fixed costs and its break-even point.
However, the changes would also increase the company’s CM ratio
(from 30% to 65%). The higher CM ratio means that once the break-
even point is reached, profits will increase more rapidly than at present.
If 20,000 units are sold next month, for example, the higher CM ratio
will generate P22,000 more in profits than if no changes are made.
The greatest risk of automating is that future sales may drop back down
to present levels (only 13,500 units per month), and as a result, losses
will be even larger than at present due to the company’s greater fixed
13-17
Chapter 13 Cost-Volume-Profit Relationships
costs. (Note the problem states that sales are erratic from month to
month.) In sum, the proposed changes will help the company if sales
continue to trend upward in future months; the changes will hurt the
company if sales drop back down to or near present levels.
If more than 16,857 units are sold, the proposed plan will yield the greatest
profit; if less than 16,857 units are sold, the present plan will yield the
greatest profit (or the least loss).
Requirement 1
Products
Sinks Mirrors Vanities Total
Percentage of total sales ................................
32% 40% 28% 100%
Sales ................................................................
P160,000 100 % P200,000 100 % P140,000 100 % P500,000 100 %
Less variable expenses ................................
48,000 30 160,000 80 77,000 55 285,000 57
Contribution margin ................................
P112,000 70 % P 40,000 20 % P 63,000 45 % 215,000 43 %*
Less fixed expenses ................................ 223,600
Net operating income (loss) ................................ P ( 8,600)
Requirement 2
Break-even sales:
Break-even point Fixed expenses
in total peso sales =
CM ratio
P223,600
=
0.43
13-18
= P520,000 in sales
Cost-Volume-Profit Relationships Chapter 13
Requirement 3
Although the company met its sales budget of P500,000 for the month, the
mix of products sold changed substantially from that budgeted. This is the
reason the budgeted net operating income was not met, and the reason the
break-even sales were greater than budgeted. The company’s sales mix was
planned at 48% Sinks, 20% Mirrors, and 32% Vanities. The actual sales
mix was 32% Sinks, 40% Mirrors, and 28% Vanities.
As shown by these data, sales shifted away from Sinks, which provides our
greatest contribution per peso of sales, and shifted strongly toward Mirrors,
which provides our least contribution per peso of sales. Consequently,
although the company met its budgeted level of sales, these sales provided
considerably less contribution margin than we had planned, with a resulting
decrease in net operating income. Notice from the attached statements that
the company’s overall CM ratio was only 43%, as compared to a planned
CM ratio of 52%. This also explains why the break-even point was higher
than planned. With less average contribution margin per peso of sales, a
greater level of sales had to be achieved to provide sufficient contribution
margin to cover fixed costs.
Requirement 1
13-19
Chapter 13 Cost-Volume-Profit Relationships
Requirement 2
Break-even point Fixed expenses
in total sales =
CM ratio
pesos
P1,800,000
=
0.60
Requirement 4
Contribution margin P2,160,000
a. Degree of operating leverage = = 6
Net operating P360,000
=
income
b. 6 × 15% = 90% increase in net operating income.
Requirement 5
Last Year: Proposed:
28,000 units 42,000 units*
Total Per Unit Total Per Unit
Sales ................................................................
P4,200,000 P150.00 P5,670,000 P135.00**
Less variable expenses ................................
1,680,000 60.00 2,520,000 60.00
Contribution margin................................
2,520,000 P 90.00 3,150,000 P 75.00
Less fixed expenses................................
1,800,000 2,500,000
Net operating income................................
P 720,000 P 650,000
Requirement 6
13-20
Cost-Volume-Profit Relationships Chapter 13
Requirement 1
Selling price................................................................................................
P30
Less variable expenses:
Purchase cost of the patches ................................................................
P15
Commissions to the student salespersons................................ 6 21
Contribution margin.............................................................................................
P 9
Since there are no fixed costs, the number of unit sales needed to yield the
desired P7,200 in profits can be obtained by dividing the target profit by the
unit contribution margin:
Target profit P7,200
= = 800 patches
Unit contribution margin P9 per patch
800 patches x P30 per patch = P24,000 in total sales
Requirement 2
Since an order has been placed, there is now a “fixed” cost associated with
the purchase price of the patches (i.e., the patches can’t be returned). For
example, an order of 200 patches requires a “fixed” cost (investment) of
P3,000 (200 patches × P15 per patch = P3,000). The variable costs drop to
only P6 per patch, and the new contribution margin per patch becomes:
13-21
Chapter 13 Cost-Volume-Profit Relationships
Selling price................................................................................................
P30
Less variable expenses (commissions only).......................................................... 6
Contribution margin.............................................................................................
P24
Since the “fixed” cost of P3,000 must be recovered before Ms. Morales
shows any profit, the break-even computation would be:
If a quantity other than 200 patches were ordered, the answer would change
accordingly.
Problem 6
TR
600,000
500,000
TC
400,000
(P)
Break-even
300,000 point
200,000 13-22
FC
100,000
250,000
P 200,000
R
O
F 150,000
I
T
100,000
Break-even
50,000
point
0
5,000 10,000 15,000 20,000 25,000 30,000
50,000
100,000
L
O 150,000
S
S
200,000
13-23
250,000
Chapter 13 Cost-Volume-Profit Relationships
13-24
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 14
I. Questions
1. Cost centers are evaluated by means of performance reports. Profit
centers are evaluated by means of contribution income statements
(including cost center performance reports), in terms of meeting sales
and cost objectives. Investment centers are evaluated by means of the
rate of return which they are able to generate on invested assets.
2. Overall profitability can be improved (1) by increasing sales, (2) by
reducing expenses, or (3) by reducing assets.
3. ROI may lead to dysfunctional decisions in that divisional managers may
reject otherwise profitable investment opportunities simply because they
would reduce the division’s overall ROI figure. The residual income
approach overcomes this problem by establishing a minimum rate of
return which the company wants to earn on its operating assets, thereby
motivating the manager to accept all investment opportunities promising
a return in excess of this minimum figure.
4. A cost center manager has control over cost, but not revenue or
investment funds. A profit center manager, by contrast, has control over
both cost and revenue. An investment center manager has control over
cost and revenue and investment funds.
5. The term transfer price means the price charged for a transfer of goods
or services between units of the same organization, such as two
departments or divisions. Transfer prices are needed for performance
evaluation purposes.
6. The use of market price for transfer purposes will create the actual
conditions under which the transferring and receiving units would be
operating if they were completely separate, autonomous companies. It is
generally felt that the creation of such conditions provides managerial
incentive, and leads to greater overall efficiency in operations.
14-1
Chapter 14 Responsibility Accounting and Transfer Pricing
7. Negotiated transfer prices should be used (1) when the volume involved
is large enough to justify quantity discounts, (2) when selling and/or
administrative expenses are less on intracompany sales, (3) when idle
capacity exists, and (4) when no clear-cut market price exists (such as a
sister division being the only supplier of a good or service).
8. Suboptimization can result if transfer prices are set in a way that benefits
a particular division, but works to the disadvantage of the company as a
whole. An example would be a transfer between divisions when no
transfers should be made (e.g., where a better overall contribution
margin could be generated by selling at an intermediate stage, rather
than transferring to the next division). Suboptimization can also result if
transfer pricing is so inflexible that one division buys from the outside
when there is substantial idle capacity to produce the item internally. If
divisional managers are given full autonomy in setting, accepting, and
rejecting transfer prices, then either of these situations can be created,
through selfishness, desire to “look good”, pettiness, or bickering.
II. Exercises
No. Although Department 3 does not cover all of the cost allocated to it. It
contributes P21,000 to the total operations over and above its direct costs.
Without Department 3, the company would earn P21,000 less as compared
with the original over-all income of P47,000.
Department
1 2 4 Total
Revenue P132,000 P168,000 P98,000 P398,000
Direct cost of department 82,000 108,000 61,000 251,000
Contribution of the
department P 50,000 P 60,000 P37,000 P147,000
Allocated cost 121,000
Net income P 26,000
With the discontinuance of Department 3, the revenue and direct cost of the
department are eliminated, but there is no reduction in the total allocated
cost.
14-2
Responsibility Accounting and Transfer Pricing Chapter 14
Requirement 1
ROI RI
Operating assets P400,000 P400,000
Operating income P100,000 P100,000
ROI (P100,000 P400,000) 25%
Minimum required income
(16% x P400,000) P64,000
RI (P100,000 - P64,000) P36,000
Requirement 2
The manager of the Cling Division would not accept this project under the
ROI approach since the division is already earning 25%. Accepting this
project would reduce the present divisional performance, as shown below:
Present New Project Overall
Operating assets P400,000 P60,000 P460,000
Operating income P100,000 P12,000* P112,000
ROI 25% 20% 24.35%
* P60,000 x 20% = P12,000
Under the RI approach, on the other hand, the manager would accept this
project since the new project provides a higher return than the minimum
required rate of return (20 percent vs. 16 percent). The new project would
increase the overall divisional residual income, as shown below:
Present New Project Overall
Operating assets P400,000 P60,000 P460,000
Operating income P100,000 P12,000 P112,000
Minimum required
return at 16% 64,000 9,600* 73,600
RI P 36,000 P 2,400 P 38,400
* P60,000 x 16% = P9,600
14-3
Chapter 14 Responsibility Accounting and Transfer Pricing
Requirement 1
Requirement 2
Requirement 1
P630,000 P9,000,000
Division A : X = ROI
P9,000,000 P3,000,000
7% X 3 = 21%
P1,800,000 P20,000,000
Division B : X = ROI
P20,000,000 P10,000,000
9% X 2 = 18%
Requirement 2
Division A Division B
Average operating assets (a) ........ P3,000,000 P10,000,000
Net operating income................... P 630,000 P 1,800,000
Minimum required return on average
operating assets - 16% x (a) .... 480,000 1,600,000
Residual income........................... P 150,000 P 200,000
14-4
Responsibility Accounting and Transfer Pricing Chapter 14
Requirement 3
No, Division B is simply larger than Division A and for this reason one
would expect that it would have a greater amount of residual income. As
stated in the text, residual income can’t be used to compare the performance
of divisions of different sizes. Larger divisions will almost always look
better, not necessarily because of better management but because of the
larger peso figures involved. In fact, in the case above, Division B does not
appear to be as well managed as Division A. Note from Part (2) that
Division B has only an 18 percent ROI as compared to 21 percent for
Division A.
14-5
Chapter 14 Responsibility Accounting and Transfer Pricing
Requirement 1
Computation of ROI
Division A:
P300,000 P6,000,000
ROI = x = 5% x 4 = 20%
P6,000,000 P1,500,000
Division B:
P900,000 P10,000,000
ROI = x = 9% x 2 = 18%
P10,000,000 P5,000,000
Division C:
P180,000 P8,000,000
ROI = x = 2.25% x 4 = 9%
P8,000,000 P2,000,000
Requirement 2
Requirement 3
14-6
Responsibility Accounting and Transfer Pricing Chapter 14
Requirement 1
Division A Division B Total Company
Sales P3,500,000 1 P2,400,000 2
P5,200,000 3
Less expenses:
Added by the division................................
2,600,000 1,200,000 3,800,000
Transfer price paid................................
— 700,000 —
Total expenses................................
2,600,000 1,900,000 3,800,000
Net operating income................................
P 900,000 P 500,000 P1,400,000
1
20,000 units × P175 per unit = P3,500,000.
2
4,000 units × P600 per unit = P2,400,000.
3
Division A outside sales (16,000 units × P175 per unit) ................................ P2,800,000
Division B outside sales (4,000 units × P600 per unit)................................ 2,400,000
Total outside sales ................................................................................................
P5,200,000
14-7
Chapter 14 Responsibility Accounting and Transfer Pricing
Requirement 2
Requirement 1
The lowest acceptable transfer price from the perspective of the selling
division is given by the following formula:
Total contribution margin
Variable on lost sales
Transfer price cost per unit
+
Number of units transferred
.
There is no idle capacity, so each of the 20,000 units transferred from
Division X to Division Y reduces sales to outsiders by one unit. The
contribution margin per unit on outside sales is P20 (= P50 – P30).
P20 x 20,000
Transfer price (P30 – P2) +
20,000
Transfer price = P28 + P20 = P48
The buying division, Division Y, can purchase a similar unit from an outside
supplier for P47. Therefore, Division Y would be unwilling to pay more
than P47 per unit.
The requirements of the two divisions are incompatible and no transfer will
take place.
14-8
Responsibility Accounting and Transfer Pricing Chapter 14
Requirement 2
In this case, Division X has enough idle capacity to satisfy Division Y’s
demand. Therefore, there are no lost sales and the lowest acceptable price
as far as the selling division is concerned is the variable cost of P20 per unit.
P0
Transfer price P20 +
20,000
= P20
The buying division, Division Y, can purchase a similar unit from an outside
supplier for P34. Therefore, Division Y would be unwilling to pay more
than P34 per unit.
