Professional Documents
Culture Documents
Solutions Additional Exercises
Solutions Additional Exercises
18-1
considered unsatisfactory by the other. Thus, the division
controller will have difficulty knowing what factors
influence his or her progress in the company. The
circumstances described in the problem do not provide
positive motivation for the division controller. Moreover,
the division controller is being asked to independently
report on the division’s performance, which may reflect
either favorably or unfavorably on the division manager.
Yet it is the division manager who makes salary and
promotion recommendations regarding the controller.
18-2
CHAPTER 2 - Basic Cost Management Concepts and
Accounting for Mass Customization Operations
Direct material. $
40
Direct labor
74
Variable manufacturing
overhead 96
Fixed manufacturing
overhead 50
Average unit cost $2
60
Production 24,000
units
Sales 20,000
units
Ending finished-goods 4,000
inventory units
18-3
288,00
0
18-4
PROBLEM 2-52
1. a, c, i, j, l 9. b, c, g, j, l
2. e 10. b, c, i, j, l
3. a, c, i, j, l 11. b, c, i, j, l
4. f 12. b, c, g, h, j, m
5. b, d, k, m 13. a, c, i, j, l
6. a, c, i, j, m 14. b, d, i, j, m
7. b, c, i, j, l 15. a, d, i, j, l
8. a, c, i, j, l
4. E Marginal cost
CASE 2-60
1. MEMORANDUM
Subject: Costs related to Printer Case Department
18-5
The real cost of the space occupied by the Printer Case
Department is the $41,000 the company is paying to rent
warehouse space. This cost would be avoided if the Printer Case
Department were closed, since the storage operation could be
moved into the company’s main building. The $41,000 rental cost
is the opportunity cost of using space in the main building for
the Printer Case Department.
The supervisor of the Printer Case Department will be
retained by the company regardless of the decision about the
Printer Case Department. However, if the Printer Case
Department is kept in operation, the company will have to hire a
new supervisor for the Assembly Department. The salary of that
new supervisor is a relevant cost of continuing to operate the
Printer Case Department.
18-6
CHAPTER 3 - Product Costing and Cost Accumulation
in a Batch Production Environment
$650,000
(a) = $32.50 per machine hour
20,000
machine
hours
$650,000
(b) = $26.00 per direct-labor hour
25,000
direct
-labor
hours
$650,000 $2.00 per direct-labor dollar or
(c) =
$325,000
* 200% of direct-labor cost
18-7
2. Work-in-Process Inventory..................... 715,00
0*
Manufacturing Overhead................. 715,00
0
*Applied manufacturing overhead = $715,000
= 22,000 hours x $32.50 per machine hour
18-8
Deduct: Under-applied overhead*
($435,000 - $433,125) 1,875
Overhead applied to work in process
433,125
Total manufacturing costs.............. $1,359,3
75
Add: Work-in-process inventory, 12/31/x3 -0-
Subtotal......................................... $1,359,3
75
Deduct: Work-in-process inventory, 12/31/x4
30,000
Cost of goods manufactured........... $1,329,3
75
*The Schedule of Cost of Goods Manufactured lists the
manufacturing costs applied to work in process. Therefore, the
under-applied overhead, $1,875, must be deducted from total
actual overhead to arrive at the amount of overhead applied to
work in process.
3. INCOME STATEMENT
Sales revenue................................................. $1,578,750
Less: Cost of goods sold.................................. 1,327,500
Gross margin.................................................. $ 251,250
Selling and administrative expenses................ 201,750
Income before taxes....................................... $ 49,500
Income tax expense........................................ 18,750
Net income..................................................... $ 30,750
18-9
PROBLEM 3-50 (15 MINUTES)
1. $30,000. Since there was no work-in-process inventory at the
beginning of 20x4, all of the costs in the year-end work-in-
process inventory were incurred during 20x4.
