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Chapter 1 - Answer - Cost Accounting

BS Accountancy (Mindanao State University)

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COST ACCOUNTING AND CONTROL – Solutions Manual

CHAPTER 1
COST ACCOUNTING FUNDAMENTALS

I. Answers to Questions

1. Cost accounting measures and reports financial information and other

information related to the acquisition or consumption of an organization’s
resources. Cost accounting provides information to both management accounting
and financial accounting.
2. Management accounting measures and reports financial as well as other types of
information that assists managers in fulfilling the goals of the organization.
Financial accounting focuses on external reporting that is guided by international
financial accounting and reporting standards.
3. Financial accounting is constrained by financial accounting and standards
principle. Management accounting is not restricted to these principles. The result
is that:
 Management accounting can include assets or liabilities (such as “brand
names” developed internally) not recognized under IFRS, and
 Management accounting can use asset or liability measurement rules
(such as present values or resale prices).
4. Cost management is actions managers undertake to satisfy customers while
continuously reducing and controlling costs.
5. The new controller could reply in one or more of several ways:
a. Demonstrate to the plant manager how he or she could make better decisions
if the plant controller was viewed as a resource rather than a deadweight. In a
related way, the plant controller could show how the plant manager’s time
and resources could be saved by viewing the new plant controller as a team
member.
b. Demonstrate to the plant manager a good knowledge of technical aspects at
the plant. This approach may involve doing background reading. It certainly
will involve spending much time on the plant floor speaking to plant
personnel.
c. Show the plant manager examples of the new plant controller’s past success
in working with line managers in other plants. Examples could include:
 Assistance in preparing the budget,
 Assistance in analyzing problem situations, and
 Assistance in submitting capital budget requests.
d. Seek assistance from the corporate controller to highlight to the plant
manager the importance of many tasks undertaken by the new plant
controller. This approach is a last resort but may be necessary in some cases.

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6. Cost accounting is an integral part of the controller’s function in an organization.

In most organizations, the controller reports to the chief financial officer, who is a
key member of the top management team.
7. In most organizations, management accountants perform multiple roles: problem
solving (comparative analyses for decision making), scorekeeping (accumulating
date and reporting reliable results), and attention directing (helping managers
properly focus their attention).
8. Accountants have ethical responsibilities that are related to competence,
confidentiality, integrity, and objectivity.
9. In decision making, managers or supervisors may wish to take actions that are not
economically justifiable. In most cases, upon receipt of a well-developed cost
analysis, a production manager is satisfied as to whether an action is feasible. If
the action is not economically justifiable the matter is dropped without conflict.
In a few cases, however, managers may wish to pursue a project because of
personal reasons, and hope to have an economic analysis support it. In these
situations, care must be taken to ascertain the economic merits of the plan, and if
the plan cannot be justified on economic grounds, the manager must make the
case for the project on another basis. The final responsibility for the decision rests
with the manager. Therefore, even plans that cannot be justified on a cost analysis
basis may still be adopted at the discretion of management.
In the control area, the accountant is charged with the responsibility of making
certain that plans are executed in an optimal and efficient manner. In some cases,
this may be viewed as placing restrictions on management actions. Under these
circumstances the manager may view the accounting function as placing too great
a constraint on the manager while the accountant may view the manager as
attempting to circumvent the rules.
Performance evaluation standards are set by upper level management, but
accounting data are usually a significant input to the performance measurement
process. Many accounting numbers are based on allocations, cost flow
assumptions (e.g., LIFO and FIFO), and similar procedures rather than on
recorded transactions alone. Managers may wish to reduce the costs charged to
them in order to increase their reported profit contributions while the accountant
may believe such reductions are unfair. Conflict resolution requires a careful
statement of the rules and the reasons therefor, prior to the start of the evaluation
period, so that the managers will know beforehand the evaluation method that
will be employed.
10. The cost accounting system is an important source of data from which financial
statements are prepared. Knowledge of the sources of data and the way the data
have been assembled is a prerequisite to understanding financial statements.
Anyone can count a physical inventory. Only a knowledgeable cost accountant
can determine if the reported cost of that inventory is appropriate.

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Cost accounting pervades business activities; knowing a company’s cost

accounting system provides a better understanding of the business. Understanding
cost accounting helps provide a “business perspective.” Finally, questions
concerning cost accounting are on the CPA and CMA exams.
11. Uses of feedback in a management control system includes:
 Changing goals
 Searching for alternative means of operating
 Changing methods for making decisions
 Making predictions
 Changing operations
 Changing the reward system

II. Answers to Exercises

Exercise 1 (Financial and management accounting)

This problem can form the basis of an introductory discussion of the entire filed of
management accounting and cost accounting.
1. The focus of management accounting is on helping internal users to make better
decisions, whereas the focus of financial accounting is on helping external users
to make better decisions. Management accounting helps in making most
decisions, including pricing, product choices, investments in equipment, making
or buying goods and services, and manager rewards.
2. Financial accounting and reporting standard affect both management accounting
and financial accounting. However, an organization’s management accounting
system is not governed by generally accepted accounting principles. For
example, if an organization wants to account for assets on the basis of
replacement costs for internal purposes, no outside agency can prohibit such
accounting.

Exercise 2 (Purposes of accounting system)

Report Statement Purpose

A Formulating overall strategies
B Meeting external regulatory
C Performance measurement of … people
D Cost planning and cost control
E Product / customer emphasis decisions

Exercise 3 (Relevant cost)

Answers
a. Cost of the present car. Not relevant; (sunk cost)
b. Trade-in value of your present car. Relevant (incremental cash flow)
c. Maintenance costs on the present car. Relevant (avoidable cost)

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d. Fuel consumption on the present car. Relevant (avoidable cost)

e. Fuel consumption on the new car. Relevant (incremental cost)
f. Cost of parking permits, garage rental,
and similar “storage costs.” Irrelevant (non-differential)
g. Liability insurance on the present car. Relevant (avoidable)
h. Liability insurance on the new car. Relevant (incremental)
i. Property and collision insurance on the
j. present car. Not relevant (premium paid, sunk cost)
k. Changes in the relative frequency of your
friends saying: “Let’s use your car since
its newer”, and the related costs of using Comment / Friend - Irrelevant
the new car. Cost of using new car - relevant

Exercise 4

a. Yes, Dawn has an ethical responsibility to take a course of action.

b. The three possible courses of action are:
(a) Discuss the matter with the controller
(b) Anonymously release the information to the local newspaper.
(c) Discuss the situation with an outside member of the board of Directors.

Of the 3 courses of action, Alternative (a) is the most appropriate. Discuss the matter
with the controller, her superior. If no action is undertaken by the controller, Dawn
can resign from the company or write a formal letter addressed to the future Board of
Directors, not just to the one she personally known.

Alternative (b) is the most inappropriate.

Exercise 5

a. The memo should recommend Accountant B because of her extensive

experience in this line of service. Second choice is Accountant A.
b. Accountant C is violating the Code of Ethics particularly on the issue of
disclosing confidential matter.

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