In this case, the requirements of the two divisions are compatible and a
transfer will hopefully take place at a transfer price within the range:
Requirement 1
Requirement 2
14-9
Chapter 14 Responsibility Accounting and Transfer Pricing
The additional savings in Division B means that now Division A should buy
outside.
Requirement 3
III. Problems
Requirement (a)
14-10
Responsibility Accounting and Transfer Pricing Chapter 14
Requirement (b)
The complaint of the manager of Product T is justified on the ground that his
product line shows a positive contribution margin and therefore, contributes
to the recovery of non-controllable fixed expenses. This observation is, of
course, made under the assumption that the preceding year’s figures (which
are not given) were less favorable than the current year.
Requirement 1
Product
A B C
Incremental sales P71,000 P46,000 P117,000
Less: Incremental costs 42,000 15,000 96,000
Net income P29,000 P31,000 P 21,000
Requirement 2
The sunk costs are:
Depreciation of equipment P 6,400
Operating cost of the equipment 4,600
Total P11,000
Requirement 3
Opportunity cost of selling Product B is
From Product A P29,000
From Product C 21,000
Total P50,000
14-11
Chapter 14 Responsibility Accounting and Transfer Pricing
Actual Based on
Cost-Volume 4,200 4,200 Variance
Formula Hours Hours U (F)
Variable Overhead Costs:
Utilities P0.80 per hour P 3,600 P 3,360 P240
Supplies 1.80 7,400 7,560 (160)
Indirect labor 1.20 5,300 5,040 260
Total P3.80 P16,300 P15,960 P340
Fixed Overhead Costs:
Utilities P 1,600 P 1,600 -
Supplies 2,200 2,200 -
Depreciation 6,000 6,000 -
Indirect labor 5,400 5,400 -
Insurance 1,200 1,200 -
Total P16,400 P16,400 -
Total Factory Overhead Costs P32,700 P32,360 P340
Requirement 1
The cost of raw materials rose significantly, possibly because of (1) deficient
machinery due to the cutback in maintenance expenditures and/or (2) to the
lower labor cost, possibly due to the use of less-skilled workers. Supplies
decreased, indicating possible inadequacies for next period’s production run.
14-12
Responsibility Accounting and Transfer Pricing Chapter 14
Requirement 2
The marketing division is behind its cost allotment. The personnel division
came in somewhat under its budgeted costs. Perhaps there has been a
cutback in hiring, indicating possible reduction in future production.
Requirement 1
14-13
Chapter 14 Responsibility Accounting and Transfer Pricing
Requirement 2
Note how the change in income follows the change in revenues, as predicted
by operating leverage. Operating leverage multiplied times the percentage
change in sales gives the percentage change in income. Thus, the greater the
operating leverage ratio, the larger the effect on income and ROI of a given
percentage change in sales. This exercise provides an opportunity to review
the relationship between volume and profit. See the illustration below:
% change in income
If volume goes to 2,000 units: (P280 – P160) / P160 = 75%
If volume goes to 1,000 units: (P160 – P40) / P160 = 75%
% change in ROI
If volume goes to 2,000 units: (35% - 20%) / 20% = 75%
If volume goes to 1,000 units: (20% - 5%) / 20% = 75%
14-14
Responsibility Accounting and Transfer Pricing Chapter 14
Requirement 1
ROI computations:
P1,800,000 P20,000,000
Quezon: x = 9% x 2 = 18%
P20,000,000 P10,000,000
Requirement 2
Pasig Quezon
Average operating assets (a) ................................
P3,000,000 P10,000,000
Net operating income ................................ P 630,000 P 1,800,000
Minimum required return on average
operating assets—16% × (a) ................................ 480,000 P 1,600,000
Residual income................................................................
P 150,000 P 200,000
Requirement 3
No, the Quezon Division is simply larger than the Pasig Division and for this
reason one would expect that it would have a greater amount of residual
income. Residual income can’t be used to compare the performance of
divisions of different sizes. Larger divisions will almost always look better,
not necessarily because of better management but because of the larger peso
figures involved. In fact, in the case above, Quezon does not appear to be as
well managed as Pasig. Note from Part (1) that Quezon has only an 18%
ROI as compared to 21% for Pasig.
14-15
Chapter 14 Responsibility Accounting and Transfer Pricing
Requirement 1
Since the Valve Division has idle capacity, it does not have to give up any
outside sales to take on the Pump Division’s business. Applying the formula
for the lowest acceptable transfer price from the viewpoint of the selling
division, we get:
Total contribution margin
Variable on lost sales
Transfer price cost per unit +
Number of units transferred
P0
Transfer price P16 +
10,000
= P16
The Pump Division would be unwilling to pay more than P29, the price it is
currently paying an outside supplier for its valves. Therefore, the transfer
price must fall within the range:
Requirement 2
Since the Valve Division is selling all of the valves that it can produce on the
outside market, it would have to give up some of these outside sales to take
on the Pump Division’s business. Thus, the Valve Division has an
opportunity cost, which is the total contribution margin on lost sales:
Total contribution margin
Variable on lost sales
Transfer price cost per unit
+
Number of units transferred
Since the Pump Division can purchase valves from an outside supplier at
only P29 per unit, no transfers will be made between the two divisions.
14-16
Responsibility Accounting and Transfer Pricing Chapter 14
Requirement 3
Applying the formula for the lowest acceptable price from the viewpoint of
the selling division, we get:
In this case, the transfer price must fall within the range:
To produce the 20,000 special valves, the Valve Division will have to give
up sales of 30,000 regular valves to outside customers. Applying the
formula for the lowest acceptable price from the viewpoint of the selling
division, we get:
Total contribution margin
Variable on lost sales
Transfer price cost per unit
+
Number of units transferred
14-17
Chapter 14 Responsibility Accounting and Transfer Pricing
14-18
MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 15
I. Questions
1. No. Planning and control are different, although related, concepts.
Planning involves developing objectives and formulating steps to
achieve those objectives. Control, by contrast, involves the means by
which management ensures that the objectives set down at the planning
stage are attained.
2. Budgets have a dual purpose, for planning and for following up the
implementation of the plan. The great benefits from budgeting lie in the
quick investigation of deviations and in the subsequent corrective action.
Budgets should not be prepared in the first place if they are ignored,
buried in files, or improperly interpreted.
3. Two major features of a budgetary program are (1) the accounting
techniques which developed it and (2) the human factors which
administer it. The human factors are far more important. The success of
a budgetary system depends upon its acceptance by the company
members who are affected by the budget. Without a thoroughly
educated and cooperative management group at all levels of
responsibility, budgets are a drain on the funds of the business and are a
hindrance instead of help to efficient operations.
4. Manufacturing overhead costs are budgeted at normal operating
capacity, and the costs are applied to the products using a predetermined
rate. The predetermined rate is computed by dividing a factor that can
be identified with both the products and the overhead into the overhead
budgeted at the normal operating capacity. Budgets may also be used in
costing products in a standard cost accounting system.
5. The production division operates to produce the products that are sold.
Production and sales must be coordinated. Products must be
manufactured so that they will be available to meet sales delivery dates.
Activity of the production division will depend upon the sales that can
be made. Also, the sales division is limited by the capabilities of the
15-1
Chapter 15 Functional and Activity-Based Budgeting
15-2
Functional and Activity-Based Budgeting Chapter 15
1. C 6. A
2. H 7. B
3. E 8. J
4. F 9. D
5. I 10. G
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Chapter 15 Functional and Activity-Based Budgeting
III. Exercises
Requirement 1
Notice that even though sales peak in August, cash collections peak in
September. This occurs because the bulk of the company’s customers pay in
the month following sale. The lag in collections that this creates is even
more pronounced in some companies. Indeed, it is not unusual for a
company to have the least cash available in the months when sales are
greatest.
Requirement 2
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Functional and Activity-Based Budgeting Chapter 15
Year 2
First Second Third Fourth Year
Production needs—chips ................................ 180,000 270,000 450,000 300,000 1,200,000
Add desired ending inventory—
chips ................................................................
54,000 90,000 60,000 48,000 48,000
Total needs—chips ................................ 234,000 360,000 510,000 348,000 1,248,000
Less beginning inventory—chips ................................ 36,000 54,000 90,000 60,000 36,000
Required purchases—chips................................ 198,000 306,000 420,000 288,000 1,212,000
Cost of purchases at P2 per chip................................
P396,000 P612,000 P840,000 P576,000 P2,424,000
Requirement 1
Assuming that the direct labor workforce is adjusted each quarter, the direct
labor budget would be:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter Year
Units to be produced ................................ 5,000 4,400 4,500 4,900 18,800
Direct labor time per unit (hours) ................................
× 0.40 × 0.40 × 0.40 × 0.40 × 0.40
Total direct labor hours needed ................................
2,000 1,760 1,800 1,960 7,520
Direct labor cost per hour ................................
× P11.00 × P11.00 × P11.00 × P11.00 × P11.00
Total direct labor cost ................................
P 22,000 P 19,360 P 19,800 P 21,560 P 82,720
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Chapter 15 Functional and Activity-Based Budgeting
Requirement 2
Assuming that the direct labor workforce is not adjusted each quarter and
that overtime wages are paid, the direct labor budget would be:
Requirement 1
Kiko Corporation
Manufacturing Overhead Budget
Requirement 2
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Functional and Activity-Based Budgeting Chapter 15
Helene Company
Selling and Administrative Expense Budget
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Chapter 15 Functional and Activity-Based Budgeting
Financing:
Borrowings ................................................................
8 20 * — — 28
Repayments (including
interest)................................................................
0 0 (25) (7)* (32)
Total financing ................................................................
8 20 (25) (7) (4)
Cash balance, ending ................................ P5 P 5 P 5 P 6 P 6
*Given.
IV. Problems
Requirement 1
Requirement 2
Payments to suppliers:
August purchases (accounts payable) ...............................................................
P16,000
September purchases: P25,000 × 20%..............................................................
5,000
Total cash payments.............................................................................................
P21,000
Requirement 3
COOKIE PRODUCTS
Cash Budget
For the Month of September
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Functional and Activity-Based Budgeting Chapter 15
Requirement 1
Production budget:
July August September October
Budgeted sales (units) ................................40,000 50,000 70,000 35,000
Add desired ending inventory ................................
20,000 26,000 15,500 11,000
Total needs................................................................
60,000 76,000 85,500 46,000
Less beginning inventory................................
17,000 20,000 26,000 15,500
Required production ................................ 43,000 56,000 59,500 30,500
Requirement 2
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Chapter 15 Functional and Activity-Based Budgeting
Requirement 3
* 30,500 units (October production) × 3 lbs. per unit= 91,500 lbs.; 91,500 lbs. ×
0.5 = 45,750 lbs.
Requirement 1
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Functional and Activity-Based Budgeting Chapter 15
Requirement 2
Sales ................................................................................................
P250,000
Cost of goods sold:
Beginning inventory................................................................
P 30,000
Add purchases................................................................ 200,000
Goods available for sale ................................................................
230,000
Ending inventory................................................................ 40,000
Cost of goods sold................................................................ 190,000
Gross margin ................................................................ 60,000
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Chapter 15 Functional and Activity-Based Budgeting
Assets
Cash ................................................................................................P 7,500
Accounts receivable (50% × 190,000)................................................................ 95,000
Inventory ................................................................................................
40,000
Buildings and equipment, net of depreciation
(P500,000 + P9,000 – P2,000)................................................................ 507,000
Total assets ................................................................................................
P649,500
Requirement 1
Units Amount
First quarter 16,000 P 480,000
Second quarter 20,000 600,000
Third quarter 22,000 660,000
Fourth quarter 22,000 660,000
Total 80,000 P2,400,000
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Functional and Activity-Based Budgeting Chapter 15
Requirement 2
Quarter
1st 2nd 3rd 4th Total
Units to be sold 16,000 20,000 22,000 22,000 80,000
Add: Desired ending inventory (20%) 4,000 4,400 4,400 5,000 5,000
Total units required 20,000 24,400 26,400 27,000 85,000
Less: Beginning inventory 3,000 4,000 4,400 4,400 3,000
Units to be produced 17,000 20,400 22,000 22,600 82,000
Requirement 3
Quarter
1st 2nd 3rd 4th Total
Units required for production 51,000 61,200 66,000 67,800 246,000
Add: Desired ending inventory 12,240 13,200 13,560 15,000 15,000
Total units 63,240 74,400 79,560 82,800 261,000
Less: Beginning inventory 12,500 12,240 13,200 13,560 12,500
Raw Materials to be Purchased 50,740 62,160 66,360 69,240 248,500
Requirement 1
Month
April May June Quarter
From accounts receivable................................