18-10
Total cost...................................... $1,190 $1,640
Markup, 10% of cost...................... 119 164
Price............................................. $1,309 $1,804
18-11
It is apparent that the two production departments have very
different cost structures. A is a relatively expensive department
to operate, while B is less costly. The basic system spends most
of its time in B, the inexpensive department. The advanced
system spends most of its time in A, the more expensive
department. Thus, using departmental overhead rates shows
that the basic system costs less than we had previously realized;
the advanced system costs more. The revised product costs are
$1,130 and $1,700 for the basic and advanced systems,
respectively. With a 10% markup, these revised product costs
yield prices of $1,243 for the basic system and $1,870 for the
advanced system. I recommend that the company switches to a
product costing system that incorporates departmental overhead
rates.
18-12
Machinery- 160,000 (20,000 320,000 (40,000 machine
related machine hrs. × $8) hrs. × $8)
Engineering 56,000 (2,800 eng. hrs. 84,000 (4,200 eng hrs. × $20)
× $20)
Total $303,450 $578,550
overhead
18-13
Chapter 4 – Process costing and hybrid product-costing
systems
2,000
18-14
PROBLEM 4-28 (45 MINUTES)
1. Physical flow of units:
Physica
l
Units
Work in process, April 1................................. 10,000
Units started during April.............................. 100,00
0
Total units to account for............................... 110,00
0
18-15
3. Cost per equivalent unit:
Direct Material Convers Total
ion
Work in process, April 1 $ 22,000 $ $
4,500 26,500
Costs incurred during April 198,000
158,400 356,400
Total costs to account for $220,000 $162,90 $382,90
0 0
Equivalent units 110,000 90,000
Costs per equivalent unit $2.00* $1.81† $3.81
Conversion:
number of equivalent cost per equivalent
× =
units of conversion unit of conversion 10,000 × 18,100
$1.81
Total cost of April 30 work-in-process $78,100
18-16
PROBLEM 4-37 (45 MINUTES)
18-17
( number of E.U. of direct material) × ( cost per E.U. of direct material) = 6,000 × $5.30 =
$31,800
Conversion:
( number of E.U. of conversion ) × ( cost per E.U. of conversion ) = 1,800 × $14.90
...................................... = 26,820
Total cost of November 30 work in process
$58,620
18-18
CHAPTER 5 – Cost management systems, Activity-
Based costing and Activity-Based Management
PROBLEM 5-41
Please turn to the excel file ‘Solution additional exercises in
excel’.
18-19
CASE 5-52 (20 MINUTES)
1. The controller, Erin Jackson, has acted ethically up to this
point. She correctly pointed out to the president that the firm's
traditional, volume-based product-costing system was distorting
the reported product cost for the company's three products. She
designed an ABC-system to provide more accurate product-
costing data.
Integrity:
• Communicate unfavorable as well as favorable information and
professional judgments or opinions.
Objectivity:
• Communicate information fairly and objectively.
18-20
• Disclose fully all relevant information that could reasonably be
expected to influence an intended user's understanding of the
reports, comments, and recommendations presented.
18-21
CHAPTER 6 - Activity-Based Management and Today’s
Advanced Manufacturing Environment
PROBLEM 6-47 (30 MINUTES)
1. ABM refers to the use of ABC to improve operations and
eliminate non-value-added costs. These costs arise from
non-value-added activities—operations that are (a)
unnecessary and dispensable or (b) necessary but
inefficient and improvable. Such activities can be eliminated
without harming quality, performance, or perceived value.
2. Cost of non-value-added activities:
Warehousing: 550 moves x $80 ($720,000 ÷ 9,000 $44,00
inventory moves) 0
Outgoing shipments: 250 shipments x $30 ($450,000 7,50
÷ 15,000 shipments) 0
Total $51,50
0
3. Extra inventory moves in the warehouse may be caused by
(e.g.) books being stocked incorrectly, poor planning for the
arrival and subsequent stocking of new titles. Extra
shipments would likely be the result of errors in order entry
and order filling, goods lost in transit, or damaged
merchandise being sent to customers.