P141,000 P 7,200 P148,200
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Chapter 15 Functional and Activity-Based Budgeting
Requirement 2
Cash budget:
Month
April May June Quarter
Cash balance, beginning ................................
P 26,000 P 27,000 P 20,200 P 26,000
Add receipts:
Collections from
customers ................................
181,000 217,200 283,000 681,200
Total available ................................
207,000 244,200 303,200 707,200
Less disbursements:
Merchandise purchases ................................
108,000 120,000 180,000 408,000
Payroll ................................ 9,000 9,000 8,000 26,000
Lease payments................................
15,000 15,000 15,000 45,000
Advertising ................................
70,000 80,000 60,000 210,000
Equipment purchases ................................
8,000 — — 8,000
Total disbursements ................................
210,000 224,000 263,000 697,000
Excess (deficiency) of
receipts over
disbursements ................................
(3,000) 20,200 40,200 10,200
Financing:
Borrowings ................................
30,000 — — 30,000
Repayments................................— — (30,000) (30,000)
Interest ................................ — — (1,200) (1,200)
Total financing................................
30,000 — (31,200) (1,200)
Cash balance, ending P 27,000 P 20,200 P 9,000 P 9,000
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Functional and Activity-Based Budgeting Chapter 15
Requirement 3
Capacity
100% 90% 80% 70% 60%
Machine Hours 200,000 180,000 160,000 140,000 120,000
Variable Overhead P1,300,000 P1,170,000 P1,040,000 P 910,000 P 780,000
Fixed Overhead 300,000 300,000 300,000 300,000 300,000
Total P1,600,000 P1,470,000 P1,340,000 P1,210,000 P1,080,000
Capacity
100% 90% 80% 70% 60%
Direct Labor Hours 200,000 180,000 160,000 140,000 120,000
Machine Hours 400,000 360,000 320,000 280,000 240,000
Variable Overhead P1,400,000 P1,260,000 P1,120,000 P 980,000 P 840,000
Fixed Overhead 500,000 500,000 500,000 500,000 500,000
Total P1,900,000 P1,760,000 P1,620,000 P1,480,000 P1,340,000
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Chapter 15 Functional and Activity-Based Budgeting
1. B 11. C 21. C
2. B 12. B 22. C
3. C 13. C 23. D
4. E 14. B 24. C
5. C 15. D 25. C
6. C 16. C 26. C
7. D 17. A 27. D
8. C 18. B 28. A
9. A 19. E 29. C
10. D 20. B 30. D
Supporting computations:
Questions 16 to 20:
January February
Cost of sales P1,400,000 P1,640,000
Add: Desired Minimum Inventory 492,000 456,000
Total 1,892,000 2,096,000
Less: Beginning Inventory (1,400,000 x 0.3) (17) 420,000 492,000
Gross Purchases (16) 1,472,000 1,604,000
Less: Cash discount 14,720 16,040
Net cost of purchases P1,457,280 P1,587,960
Payments of Purchases
60% - month of purchase P874,368 P 952,776
40% - following month 582,912
Total (18) P1,535,688
(19)
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Functional and Activity-Based Budgeting Chapter 15
February
Cash
Gross Discount Net
Current month’s sales (with
discount) 35% P595,000 P11,900 P583,100
Current month’s sales (without
discount) 15% 255,000 0 255,000
Previous month’s sales (with
discount) 4.5% 67,500 1,350 66,150
Previous month’s sales (without
discount) 40.5% 607,500 607,500
P1,525,000 P13,250 P1,511,750
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Chapter 15 Functional and Activity-Based Budgeting
Questions 26 to 29:
Schedule I
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Functional and Activity-Based Budgeting Chapter 15
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MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual
CHAPTER 16
I. Questions
1. Standard costs are superior to past data for comparison with actual costs
because they ask the question “Is present performance better than the
past?”.
2. No. Cost control and cost reduction are not the same, but cost reduction
does affect the standards which are used as basis for cost control. Cost
reduction means finding ways to achieve a given result through
improved design, better methods, new layouts and so forth. Cost
reduction results in setting new standards. On the other hand, cost
control is a process of maintaining performance at or as new existing
standards as is possible.
3. Managerial judgment is the basis for deciding whether a given variance
is large enough to warrant investigation. For some items, a small
amount of variance may spark scrutiny. For some items, 5%, 10% or
25% variances from standard may call for follow-up. Management may
also derive the standard deviation based on past cost data.
4. The techniques for overhead control differ because
1) The size of individual overhead costs usually does not justify
elaborate individual control systems;
2) The behavior of individual overhead item is either impossible or
difficult to trace to specific lots or operations; and
3) Various overhead items are the responsibility of different people.
5. In the year-to-year planning of fixed costs, managers must consider:
1) the projected maximum and minimum levels of activity,
2) prices of cost factors, and
3) changes in facilities and organization.
6. Four criteria for selecting a volume base are:
1) Cause of cost variability.
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Chapter 16 Standard Costs and Operating Performance Measures
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Standard Costs and Operating Performance Measures Chapter 16
14. Poor quality materials can unfavorably affect the labor efficiency
variance. If the materials create production problems, a result could be
excessive labor time and therefore an unfavorable labor efficiency
variance. Poor quality materials would not ordinarily affect the labor
rate variance.
15. If labor is a fixed cost and standards are tight, then the only way to
generate favorable labor efficiency variances is for every workstation to
produce at capacity. However, the output of the entire system is limited
by the capacity of the bottleneck. If workstations before the bottleneck
in the production process produce at capacity, the bottleneck will be
unable to process all of the work in process. In general, if every
workstation is attempting to produce at capacity, then work in process
inventory will build up in front of the workstations with the least
capacity.
1. E 3. C 5. A 7. J 9. I
2. G 4. H 6. D 8. B 10. F
III. Exercises
Requirement 1
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Chapter 16 Standard Costs and Operating Performance Measures
Requirement 2
Beta ML12 required per capsule as per bill of materials................................ 6.00 grams
Add allowance for material rejected as unsuitable
(6 grams ÷ 0.96 = 6.25 grams;
6.25 grams – 6.00 grams = 0.25 grams)................................ 0.25 grams
Total ................................................................................................
6.25 grams
Add allowance for rejected capsules
(6.25 grams ÷ 25 capsules)................................................................ 0.25 grams
Standard quantity of Beta ML12 per salable capsule ................................ 6.50 grams
Requirement 3
Requirement 1
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Standard Costs and Operating Performance Measures Chapter 16
Requirement 2
Actual Quantity of Inputs, at Actual Quantity of Inputs, at Standard Quantity Allowed for
Actual Price Standard Price Output, at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
P18,700 11,000 board feet × 10,000 board feet ×
P1.80 per board foot P1.80 per board foot
= P19,800 = P18,000
Price Variance, Quantity Variance,
P1,100 F P1,800 U
Alternatively:
Materials Price Variance = AQ (AP – SP)
11,000 board feet (P1.70 per board foot* – P1.80 per board foot) =
P1,100 F
* P18,700 ÷ 11,000 board feet = P1.70 per board foot.
Requirement 1
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Chapter 16 Standard Costs and Operating Performance Measures
Requirement 2
Actual Hours of Input, at Actual Hour of Input, at Standard Hours Allowed for
the Actual Rate Standard Rate Output, at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
P49,300 8,500 hours × P6 per hour 8,000 hours* × P6 per hour
= P51,000 = P48,000
Rate Variance, Efficiency Variance,
P1,700 F P3,000 U
Alternative Solution:
Requirement 3
Actual Hours of Input, at Actual Hour of Input, at Standard Hours Allowed for
the Actual Rate Standard Rate Output, at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
P39,100 8,500 hours × P4 per hour 8,000 hours × P4 per hour
= P34,000 = P32,000
Spending Variance, Efficiency Variance,
P5,100 U P2,000 U
Alternative Solution:
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Standard Costs and Operating Performance Measures Chapter 16
Requirement 1
If the total variance is P330 unfavorable, and if the rate variance is P150
favorable, then the efficiency variance must be P480 unfavorable, since the
rate and efficiency variances taken together always equal the total variance.
Requirement 2
Knowing that 500 hours of labor time were used during the week, the actual
rate of pay per hour can be computed as follows:
Rate Variance = AH (AR – SR)
500 hours (AR – P6 per hour) = P150 F
500 hours × AR – P3,000 = –P150*
500 hours × AR = P2,850
AR = P5.70 per hour
* When used with the formula, unfavorable variances are positive and
favorable variances are negative.
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Chapter 16 Standard Costs and Operating Performance Measures
IV. Problems
Requirement 1
a.
Actual Quantity of Inputs, at Actual Quantity of Inputs, at Standard Quantity Allowed for
the Actual Price Standard Price Output, at the Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
25,000 pounds x 25,000 pounds x 20,000 pounds* x
P2.95 per pound P2.50 per pound P2.50 per pound
= P73,750 = P62,500 = P50,000
Price Variance,
P11,250 U
19,800 pounds x P2.50 per pound
= P49,500
Quantity Variance,
P500 F
* 5,000 metal molds × 4.0 pounds per metal mold = 20,000 pounds
Alternatively:
Materials Price Variance = AQ (AP – SP)
25,000 pounds (P2.95 per pound – P2.50 per pound) = P11,250 U
Materials Quantity Variance = SP (AQ – SQ)
P2.50 per pound (19,800 pounds – 20,000 pounds) = P500 F
b.
Actual Hours of Input, at Actual Hours of Input, at Standard Hours Allowed for
the Actual Rate the Standard Rate Output, at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
3,600 hours x 3,600 hours x 3,000 hours* x
P8.70 per hour P9.00 per hour P9.00 per hour
= P31,320 = P32,400 = P27,000
Rate Variance, Efficiency Variance,
P1,080 F P5,400 U
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Standard Costs and Operating Performance Measures Chapter 16
* 5,000 metal molds × 0.6 hour per metal mold = 3,000 hours
Alternatively:
Labor Rate Variance = AH (AR – SR)
3,600 hours (P8.70 per hour – P9.00 per hour) = P1,080 F
Labor Efficiency Variance = SR (AH – SH)
P9.00 per hour (3,600 hours – 3,000 hours) = P5,400 U
c.
Actual Hours of Input, at Actual Hours of Input, at Standard Hours Allowed for
the Actual Rate the Standard Rate Output, at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
P4,320 1,800 hours × P2 per hour 1,500 hours* × P2 per hour
= P3,600 = P3,000
Spending Variance, Efficiency Variance,
P720 U P600 U
*5,000 metal molds × 0.3 hours per metal mold = 1,500 hours
Alternatively:
Variable Overhead Spending Variance = AH (AR – SR)
1,800 hours (P2.40 per hour* – P2.00 per hour) = P720 U
* P4,320 ÷ 1,800 hours = P2.40 per hour
Variable Overhead Efficiency Variance = SR (AH – SH)
P2.00 per hour (1,800 hours – 1,500 hours) = P600 U
Requirement 2
Summary of variances:
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Chapter 16 Standard Costs and Operating Performance Measures
This P16,390 net unfavorable variance also accounts for the difference
between the budgeted net operating income and the actual net loss for the
month.
Requirement 3
The two most significant variances are the materials price variance and the
labor efficiency variance. Possible causes of the variances include:
Problem 2
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Standard Costs and Operating Performance Measures Chapter 16
Problem 3
Requirement 1
a.
Actual Quantity of Inputs, at Actual Quantity of Inputs, at Standard Quantity Allowed for
Actual Price Standard Price Output, at Standard Price
(AQ × AP) (AQ × SP) (SQ × SP)
21,120 yards x 21,120 yards x 19,200 yards* x
P3.35 per yard P3.60 per yard P3.60 per yard
= P70,752 = P76,032 = P69,120
Price Variance, Quantity Variance,
P5,280 F P6,912 U
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Chapter 16 Standard Costs and Operating Performance Measures
Alternatively:
Materials Price Variance = AQ (AP – SP)
21,120 yards (P3.35 per yard – P3.60 per yard) = P5,280 F
Materials Quantity Variance = SP (AQ – SQ)
P3.60 per yard (21,120 yards – 19,200 yards) = P6,912 U
Requirement 2
a.
Actual Hours of Input, at Actual Hours of Input, at Standard Hours Allowed for
the Actual Rate the Standard Rate Output, at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
6,720 hours* x 6,720 hours x 7,680 hours** x
P4.85 per hour P4.50 per hour P4.50 per hour
= P32,592 = P30,240 = P34,560
Rate Variance, Efficiency Variance,
P2,352 U P4,320 F
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Standard Costs and Operating Performance Measures Chapter 16
Alternatively:
Labor Rate Variance = AH (AR – SR)
6,720 hours (P4.85 per hour – P4.50 per hour) = P2,352 U
Labor Efficiency Variance = SR (AH – SH)
P4.50 per hour (6,720 hours – 7,680 hours) = P4,320 F
Requirement 3
Actual Hours of Input, at Actual Hours of Input, at Standard Hours Allowed for
the Actual Rate the Standard Rate Output, at the Standard Rate
(AH × AR) (AH × SR) (SH × SR)
6,720 hours x 6,720 hours x 7,680 hours x
P2.15 per hour P1.80 per hour P1.80 per hour
P14,448 = P12,096 = P13,824
Spending Variance, Efficiency Variance,
P2,352 U P1,728 F
Alternatively:
Variable Overhead Spending Variance = AH (AR – SR)
6,720 hours (P2.15 per hour – P1.80 per hour) = P2,352 U
Variable Overhead Efficiency Variance = SR (AH – SH)
P1.80 per hour (6,720 hours – 7,680 hours) = P1,728 F
Requirement 4
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Chapter 16 Standard Costs and Operating Performance Measures
Materials:
Price variance................................ P5,280 F
Quantity variance ................................ 6,912 U P1,632 U
Labor:
Rate variance................................................................
2,352 U
Efficiency variance................................ 4,320 F 1,968 F
Variable overhead:
Spending variance ................................ 2,352 U
Efficiency variance................................ 1,728 F 624 U
Net unfavorable variance................................ P 288 U
Requirement 5
The variances have many possible causes. Some of the more likely causes
include:
Materials variances:
Labor variances:
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Standard Costs and Operating Performance Measures Chapter 16
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MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 17
I. Questions
1. a. Decision tree analysis provides a systematic framework for
analyzing a sequence of interrelated decisions which may be made
over time. Decision making is formulated in terms of the
consequence of acts, events and consequences because it is believed
that present decisions affect future profitability. The study and
understanding of alternative scenarios is encouraged with the use of
decision tree analysis.
b. Advantages of Decision Tree Analysis
1. Clarifies the choices, risks, and monetary gains involved in an
investment problem.
2. Presents the relevant information more clearly.
3. Combines action choices with different possible events or results
of action which are partially affected by chance or other
uncontrollable circumstances.
4. Encourages the focus on the relationship between current and
future decisions.
5. Utilizes such analytical techniques as present value and
discounted cash flow.
6. Considers various alternatives with greater ease.
Weaknesses of Decision Tree Analysis
1. Not all events that can happen can be/are identified.
2. Not all the decisions that must be made on a subject under
analysis are listed because choices are usually not restricted to
two or three.
3. If a large number of choices is involved, decision tree analysis
by hand becomes complicated.
4. Uncertain alternatives are generally treated as if they were
discrete, well-defined possibilities.
2. Refer to page 665 of the textbook.
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Chapter 17 Applicationof Quantitative Techniques inPlanning, Control and Decision Making - I
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MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 18
I. Questions
1. PERT is superior to Gantt Charts in complex projects because:
a. PERT charts are flexible and can reflect slippage or changes in
plans, but Gantt charts simply plot a bar chart against a calendar
scale.
b. PERT charts reflect interdependencies among activities; Gantt charts
do not.
c. PERT charts reflect uncertainties or tolerances in the time estimates
for various activities; Gantt charts do not.
2. The use of PERT provides a structured foundation for planning complex
projects in sufficient detail to facilitate effective control.
A workable sequence of events that comprise the project are first
identified. Each key event should represent a task; then the
interdependent relationships between the events are structured.
After the network of events is constructed, cost and time parameters are
established for each package. Staffing plans are reviewed and analyzed.
The “critical path” computation identifies sequence of key events with
total time equal to the time allotted for the project’s completion. Jobs
which are not on the critical path can be slowed down and the slack
resources available on these activities reallocated to activities on the
critical path.
Use of PERT permits sufficient scheduling of effort by functional areas
and by geographic location. It also allows for restructuring scheduling
efforts and redeployment of workers as necessary to compensate for
delays or bottlenecks. The probability of completing this complex
project on time and within the allotted budget is increased.
3. Time slippage in noncritical activities may not warrant extensive
managerial analysis because of available slack, but activity cost usually
increases with time and should be monitored.
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Chapter 18 Applicationof Quantitative Techniques inPlanning, Control and Decision Making - II
4. The critical path is the network path with the longest cumulative
expected activity time. It is critical because a slowdown along this path
delays the entire project.
5. Crashing the network means finding the minimum cost for completing
the project in minimum time in order to achieve an optimum tradeoff
between cost and time. The differential crash cost of an activity is the
additional cost of that activity for each period of time saved.
6. Slack is the amount of time an event can be delayed without affecting
the project’s completion date. Slack can be utilized by management as a
buffer against bottlenecks that may occur on the critical path.
7. Unit gross margin are typically computed with an allocation of fixed
costs. Total fixed costs generally will not change with a change in
volume within the relevant range. Unitizing the fixed costs results in
treating them as though they are variable costs when, in fact, they are
not. Moreover, when multiple products are manufactured, the relative
contribution becomes the criterion for selecting the optimal product mix.
Fixed costs allocations can distort the relative contributions and result in
a suboptimal decision.
8. This approach will maximize profits only if there are no constraints on
production or sales, or if both products use all scarce resources at an
equal rate. Otherwise management would want to maximize the
contribution per unit of scarce resource.
9. The opportunity cost of a constraint is the cost of not having additional
availability of the constrained resources. This is also called a shadow
price.
10. The feasible production region is the area which contains all possible
combinations of production outputs. It is bounded by the constraints
imposed on production possibilities. The production schedule which
management chooses must come from the feasible production region.
11. The accountant usually supplies the contribution margin data that is used
in formulating a profit-maximizing objective function. In addition, the
accountant participates in the analysis of linear programming outputs by
assessing the costs of additional capacity or of changes in product mix.
12. a. Hourly fee for inventory audit (C)
b. Salary of purchasing supervisor (N)
c. Costs to audit purchase orders and invoices (P)
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Application of Quantitative Techniques in Planning, Control and Decision Making – II Chapter 18
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Chapter 18 Applicationof Quantitative Techniques inPlanning, Control and Decision Making - II
II. Problems
Problem 2
Requirement (a)
The critical path through each of the three alternative paths calculated as the
longest is 0 - 1 - 6- 7- 8.
0-1-2-5-8 2 + 8 + 10 + 14 = 34
0-1-3-4-7-8 2+8+7+5+3 = 25
0-1-6-7-8 2 + 26 + 9 + 3 = 40*
________
* critical
Requirement (b)
40 - 3 - 5 = 32
Requirement (c)
Requirement (d)
The earliest time for reaching event 5 via 0 - 1 - 2 - 5 is 20, the sum of the
expected times.
Problem 3
No, they didn’t make a right decision, since they included fixed costs which
do not differ in the short run. If they had used contribution margin instead of
gross margin, they would have had P5 for G1 and P6.50 for G2, therefore
they would have decided to produce G2 exclusively.
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Application of Quantitative Techniquesin Planning, Control and Decision Making – II Chapter 18
Problem 1
Requirement (a)
TASKS 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
___________
X Dead Time
Requirement (b)
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Chapter 18 Applicationof Quantitative Techniques inPlanning, Control and DecisionMaking - II
Problem 4
a. Carrying costs:
QS 250 x P109.40
= = P13,675.00
2 2
Order costs:
AP 1,500 x P878
= = P 5,268.00
Q 250
Total P18,943.00
2 x 1,500 x P878
Q* = = 24,077 = 155 units
P109.40
Carrying costs:
QS 155 x P109.40
= = P 8,478.50
2 2
Order costs:
AP 1,500 x P878
= = P 8,496.77
Q 155
Total P16,975.27
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Application of Quantitative Techniques in Planning, Control and Decision Making – II Chapter 18
Problem 5
Additional computations:
a
15 is the number of orders per year.
b
It should be evident that at this level the carrying costs alone exceed the total costs
at a safety stock of 175 units. Therefore, it is not possible for this or any safety-
stock level larger than 250 to be less costly than 175 units. Indeed, given a total
cost at 175 units of P5,507.5, stockout costs would have to occur with probability
zero for any safety stock greater than 225.72 units (i.e., P5,507.5 / P24.40 =
P225.72).
18-7
MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 19
I. Questions
1. Quantitative factors are those which may more easily be reduced in
terms of pesos such as projected costs of materials, labor and overhead.
Qualitative factors are those whose measurement in pesos is difficult and
imprecise; yet a qualitative factor may be easily given more weight than
the measurable cost savings. It can be seen that the accountant’s role in
making decisions deals with the quantitative factors.
2. Relevant costs are expected future costs that will differ between
alternatives. In view of the definition of relevant costs, historical costs
are always irrelevant because they are not future costs. They may be
helpful in predicting relevant costs but they are always irrelevant costs
per se.
3. The differential costs in any given situation is commonly defined as the
change in total cost under each alternative. It is not relevant cost, but it
is the algebraic difference between the relevant costs for the alternatives
under consideration.
4. Analysis:
The original cost of the old truck is irrelevant but its disposal value is
relevant. It is recommended that the truck should be rebuilt because it
will involve lesser cash outlay.
19-1
Chapter 19 Relevant Costs for Decision Making
II. Exercises
Case 1 Case 2
Not Not
Item Relevant Relevant Relevant Relevant
a. Sales revenue ................................ X X
b. Direct materials............................... X X
c. Direct labor ................................ X X
d. Variable manufacturing
overhead.......................................... X X
e. Book value – Model E7000
machine........................................... X X
f. Disposal value – Model E7000
machine........................................... X X
g. Depreciation – Model E7000
machine........................................... X X
h. Market value – Model F5000
machine (cost)................................ X X
i. Fixed manufacturing
overhead.......................................... X X
j. Variable selling expense ................. X X
k. Fixed selling expense...................... X X
l. General administrative
overhead.......................................... X X
Requirement 1
* Depreciation ................................................................
P2,000
Insurance ................................................................ 960
Garage rent................................................................ 480
Automobile tax and license................................ 60
Total ................................................................ P3,500
19-2
Relevant Costs for Decision Making Chapter 19
Requirement 2
Requirement 3
When figuring the incremental cost of the more expensive car, the relevant
costs would be the purchase price of the new car (net of the resale value of
the old car) and the increases in the fixed costs of insurance and automobile
tax and license. The original purchase price of the old car is a sunk cost and
is therefore irrelevant. The variable operating costs would be the same and
therefore are irrelevant. (Students are inclined to think that variable costs
are always relevant and fixed costs are always irrelevant in decisions. This
requirement helps to dispel that notion.)
Requirement 1
Per Unit
Differential
Costs 15,000 units
Make Buy Make Buy
Cost of purchasing ................................................................
P200 P3,000,000
Direct materials................................................................
P 60 P 900,000
Direct labor ................................................................
80 1,200,000
Variable manufacturing overhead ................................ 10 150,000
Fixed manufacturing overhead, traceable1 ................................ 20 300,000
Fixed manufacturing overhead, common................................ 0 0 0 0
Total costs ................................................................
P170 P200 P2,550,000 P3,000,000
19-3
Chapter 19 Relevant Costs for Decision Making
Requirement 2
Make Buy
Cost of purchasing (part 1)................................................................ P3,000,000
Cost of making (part 1) ................................................................ P2,550,000
Opportunity cost—segment margin forgone on a
potential new product line................................................................ 650,000
Total cost ................................................................................................
P3,200,000 P3,000,000
Thus, the company should accept the offer and purchase the parts from the outside
supplier.
Only the incremental costs and benefits are relevant. In particular, only the
variable manufacturing overhead and the cost of the special tool are relevant
overhead costs in this situation. The other manufacturing overhead costs are
fixed and are not affected by the decision.
Per Total
Unit 10 bracelets
Incremental revenue................................................................
P3,499.50 P34,995.00
Incremental costs:
Variable costs:
Direct materials................................................................
1,430.00 14,300.00
Direct labor ................................................................
860.00 8,600.00
Variable manufacturing overhead ................................ 70.00 700.00
Special filigree ................................................................
60.00 600.00
Total variable cost................................................................
P2,420.00 24,200.00
Fixed costs:
Purchase of special tool................................ 4,650.00
Total incremental cost................................................................ 28.850.00
19-4
Relevant Costs for Decision Making Chapter 19
Requirement 1
X Y Z
(1) Contribution margin per unit................................................................
P18 P36 P20
(2) Direct labor cost per unit................................................................
P12 P32 P16
(3) Direct labor rate per hour ................................................................
8 8 8
(4) Direct labor-hours required per unit (2) ÷ (3) ................................1.5 4.0 2.0
Contribution margin per direct labor-hour (1) ÷ (4)................................
P12 P 9 P10
Requirement 2
X Y Z
Contribution margin per direct labor-hour ................................
P12 P9 P10
Direct labor-hours available ................................ × 3,000 × 3,000 × 3,000
Total contribution margin ................................ P36,000 P27,000 P30,000
Although product X has the lowest contribution margin per unit and the
second lowest contribution margin ratio, it has the highest contribution
margin per direct labor-hour. Since labor time seems to be the company’s
constraint, this measure should guide management in its production
decisions.