4. As the following figures show, the elimination of non-value-
added activities allows ReadersNet.Com to achieve the
target-cost percentage for software only.
Activity Cost- % % Cost- Cost-
Driver Book Softwa Driver Driver
Quantity s re Qty: Qty:
Books Software
Incoming 2,000 70% 30% 1,400 600
receipts
Warehousing 9,000 80% 20% 6,650* 1,800
Outgoing 15,000 25% 75% 3,750 11,00
shipments 0**
* (9,000 moves x 80%) – 550
** (15,000 shipments x 75%) – 250
Incoming receipts: Books Software
1,400 purchase orders x $300 $ 420,000
($600,000 ÷ 2,000)
18-22
600 purchase orders x $300 $180,00
0
Warehousing:
6,650 moves x $80 532,000
1,800 moves x $80 144,00
0
Outgoing shipments:
3,750 shipments x $30 112,50
0
11,000 shipments x $30 330,00
0
Total cost $1,064,50 $654,00
0 0
Cost as a percentage of sales:
$1,064,500 ÷ $7,800,000 13.65%
$654,000 ÷ $5,200,000 12.58%
5. Additional cost cutting of $50,500 is needed for books to
achieve the 13% target of $1,014,000. Tools that the
company might use include customer-profitability analysis,
target costing, value engineering, kaizen costing,
50,000benchmarking, and reengineering.
PROBLEM 6-52 (40 MINUTES)
1.
40,000Customer-profitability analysis:
Caltex Trace
Sales
30,000 revenue $380,000 $247,600
Cost of goods sold 160,000 124,000
Gross margin $220,000 $123,600
20,000
General selling$1costs $ 48,000 $ 36,000
4,000
General administrative costs 38,000 32,000
Customer-related
10,000 costs:
Sales activity 16,000 12,000
Order taking 6,000 8,000
0 Special handling 80,000 60,000
Customer
Special shipping 18,000 20,000
-10,000 selling and administrative
Total $206,000 $168,000
costs
Operating income $ 14,000 $ (44,400)
-20,000
2. Customer-profitability graph: Customer Operating Income
(in
-30,0dollars)
00
-40,000
$(44,400)
-50,000
18-23
Caltex Trace
Computer Telecom
PROBLEM 6-53 (45 MINUTES)
1. Cumulative Operating Income as a % of Total Operating
Income
120%
110%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1 2 3 4 5 6 7 8
Customers*
*Customers ranked by operating income.
18-24
c
From solution to preceding problem.
18-25
Actual cost
Cost base reduction
for current year Kaizen goal: achieved
cost-reduction amount
$500
Actual cost
performance Kaizen goal:
at end of cost-reduction rate Actual cost
$400 last year performance
of current year
Cost base
for next year
$300
$200
$100
Time
J an Feb Mar Apr May J un J ul Aug Sept Oct Nov Dec
12/31/x4 12/31/x5
18-26
CHAPTER 7 - Activity Analysis, Cost Behavior, and Cost
Estimation
1. h 5. a 9. d Note that j
was not used.
2. i 6. g 10. k
3. f 7. c 11. l
4. e 8. b
18-27
tons) (1,400
tons)
Total royalty cost $224,50 $140,00
0 0
Less: Variable cost at 175,50 91,00
$65 per ton 0 0
Fixed royalty cost $ $
49,000 49,000
18-28
have as significant long-term ramifications for a firm as do
more long-lasting actions. While it’s true that cutting
expenditures on advertising or R&D can often have adverse
long-term consequences, other cuts could have even more
significant negative consequences in the future. The decision
to close a manufacturing facility, for example, could reduce
property taxes, rent, and/or depreciation. However, that
decision may result in a significant long-run change in
operations that may be difficult to overturn when economic
conditions rebound.