Requirement 3
The amount Jaycee Company should be willing to pay in overtime wages for
additional direct labor time depends on how the time would be used. If
there are unfilled orders for all of the products, Jaycee would presumably
use the additional time to make more of product X. Each hour of direct
19-5
Chapter 19 Relevant Costs for Decision Making
labor time generates P12 of contribution margin over and above the usual
direct labor cost. Therefore, Jaycee should be willing to pay up to P20 per
hour (the P8 usual wage plus the contribution margin per hour of P12) for
additional labor time, but would of course prefer to pay far less. The upper
limit of P20 per direct labor hour signals to managers how valuable
additional labor hours are to the company.
If all the demand for product X has been satisfied, Jaycee Company would
then use any additional direct labor-hours to manufacture product Z. In that
case, the company should be willing to pay up to P18 per hour (the P8 usual
wage plus the P10 contribution margin per hour for product Z) to
manufacture more product Z.
Likewise, if all the demand for both products X and Z has been satisfied,
additional labor hours would be used to make product Y. In that case, the
company should be willing to pay up to P17 per hour to manufacture more
product Y.
III. Problems
Product A Product B
Selling price per unit P1.20 P1.40
Less Variable costs/unit:
Materials 0.50 0.70
Labor 0.20 0.24
Factory overhead (25%) 0.10 0.14
0.80 1.08
Contribution margin/unit P0.40 P0.32
19-6
Relevant Costs for Decision Making Chapter 19
Requirement 1
Requirement 2
Trampoline
Total Round Rectangular Octagonal
Sales ..................................... P1,000,000 P140,000 P500,000 P360,000
Less variable expenses ......... 410,000 60,000 200,000 150,000
Contribution margin............. 590,000 80,000 300,000 210,000
Less fixed expenses:
Advertising – traceable..... 216,000 41,000 110,000 65,000
Depreciation of special
equipment ..................... 95,000 20,000 40,000 35,000
19-7
Chapter 19 Relevant Costs for Decision Making
Line supervisors’
salaries .......................... 19,000 6,000 7,000 6,000
Total traceable fixed
expenses ........................... 330,000 67,000 157,000 106,000
Product-line segment
margin............................... 260,000 P 13,000 P143,000 P104,000
Less common fixed
expenses ........................... 200,000
Net operating income
(loss)................................ P 60,000
Requirement 1
Product Line
A B C D
Selling price per unit P30 P25 P10 P8
Variable cost per unit 25 10 5 4
Contribution margin / unit P5 P15 P 5 P4
Divided by no. of hours required
for each unit 5 hrs. 10 hrs. 4 hrs. 1 hr.
Contribution per hour P1 P1.5 P1.25 P4
Product ranking:
1. D 2. B 3. C 4. A
Based on the above analysis, first priority should be given to Product D. The
company should use 4,000 out of the available 96,000 hrs. to produce 4,000
units of product D. The remaining 92,000 hrs. should be used to produce
9,200 units of Product B. Hence, the best product combination is 4,000 units
of Product D and 9,200 units of Product B.
Requirement 2
19-8
Relevant Costs for Decision Making Chapter 19
Requirement 1
The company should accept the special order of 4,000 @ P10 each because
this selling price is still higher than the additional variable cost to be
incurred. Whether or not variable marketing expenses will be incurred, the
decision is still to accept the order.
Supporting computations:
(a) Assume no additional variable marketing cost will be incurred.
Selling price per unit P10.00
Less variable manufacturing costs:
Direct materials P5.00
Direct labor 3.00
Variable overhead 0.75 8.75
Contribution margin/unit P 1.25
Multiplied by number of units of order 4,000 units
Total increase in profit P5,000
(b) Assume additional variable marketing cost will be incurred.
Selling price per unit P10.00
Less variable costs (P8.75 + P0.25) 9.00
Contribution margin / unit P 1.00
Multiplied by number of units of order 4,000 units
Total increase in contribution margin P4,000
Requirement 2
19-9
Chapter 19 Relevant Costs for Decision Making
Requirement 3
Requirement 4
Requirement (a)
Requirement (b)
Production
4,000 units 5,000 units 6,000 units
Sales (4,000 x P40) P160,000 P160,000 P160,000
Less variable costs
Production cost @ P25 100,000 125,000 150,000
Purchase cost @ P45 - - -
Total P100,000 P125,000 P150,000
Contribution margin P 60,000 P 35,000 P 10,000
19-10
Relevant Costs for Decision Making Chapter 19
Requirement (c)
Problem 6 (Pricing)
Requirement A:
Operating
Result at Full
2005 2006 Capacity
Sales P 100,000 P 400,000 P 480,000
Less Variable cost 130,000 520,000 624,000
Contribution margin (P 30,000) (P120,000) (P144,000)
Less Fixed cost 40,000 40,000 40,000
Net income (loss) (P 70,000) (P160,000) (P184,000)
The company had been operating at a loss because the product had been
selling with a negative contribution margin. Hence, the more units are sold,
the higher the loss will be.
19-11
Chapter 19 Relevant Costs for Decision Making
Requirement B: P60.14
Requirement C: P74.29
Requirement D: P56.58
19-12
Relevant Costs for Decision Making Chapter 19
20. R S T
Sales (10,000 x P20) P200,000 P200,000 P200,000
Less: Variable costs
R (P12 x 10,000) 120,000
S (P 8 x 10,000) 80,000
T (P 4 x 10,000) 40,000
Contribution margin P 80,000 P120,000 P160,000
21. R S T
Sales (P16 x 15,000) P240,000 P240,000 P240,000
Less: Variable costs
R (P12 x 15,000) 180,000
S (P 8 x 15,000) 120,000
T (P 4 x 15,000) 60,000
Contribution margin P 60,000 P120,000 P180,000
Less: Fixed costs 40,000 80,000 120,000
Operating income P 20,000 P 40,000 P 60,000
19-13
Chapter 19 Relevant Costs for Decision Making
19-14
Relevant Costs for Decision Making Chapter 19
19-15
MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 20
I. Questions
1. A capital investment involves a current commitment of funds with the
expectation of generating a satisfactory return on these funds over a
relatively extended period of time in the future.
2. Cost of capital is the weighted minimum desired average rate that a
company must pay for long-term capital while discounted rate of return
is the maximum rate of interest that could be paid for the capital
employed over the life of an investment without loss on the project.
3. The basic principles in capital budgeting are:
1. Capital investment models are focused on the future cash inflows
and outflows - rather than on net income.
2. Investment proposals should be evaluated according to their
differential effects on the company’s cash flows as a whole.
3. Financing costs associated with the project are excluded in the
analysis of incremental cash flows in order to avoid the “double-
counting” of the cost of money.
4. The concept of the time value of money recognizes that a peso of
present return is worth more than a peso of future return.
5. Choose the investments that will maximize the total net present
value of the projects subject to the capital availability constraint.
4. The major classifications as to purpose are:
1. Replacement projects
- those involving replacements of worn-out assets to avoid
disruption of normal operations, or to improve efficiency.
2. Product or process improvement
- projects that aim to produce additional revenue or to realize cost
savings.
3. Expansion
- projects that enhance long-term returns due to increased
profitable volume.
20-1
Chapter 20 Capital Budgeting Decisions
1. A 6. H
2. C 7. D
3. F 8. G
4. B 9. J
5. I 10. E
III. Problems
Requirement 1
Total Present Value
A. New Situation:
Recurring cash operating costs (P26,500 x 2.69) P 71,285
Cost of new equipment 44,000
Disposal value of old equipment now (5,000)
Present value of net cash outflows P110,285
B. Present Situation:
Recurring cash operating costs (P45,000 x 2.69) P121,050
Disposal value of old equipment four years
hence (1,342)
(P2,600 x 0.516)
Present value of net cash inflows P119,708
Difference in favor of replacement P 9,423
Requirement 2
P44,000 – P5,000
Payback period for the new equipment =
P18,500
20-2
Capital Budgeting Decisions Chapter 20
= 2.1 years
Requirement 3
Another alternative way to get the same answer would be to divide the net
present value of P9,423 by 2.690.
Problem 2
After Tax
Cash Inflows PV Factor PV
Year 1 P42,000 x 0.909 P 38,178
Year 2 40,000 x 0.826 33,040
Year 3 38,400 x 0.750 28,800
Year 3 Salvage 20,000 x 0.750 15,000
Year 3 Tax loss 15,600* x 0.750 11,700
P126,718
Investment (I) 100,000
Net present value (NPV) P 26,718
20-3
Chapter 20 Capital Budgeting Decisions
_________________
* The P15,600 tax benefit of the loss on the disposal of the computer at the end of
year 3 is computed as follows:
Estimated salvage value P 20,000
Estimated book value:
Historical cost P100,000
Accumulated depreciation 48,800 51,200
Estimated loss P(31,200)
Since the net present value is positive, the computer should be purchased
replacing the manual bookkeeping system.
Problem 3
Requirement 1
20-4
Capital Budgeting Decisions Chapter 20
Requirement 2
Problem 4
Requirement 1: P(507,000)
Requirement 2: P(466,200)
Requirement 3: P(23,400)
20-5
Chapter 20 Capital Budgeting Decisions
20-6
MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 21
I. Questions
1. Decentralization means that decision making in an organization isn’t
confined to a few top executives, but rather is spread throughout the
organization with managers at various levels making key operating
decisions relating to their sphere of responsibility.
2. The benefits include: (1) a spreading of decision-making responsibility
among managers, thereby relieving top management from day-to-day
problem solving and allowing them to focus their time on long-range
planning; (2) training in decision making for lower-level managers,
thereby preparing them to assume greater responsibility; (3) greater job
satisfaction and greater incentive for lower-level managers; (4) better
decisions, since decisions are made at the level where the problem is
best understood; and (5) a more effective basis for measuring
managerial performance through the creation of profit and investment
centers.
3. The three business practices are (a) omission of some costs in the
assignment process, (b) the use of inappropriate allocation methods,
and (c) allocation of common costs to segments.
4. The contribution margin represents the portion of sales revenue
remaining after deducting variable expenses. The segment margin
represents the margin still remaining after deducting traceable fixed
expenses from the contribution margin. Generally speaking, the
contribution margin is most useful as a planning tool in the short run,
when fixed costs don’t change. The segment margin is most useful as a
planning tool in the long run, when fixed costs will be changing, and as
a tool for evaluating long-run segment performance. One concept is no
more useful to management than the other; the two concepts simply
relate to different planning horizons.
21-1
Chapter 21 Decentralized Operations and Segment Reporting
II. Problems
Requirement 1
Requirement 2
b. The segment margin ratio rises and falls as sales rise and fall due to the
presence of fixed costs. The fixed expenses are spread over a larger base
as sales increase.
21-2
Decentralized Operations and Segment Reporting Chapter 21
Requirement 1
Geographic Market
Total Company East Central West
Amount % Amount % Amount % Amount %
Sales ................................................................
P1,500,000 100.0 P400,000 100 P600,000 100 P500,000 100
Less variable expenses................................ 588,000 39.2 208,000 52 180,000 30 200,000 40
Contribution margin................................................................
912,000 60.8 192,000 48 420,000 70 300,000 60
Less traceable fixed expenses ................................ 770,000 51.3 240,000 60 330,000 55 200,000 40
Geographic market segment margin ................................ 142,000 9.5 P(48,000) (12) P 90,000 15 P100,000 20
Less common fixed expenses not
traceable to geographic markets* ................................ 175,000 11.7
Net operating income (loss)................................ P (33,000) (2.2)
Requirement 2
1. B 6. A 11. A
2. C 7. C 12. B
3. B 8. B
4. B 9. D
5. B 10. C
21-3
MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 22
BUSINESS PLANNING
I. Questions
1. Strategy, plans, and budgets are interrelated and affect one another.
Strategy describes how an organization matches its own capabilities
with the opportunities in the marketplace to accomplish its overall
objectives. Strategy analysis underlies both long-run and short-run
planning. In turn, these plans lead to the formulation of budgets.
Budgets provide feedback to managers about the likely effects of their
strategic plans. Managers use this feedback to revise their strategic
plans.
2. Budgeted performance is better than past performance for judging
managers. Why? Mainly because the inefficiencies included in past
results can be detected and eliminated in budgeting. Also, new
opportunities in the future, which did not exist in the past, may be
ignored if past performance is used.
3. A company that shares its own internal budget information with other
companies can gain multiple benefits. One benefit is better
coordination with suppliers, which can reduce the likelihood of supply
shortages. Better coordination with customers can result in increased
sales as demand by customers is less likely to exceed supply. Better
coordination across the whole supply chain can also help a company
reduce inventories and thus reduce the costs of holding inventories.
4. The sales forecast is typically the cornerstone for budgeting, because
production (and, hence, costs) and inventory levels generally depend on
the forecasted level of sales.
5. Sensitivity analysis adds an extra dimension to budgeting. It enables
managers to examine how budgeted amounts change with changes in
the underlying assumptions. This assists managers to monitor those
assumptions that are most critical to a company attaining its budget or
make timely adjustments to plans when appropriate.
22-1
Chapter 22 Business Planning
II. Problems
Globalcom Company
Budgeted Income Statement for 2006
(in thousands)
Requirement 1
22-2
Business Planning Chapter 22
Requirement 2
Requirement 3
22-3
Chapter 22 Business Planning
Requirement 4
Requirement 5
Requirement 6
P104,500
Budgeted manufacturing overhead rate: = P19.00 per hour
5,500
Requirement 7
22-4
Business Planning Chapter 22
Requirement 8
Requirement 9
Requirement 10
From
Schedule Total
Beginning finished goods
inventory, January 1,
2006 Given P 37,480
Direct materials used 3A P193,800
Direct manufacturing labor 4 137,500
22-5
Chapter 22 Business Planning
Requirement 11
1. A 6. A 11. D
2. B 7. B 12. D
3. C 8. D 13. B
4. D 9. A 14. C
5. D 10. C 15. A
22-6
MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 23
I. Questions
1.
Strategy Weakness
Cost leadership The tendency to cut costs in a way that undermines
demand for the product or service.
Differentiation The firm’s tendency to undermine its strength by
attempting to lower costs or by lacking a continual
and aggressive marketing plan to reinforce the
perceived difference.
Focus The market niche may suddenly disappear due to
technological change in the industry or change in
consumer tastes.
2. The balanced scorecard is an accounting report that includes the firm’s
critical success factors in four areas: customer satisfaction, financial
performance, internal business processes, and innovation and learning
(human resources). The primary objective of the balanced scorecard is
to serve as an action plan, a basis for implementing the strategy
expressed in the critical success factors.
3. The balanced scorecard is important to integrate both financial and non-
financial information into management reports. Financial measures
reflect only a partial- and short-term measure of the firm’s progress.
Without strategic non-financial information, the firm is likely to stray
from its competitive course and to make strategically wrong product
decisions – to choose the wrong products, the wrong customers. The
balanced scorecard provides a basis for a more complete analysis than is
possible with financial data alone.
4. An analyst can incorporate other factors such as the growth in the
overall market and reductions in selling prices resulting from
productivity gains into a strategic analysis of operating income. To do
so, the analyst attributes the sources of operating income changes to the
23-1
Chapter 23 Strategic Cost Management; Balanced Scorecard
particular factors of interests. For example, the analyst will combine the
operating income effects of strategic price reductions and any resulting
growth with the productivity component to evaluate a company’s cost
leadership strategy.
5. A company’s balanced scorecard should be derived from and support its
strategy. Since different companies have different strategies, their
balanced scorecards should be different.
6. The difference between the delivery cycle time and the throughput time
is the waiting period between when an order is received and when
production on the order is started. The throughput time is made up of
process time, inspection time, move time, and queue time. These four
elements can be classified between value-added time (process time) and
non-value-added time (inspection time, move time, and queue time).
7. The balanced scorecard is constructed to support the company’s strategy,
which is a theory about what actions will further the company’s goals.
Assuming that the company has financial goals, measures of financial
performance must be included in the balanced scorecard as a check on
the reality of the theory. If the internal business processes improve, but
the financial outcomes do not improve, the theory may be flawed and the
strategy should be changed.
8. If a company has an MCE of less than 1, it means the production process
includes non-value-added time. An MCE of 0.40, for example, would
mean that 40% of the throughput time consists of actual processing, and
that the other 60% consists of moving, inspection, and other non-value-
added activities.
Requirement 1
a, b, and c
Month
1 2 3 4
Throughput time in days:
Process time....................................................
0.6 0.5 0.5 0.4
Inspection time ................................ 0.7 0.7 0.4 0.3
Move time ......................................................
0.5 0.5 0.4 0.5
Queue time .....................................................
3.6 3.6 2.6 1.7
Total throughput time................................
5.4 5.3 3.9 2.9
23-2
Strategic Cost Management; Balanced Scorecard Chapter 23
Requirement 2
The general trend is favorable in all of the performance measures except for
total sales. On-time delivery is up, process time is down, inspection time is
down, move time is basically unchanged, queue time is down, manufacturing
cycle efficiency is up, and the delivery time is down. Even though the
company has improved its operations, it has not yet increased its sales. This
may have happened because management attention has been focused on the
factory – working to improve operations. However, it may be time now to
exploit these improvements to go after more sales – perhaps by increased
product promotion and better marketing strategies. It will ultimately be
necessary to increase sales so as to translate the operational improvements
into more profits.
Requirement 3
a and b
Month
5 6
Throughput time in days:
Process time.................................................... 0.4 0.4
Inspection time ............................................... 0.3
Move time ...................................................... 0.5 0.5
Queue time .....................................................
Total throughput time..................................... 1.2 0.9
23-3
Chapter 23 Strategic Cost Management; Balanced Scorecard
1. D 6. C
2. D 7. D
3. C 8. C
4. A 9. D
5. A 10. A
23-4
MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 24
I. Questions
1. Return on investment (ROI) is the ratio of profit to amount invested for
the business unit.
2. The measurement issues for ROI are:
a. The effect of accounting policies, which affect the determination of
net income.
b. Other measurement issues for income, which include the handling of
non-recurring items in the income statement, differences in the
effect of income taxes across units, differential effect of foreign
currency exchange, and the effect of cost allocation when two or
more units share a facility or cost.
c. Measuring investment: which assets to include.
d. Measuring investment: allocating the cost of shared assets.
3. The advantages of return on investment are:
a. It is intuitive and easily understood.
b. It provides a useful basis for comparison among SBUs.
c. It is widely used.
The limitations of return on investment are:
a. It has an excessive short-term focus.
b. Investment planning uses discounted cash flow analysis while
managers are evaluated on ROI.
c. It contains a disincentive for new investment by the most profitable
units.
4. The key advantage of residual income is that it deals effectively with the
limitation of ROI, that is ROI has a disincentive for the managers of the
most profitable units to make new investments. With residual income,
no matter how profitable the unit, there is still an incentive for new
24-1
Chapter 24 Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial
24-2
Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial Chapter 24
13. a. Consider each activity and the organization itself from the
customer’s perspective,
b. Evaluate each activity using customer-validated measures of
performance,
c. Consider all facets of activity performance that affect customers and
are comprehensive, and
d. Provide feedback to help organization members identify problems
and opportunities for improvement.
II. Exercises
Requirement 1
A quick inspection of the data shows mortgage loans with a higher ROI to be
more successful. But see requirement 2 below.
Requirement 2
Division A Division B
(Mortgage Loans) (Consumer Loans)
Total Assets P2,000 P10,000
Operating Income 400 1,500
Return on Investment 25% 15%
Residual Income:
(a) * at 11% P180 P400
(b) ** at 15% 100 0
(c) *** at 17% 60 (200)
24-4
Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial Chapter 24
Requirement 1
Investing in the new plant would lower JSD’s ROI and, hence, limit Tan’s
bonus.
Requirement 2
24-5
Chapter 24 Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial
Requirement 3
Operating income 480,000
Return on Sales (ROS) = = = 20%
Sales 2,400,000
If Magic Industries uses ROS to determine Tan’s bonus, Tan will be more
willing to invest in the new plant because ROS for the new plant of 20%
exceeds the current ROS of 19%.
The advantages of using ROS are (a) that it is simpler to calculate and (b)
that it avoids the negative short-run effects of ROI measures that may induce
Tan to not make the investment in the new plant. Tan may favor ROS
because she believes that eventually increases in ROS will increase ROI and
RI.
III. Problems
Requirement 1
Truck Rental Transportation
Division Division
Total assets P650,000 P950,000
Current liabilities 120,000 200,000
Investment
(Total assets – current 530,000 750,000
liabilities)
Required return (12% x Investment) 63,600 90,000
Operating income before tax 75,000 160,000
Residual income
(Operating income before tax –
required return) 11,400 70,000
Requirement 2
24-6
Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial Chapter 24
Requirement 3
Both the residual income and the EVA calculations indicate that the
Transportation Division is performing better than the Truck Rental Division.
The Transportation Division has a higher residual income (P70,000 versus
P11,400) and a higher EVA [P24,000 versus P(5,880)]. The negative EVA
for the Truck Rental Division indicates that, on an after-tax basis, the
division is destroying value – the after-tax economic return from the Truck
Rental Division’s assets is less than the required return. If EVA continues to
be negative, Lighthouse may have to consider shutting down the Truck
Rental Division.
24-7
Chapter 24 Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial
Supporting Calculations:
The biggest weakness of ROI is the tendency to reject projects that will
lower historical ROI even though the prospective ROI exceeds the required
ROI. RI achieves goal congruence because subunits will make investments
as long as they earn a rate in excess of the required return for investments.
The biggest weakness of residual income is it favors larger divisions in
ranking performance. The greater the amount of the investment (the size of
the division), the more likely that larger divisions will be favored assuming
that income grows proportionately.
Requirement 1
(a)
Operating income Operating income
Phil. Division’s ROI in 2005 = = = 15%
Total assets P8,000,000
(b)
9,180,000 kronas
Swedish Division’s ROI in 2005 in kronas = = 15.3%
60,000,000 kronas
24-8
Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial Chapter 24
Requirement 2
Convert total assets into pesos at December 31, 2004 exchange rate, the rate
prevailing when the assets were acquired (8 kronas = P1)
60,000,000 kronas
24,000,000 kronas = = P7,500,000
8 kronas per peso
Convert operating income into pesos at the average exchange rate prevailing
when during 2005 when operating income was earned equal to
9,180,000 kronas
= P1,080,000
8.5 kronas per peso
P1,080,000
Comparable ROI for Swedish Division = = 14.4%
P7,500,000
Requirement 3
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Chapter 24 Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial
Requirement 1
P130,000
Luzon Division = 38.24%
P340,000
P220,000
Visayas Division = 19.13%
P1,150,000
P380,000
Mindanao Division = 23.46%
P1,620,000
Requirement 2
The gross book values (i.e., the original costs of the plants) under historical
cost are calculated as the useful life of each plant (12) x the annual
depreciation:
Step 1: Restate long-term assets from gross book value at historical costs to
gross book value at current cost as of the end of 2005.
Gross book value
Construction cost index in 2005
of long-term assets x
Construction cost index in year of construction
at historical cost
Luzon P 840,000 x (170 100) = P1,428,000
Visayas P1,200,000 x (170 136) = P1,500,000
Mindanao P1,440,000 x (170 160) = P1,530,000
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Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial Chapter 24
Step 2: Derive net book value of long-term assets at current cost as of the
end of 2005. (Estimated useful life of each plant is 12 years).
Gross book value
of long-term assets Estimated useful life remaining
at current cost at x
Estimated total useful life
the end of 2005
Luzon P1,428,000 x (2 12) = P 238,000
Visayas P1,500,000 x (9 12) = P1,125,000
Mindanao P1,530,000 x (11 12) = P1,402,500
Step 3: Compute current cost of total assets at the end of 2005. (Assume
current assets of each plant are expressed in 2005 pesos.)
Current assets at the end Net book value of long-term assets at
of 2005 (given) + current cost at the end of 2005 (Step 2)
Luzon P200,000 + P238,000 = P 438,000
Visayas P250,000 + P1,125,000 = P1,375,000
Mindanao P300,000 + P1,402,500 = P1,702,500
Gross book value of long-term assets at current cost at the end of 2005
(from Step 1) x (1 12)
24-11
Chapter 24 Advanced Analysis and Appraisal of Performance: Financial and Nonfinancial
Step 6: Compute ROI using current-cost estimate for long-term assets and
depreciation.
Operating income for 2005 using 2005 current cost depreciation (Step 5)
Current cost of total assets at the end of 2005 (Step 3)
Requirement 3
24-12
MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 25
I. Questions
1. Productivity is the relationship between the output and the input
resources required for generating the output.
2. A critical success factor for a firm that competes as a cost leader is to be
the low cost provider. A low cost provider needs to perform the
required tasks for the same output with fewer resources than its
competitors.
3. Among criteria that often are used in assessing productivity and their
advantages and disadvantages are:
Using a prior year’s productivity as the criterion
Advantages:
Data readily available
Facilitates monitoring of continuous improvements
Disadvantages:
Difficult to assess adequacy of productivity improvements
Hard to compare productivity improvements between the years
25-1
Chapter 25 Managing Productivity and Marketing Effectiveness
25-2
Managing Productivity and Marketing Effectiveness Chapter 25
which the firm operates often also leads to a favorable sales quantity
variance. A favorable sales quantity variance in an expanding total
market may not be favorable to the firm strategically if the firm also
has an unfavorable market share variance.