PROBLEM 7-46
Please turn to the excel file ‘Solution additional exercises in
excel’.
18-29
CHAPTER 8 - Cost-Volume-Profit Analysis
contributi
onmargin
2. Operating
leverage
factor
(at$1,000,000
sales =
level)
net
income
$435,000
= = 4.35
$100,000
percentage operating
increase
3. Percentage
increase =
innetincome ×
insales
revenue leverage
factor
= 12% × 4.35 =
52.2%
18-30
4. Most operating managers prefer the contribution income
statement for answering this type of question. The
contribution format highlights the contribution margin and
separates fixed and variable expenses.
2 Sales mix:
.
High-quality bicycles 30%
Medium-quality bicycles 70%
3 Weighted-
average unit = ($400 × 30%) + ($300 × 70%) =
. $330
contribution
margin
fixedexpenses
4 Break
-even
point =
(inunits)
weighted
-averageunit
contributi
onmargin
.
$148,500
= = 450bicycles
$330
Break- Sales
Bicycle Type Even Sales Price Revenu
Sales e
Volume
High-quality bicycles 135 (450 $1,000
× .30) $135,00
0
Medium-quality bicycles 315 (450 600
× .70) 189,000
Total
$324,00
0
18-31
5. Target net income:
+ $99,000
$148,500
Sales
volume
required
toearn
target
netincome =
of$99,000
$330
= 750bicycles
The shop will need to sell the following volume of each type
to earn the target net income:
High-quality .............................225 (750 × .30)
Medium-quality .............................525 (750 × .70)
18-32
PROBLEM 8-40 (35 MINUTES)
1. Current income:
Sales revenue $4,032,
000
Less: Variable costs $1,008,
000
Fixed costs. 2,736, 3,744,
000 000
Net income $
288,00
0
CompTronics has a contribution margin of $72 [($4,032,000
- $1,008,000) ÷ 42,000 sets] and desires to increase income
to $576,000 ($288,000 x 2). In addition, the current selling
price is $96 ($4,032,000 ÷ 42,000 sets). Thus:
Required sales = (fixed costs + target net profit) ÷ unit
contribution margin
= ($2,736,000 + $576,000) ÷ $72
= 46,000 sets, or $4,416,000 (46,000 sets x
$96)
18-33
decrease of $13.50 per unit ($24.00 - $10.50) is
needed.
Let X = unit contribution margin
$2,736,000 ÷ X = 32,000 units
X = $85.50
4. (a) Increase
(b) No effect
(c) Increase
(d) No effect
18-34
PROBLEM 8-44 (45 MINUTES)
1. Break-even point in units:
fixed
costs
Break
-even =
point
unit
contributi
onmargin
18-35
computer-assisted manufacturing method utilizes a greater
degree of operating leverage. The greater the operating
leverage, the greater the change in operating income (loss)
relative to a small fluctuation in sales volume.
4. Management should employ the computer-assisted
manufacturing method if annual sales are expected to exceed
311,111 units.
5. Zodiac’s management should consider many other business
factors, like:
• Variability or uncertainty with respect to demand quantity and
selling price.
• The ability to produce and market the new product quickly.
• The ability to discontinue production and marketing of the
new product while incurring the least amount of loss.