A firm can have a favorable market size variance and an unfavorable
market share variance if the proportional increase of the firm’s total
sales is less than those of the total market.
c. Yes. The Wall Street Journal reported on April 14, 1994 (p. B4)
that Colgate-Palmolive had slashed marketing spending to reach its
ambitious target of 15 percent annual earnings growth. The firm, for
example, spent P88.8 million on advertising in 1993, compared with
P97.5 million in 1992. The firm met the goal of a 15 percent
increase in per share earnings and its CEO, Mr. Mark, expected the
company to announce a similar increase for first quarter earnings
soon. The market share of the firm, however, have decreased in all
categories.
11. The sales volume variance is the sum of sales quantity and sales mix
variances. The sales quantity variance is the sum of market size and
market share variances.
II. Problems
Requirement 1
Star Company
Comparative Income Statement
For the years 2005 and 2006
2005 2006
Sales 15,000 x P40 = P600,000 18,000 x P40 = P720,000
Variable cost of sales:
Materials 12,000 x P 8 = P 96,000 12,600 x P10 = P126,000
Labor 6,000 x P20 = 120,000 5,000 x P25 = 125,000
Power 1,000 x P 2 = 2,000 2,000 x P 2 = 4,000
Total variable costs of sales P218,000 P255,000
Contribution margin P382,000 P465,000
25-3
Chapter 25 Managing Productivity and Marketing Effectiveness
Requirement 2
2006 2005
DM 18,000 / 12,600 = 1.4286 15,000 / 12,000 = 1.25
DL 18,000 / 5,000 = 3.6 15,000 / 6,000 = 2.5
Power 18,000 / 2,000 = 9 15,000 / 1,000 = 15
Requirement 3
2006 2005
DM 12,600 x P10 = P126,000 12,000 x P 8 = P 96,000
DL 5,000 x P25 = P125,000 6,000 x P20 = P120,000
Power 2,000 x P 2 = P 4,000 1,000 x P 2 = P 2,000
2006 2005
DM 18,000 / 126,000 = 0.1429 15,000 / 96,000 = 0.15625
DL 18,000 / 125,000 = 0.144 15,000 / 120,000 = 0.125
Power 18,000 / 4,000 = 4.5 15,000 / 2,000 = 7.5
Requirement 4
The financial partial productivity for both direct materials and power
deteriorated from 2005 to 2006. Increases in direct materials costs were
more than the improvements in operational partial productivity for direct
materials. Like the operational partial productivity, the financial partial
productivity for direct labor also improved. The extent of improvements,
25-4
Managing Productivity and Marketing Effectiveness Chapter 25
Requirement 5
(2) 1/Productivity
DM: 12,600/18,000 12,000/15,000 12,000/15,000 12,000/15,000
= 0.7 = 0.8 = 0.8 = 0.8
DL: 5,000/18,000 6,000/15,000 6,000/15,000 6,000/15,000
= 0.2778 = 0.4 = 0.4 = 0.4
Power: 2,000/18,000 1,000/15,000 1,000/15,000 1,000/15,000
= 0.1111 = 0.0667 = 0.0667 = 0.0667
25-5
Chapter 25 Managing Productivity and Marketing Effectiveness
Decomposition
DM: 18,000 / 126,000 18,000 / 144,000 18,000 / 115,200 15,000 / 96,000
= 0.1429 = 0.125 = 0.15625 = 0.15625
DL: 18,000 / 125,010 18,000 / 180,000 18,000 / 144,000 = 15,000 / 120,000
= 0.1440 = 0.1 0.125 = 0.125
Power: 18,000 / 4,000 18,000 / 2,401 18,000 / 2,401 15,000 / 2,001
= 4.5 = 7.4969 = 7.4969 = 7.4963
Summary of Result
Change as % of 2005 Productivity
Productivity Input Price Total Productivity Input Price Total
Change Change Change Change Change Change
DM: 0.0179 F 0.03125 U 0.01335 U 11.46% F 20% U 8.54% U
DL: 0.044 F 0.025 U 0.019 F 35.2% F 20% U 15.2% F
Power: 2.9969 U 0 2.9969 U 39.98% U 0 39.98% U
Requirement 6
Productivity for both direct materials and direct labor improved in 2006.
The percentages of improvements in productivity are 11.46 and 35.2 for
direct materials and direct labor, respectively, of the 2005 productivity.
However, cost increases in direct materials and direct labor reduced the
gains in productivity on these two manufacturing factors.
25-6
Managing Productivity and Marketing Effectiveness Chapter 25
Requirement 1
2006:
Total actual direct labor hours: 20 x 20,000 = 400,000
Total standard direct labor hours: 21 x 20,000 = 420,000
25-7
Chapter 25 Managing Productivity and Marketing Effectiveness
2006:
Total actual direct labor hours: 10 x 20,000 = 200,000
Total standard direct labor hours: 11 x 20,000 = 220,000
Recap:
Assembly Department Testing Department
2005 2006 2005 2006
Rate variance P1,000,000 U P400,000 U P240,000 F P200,000 F
Efficiency variance P560,000 U P700,000 F P840,000 F P500,000 F
Requirement 2
Requirement 3
25-8
Managing Productivity and Marketing Effectiveness Chapter 25
Requirement 4
Requirement 5
25-9
Chapter 25 Managing Productivity and Marketing Effectiveness
Requirement 1
Requirement 2
Sales volume variances for the period for each of the products and for the
firm
Premium Regular
Sales Sales
Flexible Master Volume Flexible Master Volume
Budget Budget Variance Budget Budget Variance
Barrels 180 180 540 360
Sales P27,000 P36,000 P64,800 P43,200
Variable
expenses 16,200 21,600 40,500 27,000
Contribution
margin P10,800 P14,400 P3,600 U P24,300 P16,200 P8,100 F
Fixed
25-10
Managing Productivity and Marketing Effectiveness Chapter 25
Requirement 3
Sales quantity variances for the firm and for each of the products. (See next
page.)
Requirement 4
Sales mix variances for the period for each of the products and for the firm
(000 omitted).
Calculation for sales mixes:
Budgeted Actual
Total Sales Sales Total Sales Sales
in Units Mix in Units Mix
Premium 240 0.40 180 0.25
Regular 360 0.60 540 0.75
600 1.00 720 1.00
Premium
720 x 0.25 x P60 = P10,800 720 x 0.40 x P60 = P17,280 600 x 0.40 x P60 = P14,400
25-11
Chapter 25 Managing Productivity and Marketing Effectiveness
Regular
720 x 0.75 x P45 = P24,300 720 x 0.60 x P45 = P19,440 600 x 0.60 x P45 = P16,200
Total
Sales mix variance = P6,480 U + P4,860 F = P1,620 U
Sales quantity variance = P2,880 U + P3,240 F = P6,120 F
Requirement 5
Verification
Requirement 6
Requirement 7
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Managing Productivity and Marketing Effectiveness Chapter 25
Requirement 8
The sum of market size variance and market share variance and verification
that this total equals the sales quantity variance.
Total market size variance + Total market share variance = Total quantity variance
P2,040 F P4,080 F P6,120 F
Requirement 1
25-13
Chapter 25 Managing Productivity and Marketing Effectiveness
Requirement 2
Tan should not follow the order without following a consistent accounting
method. If the firm believes that certain cost items should be reclassified as
indirect costs, the same procedure should be followed for all years. Tan
should then go back and revise operating results of previous years.
Requirement 1
Budget Actual
Empress’ Empress’
Designs Industry Share Designs Industry Share
WS 50 500 10.0% 45 425 45/425
DH 25 200 12.5% 35 150 35/150
Requirement 2
Requirement 3
Requirement 4
Among possible reasons are quality changes, pricing changes, less producers
due to seasonal variations, and market no longer there.
25-14
Managing Productivity and Marketing Effectiveness Chapter 25
Requirement 5
1. A 11. A 21. A
2. C 12. B 22. D
3. B 13. A 23. C
4. D 14. B 24. D
5. A 15. C
6. C 16. D
7. C 17. B
8. B 18. C
9. C 19. A
10. D 20. D
Supporting Computations:
2005 2006
Input Input
Resource Partial Resource Partial
Output Used Productivity Output Used Productivity
X-45 60,000 75,000 = 0.8 64,000 89,600 = 0.7143
Direct (1)
labor 60,000 10,000 = 6.0 64,000 10,847 = 5.9002
(2)
Financial partial productivity
2005 2006
Cost of Input Cost of Input
Units of Resource Partial Units of Resource Partial
Output Used Productivity Output Used Productivity
X-45 60,000 P540,000 = 0.1111 64,000 P609,280 = 0.1050
Direct (3)
labor 60,000 300,000 = 0.2 64,000 P347,104 = 0.1844
Total productivity in units
(4)
25-15
Chapter 25 Managing Productivity and Marketing Effectiveness
2005 2006
(a) Total units manufactured 60,000 64,000
(b) Total variable manufacturing costs
incurred P840,000 P956,384
(c) Total productivity (a) (b) 0.071429 (5) 0.066919
(d) Decrease in productivity 0.071429 – 0.066919 = 0.00451 (6)
25-16
Managing Productivity and Marketing Effectiveness Chapter 25
2005 2006
(1) Output 400,000 486,000
Total cost:
Direct materials cost P540,000 P562,500
Direct labor cost 260,000 337,500
(2) Total cost P800,000 P900,000
(3) Total productivity (1) (2) 0.5 0.54
Market Share
(13)
Product A Product B Total
Budgeted sales unit 30,000 60,000 90,000
Budgeted contribution margin per unit x P4.00 x P10.00
Budgeted total contribution margin P120,000 P600,000 P720,000
Budgeted average contribution margin
per unit P8.00
(14)
Product A Product B Total
Actual units sold 35,000 65,000
Budgets sales unit – 30,000 – 60,000
Differences in sales units 5,000 5,000
Budgeted contribution margin per unit x P4.00 x P10.00
Sales volume contribution margin
variance P20,000 F P50,000 F P70,000 F
25-17
Chapter 25 Managing Productivity and Marketing Effectiveness
Sales mixes:
Budgeted Actual
Unit % Unit %
Product A 30,000 1/3 35,000 35
Product B 60,000 2/3 65,000 65
TOTAL 90,000 100 100,000 100
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Managing Productivity and Marketing Effectiveness Chapter 25
25-19
MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 26
I. Questions
1. Incentive compensation is a monetary reward that is based on measured
performance. Organizations where employees have been given the
responsibility to make decisions are best suited for incentive
compensation systems.
2. The four guidelines are: fairness, participation, basic wage level, and
independent wage policy.
Fairness deals with the ratio of salaries of the highest paid to lowest paid
employees.
Participation states that all employees should be included in a
compensation plan. Although, they do not need to be included in the
same one.
Basic wage level states that a market wage should be paid, and incentive
compensation should not be used to adjust the market wage downward.
Independent wage policy states that the incentive compensation system
for the most senior levels of the organization should be set by a group
that is independent of senior management.
3. a. based on salary – easy to administer, likely to be considered fair,
and, to the extent that salary reflects the relative ability to contribute
to results, is based on contribution;
based on equal share – easy to administer, likely to be considered
fair, and reflects how people often divide up rewards when left to
their own devices;
based on position – same as based on salary;
based on individual performance – ties reward most closely to
performance and likely to have the highest motivational impact.
26-1
Chapter 26 Executive Performance Measures and Compensation
26-2
Executive Performance Measures and Compensation Chapter 26
II. Problems
Problem 1
Requirement (a)
Requirement (b)
Problem 2
Requirement (a)
Requirement (b)
1. C 11. C 21. C
2. A 12. B 22. D
3. D 13. D 23. B
4. C 14. B 24. D
5. B 15. A
6. D 16. D
7. D 17. C
8. A 18. B
9. D 19. B
10. B 20. B
26-3
MANAGEMENT ACCOUNTING (VOLUME II) - Solutions Manual
CHAPTER 27
MANAGING ACCOUNTING IN
A CHANGING ENVIRONMENT
I. Questions
1. The American Heritage Dictionary defines quality as “1. a characteristic
or attribute of something; property; a feature. 2. the natural or essential
character of something. 3. excellence; superiority.”
Quality for a product or service can be defined as a “product or service
that conforms with a design which meets or exceeds the expectations of
customers at a price they are willing to pay.”
2. Procter & Gamble defines TQM as “the unyielding and continually
improving effort by everyone in an organization to understand, meet, and
exceed the expectations of customers.” Typical characteristics of TQM
include focusing on satisfying customers, striving for continuous
improvement, and involving the entire workforce.
TQM is a continual effort and never completes. Global competition,
new technology, and ever-changing customer expectations make TQM a
continual effort for a successful firm.
3. The core principles of TQM include (1) focusing on satisfying the
customer, (2) striving for continuous improvement, and (3) involving the
entire work force.
4. Continuous improvement (Kaizen) in total quality management is the
belief that quality is not a destination; rather, it is a way of life and firms
need to continuously strive for better products with lower costs.
In today’s global competition, where firms are forever trying to
outperform the competition and customers present ever-changing
expectations, a firm can never reach the ideal quality standard and needs
to continuously improve quality and reduce costs to remain competitive.
5. The Institute of Management Accountants (IMA) believes an effective
implementation of total quality management will take between three and
five years and involves the following tasks:
27-1
Chapter 27 Managing Accounting in a Changing Environment
Year 1
Create a quality council and staff
Conduct executive quality training programs
Conduct quality audits
Prepare gap analysis
Develop strategic quality improvement plans
Year 2
Conduct employee communication and training programs
Establish quality teams
Create measurement systems and set goals
Year 3
Revise compensation / appraisal / recognition systems
Launch external initiatives with suppliers
Review and revise
6. Reward and recognition are the best means of reinforcing the emphasis
on TQM. Moreover, proper reward and recognition structures can be
very powerful stimuli to promote TQM. Efforts and progress will most
likely be short-lived if no change is made to the compensation / appraisal
/ recognition systems to make them in line with the objectives of the
firm’s TQM.
7. The purposes of conducting a quality audit are to identify strengths and
weaknesses in quality practices and levels of a firm’s quality and to help
the firm identify the target areas for quality improvements.
8. A gap analysis is a type of benchmarking that includes analyzing the
differences in practices between the firm and the best-in-class. The
objective of gap analyses is to identify strengths, weaknesses, and target
areas for quality improvement.
9. Some examples of costs associated with cost of quality categories are:
Prevention costs: Training costs such as instructors’ fees, purchase of
training equipment, tuition for external training, training wages and
salaries; salaries for quality planning and executions, cost of preventive
equipment, printing and promotion costs for quality programs, awards
for quality.
27-2
Managing Accounting in a Changing Environment Chapter 27
27-3
Chapter 27 Managing Accounting in a Changing Environment
27-4
Managing Accounting in a Changing Environment Chapter 27
27-5
Chapter 27 Managing Accounting in a Changing Environment
II. Exercises
Internal External
Prevention Appraisal Failure Failure
a. Warranty repairs x
b. Scrap x
c. Allowance granted due to
blemish x
27-6
Managing Accounting in a Changing Environment Chapter 27
Requirements 1 & 2
Bali Company
Cost of Quality Report
For 2005 and 2006
a. There were slight increases in both prevention and appraisal costs from
2005 to 2006. Each of these two cost of quality increased by
approximately 0.33 percent of the total sales. These two costs increased
by P40,000 over the two years.
b. Both internal failure costs and external failure costs decreased
substantially in 2006 as compared to those in 2005. The firm
27-7
Chapter 27 Managing Accounting in a Changing Environment
Requirement 3
Requirement 1
Internal External
Costs of Quality Prevention Appraisal Failure Failure
Rework P 6,000
Recalls P15,000
Reengineering efforts P 9,000
Repair 12,000
Replacements 12,000
Retesting 5,000
Supervision P18,000
Scrap 9,000
Training 15,000
Testing of incoming
materials 7,000
Inspection of work in
process 18,000
27-8
Managing Accounting in a Changing Environment Chapter 27
Downtime 10,000
Product liability
insurance 9,000
Quality audits 5,000
Continuous
improvement 1,000
Warranty repairs 15,000
Requirement 2
Total spent by
category P25,000 P48,000 P42,000 P51,000
Requirement 3
Requirements 1 and 2
2006 2005
Revenues P12,500,000 P10,000,000
Percentage Percentage
of Revenues of Revenues
Cost (2) = (1) Cost (4) = (3)
Costs of Quality (1) P12,500,000 (3) P10,000,000
Prevention costs
Design engineering P240,000 P100,000
Preventive maintenance 90,000 35,000
Training 120,000 45,000
Supplier evaluation 50,000 20,000
Total prevention
costs 500,000 4.0% 200,000 2.0%
27-9
Chapter 27 Managing Accounting in a Changing Environment
Appraisal costs
Line inspection 85,000 110,000
Product-testing
equipment 50,000 50,000
Incoming materials
inspection 40,000 20,000
Product-testing labor 75,000 220,000
Total appraisal costs 250,000 2.0% 400,000 4.0%
Internal failure costs
Scrap 200,000 250,000
Rework 135,000 160,000
Breakdown
maintenance 40,000 90,000
Total internal failure
costs 375,000 3.0% 500,000 5.0%
External failure costs
Returned goods 145,000 60,000
Customer support 30,000 40,000
Product liability claims 100,000 200,000
Warranty repair 200,000 300,000
475,000 3.8% 600,000 6.0%
Total costs of quality P1,600,000 12.8% P1,700,000 17.0%
Between 2005 and 2006, Gabriel’s costs of quality have declined from 17%
of sales to 12.8% of sales. The analysis of individual costs of quality
categories indicates that Gabriel began allocating more resources to
prevention activities – design engineering, preventive maintenance, training
and supplier evaluations in 2006 relative to 2005. As a result, appraisal
costs declined from 4% of sales to 2%, costs of internal failure fell from 5%
of sales to 3%, and external failure costs decreased from 6% of sales to
3.8%. The one concern here is that, although external failure costs have
decreased, the cost of returned goods has increased. Gabriel’s management
should investigate the reasons for this and initiate corrective action.
Requirement 3
27-10
Managing Accounting in a Changing Environment Chapter 27
Requirements 1 and 2
Percentage of
Revenues
Costs (2) = (1)
Costs of Quality (1) P20,000,000
Prevention costs
Design engineering (P75 x
6,000 hours) P 450,000 2.25%
Appraisal costs
Testing and inspection (P40 x
1 hour x 10,000 units) 400,000 2.00%
Internal failure costs
Rework (P500 x 5% x 10,000
units) 250,000 1.25%
External failure costs
Repair (P600 x 4% x 10,000
units) 240,000 1.20%
Total costs of quality P1,340,000 6.70%
27-11
Chapter 27 Managing Accounting in a Changing Environment
Percentage of
Revenues
Costs (2) = (1)
Costs of Quality (1) P7,500,000
Prevention costs
Design engineering (P75 x
1,000 hours) P 75,000 1.00%
Appraisal costs
Testing and inspection (P40 x
0.5 x 5,000 units) 100,000 1.33%
Internal failure costs
Rework (P400 x 10% x 5,000
units) 200,000 2.67%
External failure costs
Repair (P450 x 8% x 5,000
units) 180,000 2.40%
Estimated forgone
contribution margin on
lost sales [(P1,500 –
P800) x 300] 210,000 2.80%
Total external failure
costs 390,000 5.20%
Total costs of quality P765,000 10.20%
27-12
Managing Accounting in a Changing Environment Chapter 27
Requirement 3
III. Problems
Requirement 1
Requirement 2
27-13
Chapter 27 Managing Accounting in a Changing Environment
Requirement 3
Yes. The cost of the new process is P15,000,000 and the expected benefits
is P28,837,500 over three years. The firm can expect to earn a return of over
90%.
Requirement 4
The following factors should be considered before making the final decision:
Requirement 5
The member of the board would be right if we ignore the financial payoff of
the new process and if the firm is going to be in business for only three
years. Having high quality products, especially for a high-end product such
as the one the firm is selling, is crucial for a long term success.
Increase
Costs Categories 2005 2006 (Decrease)
Prevention costs:
Training P 75,000 P 100,000 P 25,000
Product design 150,000 175,000 25,000
Total prevention 225,000 275,000 50,000
27-14
Managing Accounting in a Changing Environment Chapter 27
Appraisal costs:
Testing 50,000 150,000 100,000
Calibration 75,000 100,000 25,000
Total appraisal 125,000 250,000 125,000
Requirement 1
Incremental
Costs under Incremental
Current Costs under JIT
Production Production
Relevant Items System System
Annual tooling costs – P150,000
Required return on investment
12% per year x P900,000 of average
inventory per year P108,000
12% per year x P200,000 of average
inventory per year 24,000
Insurance, space, materials
handling, and setup costs 200,000 140,000a
Rework costs 350,000 280,000b
Incremental revenues from higher
selling prices – (90,000)c
Total net incremental costs P658,000 P504,000
Annual difference in favor of JIT
production P154,000
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Chapter 27 Managing Accounting in a Changing Environment
a
P200,000 (1 – 0.30) = P140,000
b
P350,000 (1 – 0.20) = P280,000
c
P3 x 30,000 units = P90,000
Requirement 2
Requirement 1
Incremental
Costs under Incremental
Current Costs under JIT
Purchasing Purchasing
System Policy
Required return on investment
20% per year x P600,000 of
average inventory per year P120,000
20% per year x P0 of inventory
per year P 0
Annual insurance costs 14,000 0
Warehouse rent 60,000 (13,500) a
27-16
Managing Accounting in a Changing Environment Chapter 27
Overtime costs
No overtime 0
Overtime premium 40,000
Stockout costs
No stockouts 0
P6.50b contribution margin per
unit x 20,000 units 130,000
Total incremental costs P194,000 P156,500
Difference in favor of JIT
purchasing P37,500
a
P(13,500) = Warehouse rental revenues, [(75% x 12,000) x P1.50].
b
Calculation of unit contribution margin
Selling price (P10,800,000 900,000 units) P12.00
Variable costs per unit:
Variable manufacturing costs per unit
(P4,050,000 900,000 units) P4.50
Variable marketing and distribution
costs per unit
(P900,000 900,000 units) 1.00
Total variable costs per unit 5.50
Contribution margin per unit P6.50
Note that the incremental costs of P40,000 for overtime premiums to make
the additional 15,000 units are less than the contribution margin from losing
these sales equal to P97,500 (P6.50 x 15,000). Josefina would rather incur
overtime than lose 15,000 units of sales.
Requirement 1
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Chapter 27 Managing Accounting in a Changing Environment
Zashi should invest in the modern jigs and tools because the benefit of
higher throughput contribution of P40,000 exceeds the cost of P30,000.
Requirement 2
Requirement 1
Requirement 2
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Managing Accounting in a Changing Environment Chapter 27
Requirement 1
Requirement 2
Alternatively, the cost of 2,000 defective units at the finishing operation can
be calculated as the lost revenue of P72 x 2,000 = P144,000. This line of
reasoning takes the position that direct materials costs of P32 x 2,000 =
P64,000 and all fixed operating costs in the machining and finishing
operations would be incurred anyway whether a defective or good unit is
produced. The cost of producing a defective unit is the revenue lost of
P144,000.
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Chapter 27 Managing Accounting in a Changing Environment
Problem 8
Requirement (a)
Anthony Foods
Quality Costs
2005-2006
(Millions)
2005 2006
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Quality assurance
administration P 6.20 P 6.52 P 6.86 P 7.19 P 7.93 P 8.74 P 9.61 P10.53
Training 13.10 14.39 15.90 17.46 21.12 25.50 30.37 36.35
Process
engineering 2.20 2.46 2.76 3.11 3.87 4.86 6.13 7.58
Prevention 21.50 23.37 25.52 27.76 32.92 39.10 46.11 54.46
Inspection 1.40 1.56 1.75 1.95 2.39 2.96 3.63 4.46
Testing 1.60 1.72 1.85 1.99 2.29 2.62 3.01 3.45
Appraisal 3.00 3.28 3.60 3.94 4.68 5.58 6.64 7.91
Rework 15.80 12.65 10.03 8.49 7.25 6.16 5.56 5.00
Scrap 17.60 14.48 11.92 10.32 8.92 7.72 7.00 6.34
Internal failure 33.40 27.13 21.95 18.81 16.17 13.88 12.56 11.34
Returns 26.90 21.09 16.35 13.53 11.32 9.50 8.43 7.52
Customer complaint
dept. 3.90 3.45 3.03 2.76 2.50 2.27 2.14 2.01
Lost sales 49.20 40.31 33.11 28.42 24.45 21.08 19.20 17.44
External failure 80.00 64.85 52.49 44.71 38.27 32.85 29.77 26.97
Total costs P137.90 P118.63 P103.56 P95.22 P92.04 P91.41 P95.08 P100.68
Requirement (b)
From the preceding data we see that prevention and appraisal costs are
increasing while internal and external failure costs have been decreasing.
The following graph plots three series: prevention and appraisal costs,
failure costs, and total quality costs.
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Managing Accounting in a Changing Environment Chapter 27
140
120
100
80
60
40
20
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
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Chapter 27 Managing Accounting in a Changing Environment
1. C 11. C
2. B 12. A
3. C 13. C
4. D 14. B
5. D 15. C
6. A 16. D
7. C 17. D
8. C 18. D
9. D 19. A
10. D 20. A
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