− variable
sales costs
1 (a Unit
contributi =
onmargin
. ) units
sold
− $1,400,000
$2,000,000
= = $6perunit
100,000
fixed
costs
Break
-even
point =
(inunits)
unit
contributi
onmargin
$420,000
= = 70,000
units
$6
18-36
target after - tax net income
fixed costs +
2 Number of units of (1 − t)
. sales required to earn =
unit contribution margin
target after-tax net
$180,000
income $420,000 +
(1 −.4) $720,000
= = =120,000 unit
$6 $6
18-37
PROFIT-VOLUME GRAPH:
Dollars per
year
$1,500,00
0
$1,000,00
0
$500,00 Profit
Break-even area
0 point:
70,000 units
Units
0 • sold per
Loss25,000 50,000 75,000 100,00 year
area 0
$(500,00
0)
$(1,000,0
00)
$(1,500,0
00)
18-38
PROBLEM 8-51 (35 MINUTES)
− $79.20
$120.00
1. Contributi
onmargin =
ratio = .34
$120.00
target
after
- taxnetincome
fixed +
expenses
2. Number of units of (1− t)
sales required to earn =
unit
contributi
onmargin
target after-tax income
$33,120
+
$475,200
(1− .40) $530,400
X= =
− $79.20 $40.80
$120.00
X= 13,000
units
3. Break-even point (in $554,400
= = 10,500
units
units) for the touring − $79.20
$132.00
model
Let Y denote the variable cost of the mountaineering model
such that the break-even point for the mountaineering model
is 10,500 units.
Then we have:
$475,200
10,500 =
$120.00 − Y
(10,500) × ($120.00 − Y) = $475,200 $1,260,000 − 10,500Y = $475,200
10,500Y = $784,800 Y = $74.74 (rounded)
Thus, the variable cost per unit would have to decrease by
$4.46 ($79.20 – $74.74).
18-39
5. Weighted- = (50% × $52.80) + (50% × $40.80) = $46.80
average unit
contribution fixed costs $514,800
margin = =
weighted - average unit contribution margin $46.80
= 11,000 units (or 5,500 of each type)
Break-even
point
18-40
CHAPTER 9 - Profit Planning, Activity-Based Budgeting,
and e-Budgeting
18-41
$306,000.
$192,00
0
One-hour visits (4,000 × 20%).............. 800
800
Billing rate.......................................... × × $105
$105
Total billings for one-hour visits........... $84,000 $
84,000
Total billings during month.................. $
276,000
$276,00
0
Percentage of month's billings × ×
collected during June........................... 10% 90%
Collections during June........................ $27,600
$248,40
0
18-42
Patient registration and records (4,000 visits × $3.00 per
visit).......................................................... $12,000
Other overhead and administrative expenses (2,400 hours ×
$7.50 per hour).......................................... 18,000
Total overhead and administrative expenses
................................................... $30,000
(2)(annual
requiremen
t)(cost
perorder)
EOQ=
annual
holding
costperunit
(2)(7,290)
($500)
CaseA: EOQ= = 810,000
= 900
$9
(2)(4,563)
($10)
B: EOQ=
Case = 6,084
= 78
$15
(2)(150)($
100)
C : EOQ=
Case = 2,500
= 50
$12
1 The lead time is one month, so the safety stock is equal to the
. difference between average monthly usage and the maximum
usage in a month. Average monthly usage is 70 tons (840/12),
and the maximum usage is 85 tons. Therefore, the safety stock
is 15 tons (85 – 70).
2 Reorder point: 85 tons. This is the maximum amount of the
. bonding agent that would be used in a month, which is the
time required to receive an order after it is placed.
PROBLEM 9-43 (60 MINUTES)
18-43
Heavy coils 40,000 $190 7,600,
000
Projected sales $15,400,
000
18-44
Heavy coils 41,000 6 246,00 20 4,920,
0 000
Total $8,820,
000
6. Manufacturing Cost Driver Cost Driver
overhead budget: Quantity Rate Cost
Purchasing and material 725,000 lb.a $0.50 $362,50
handling 0
Depreciation, utilities, 106,000 coils b
$8.00 848,000
and inspection
Shipping 100,000c $2.00 200,000
General manufacturing 506,000 hr. d
$6.00 3,036,
overhead 000
Total manufacturing $4,446,
overhead 500
a
725,000 = 469,000 + 256,000 (from req. 3), b106,000 = 65,000 +
41,000 (from req. 2)
c
100,000 = 60,000 + 40,000 (total units sold, from problem),
d
506,000 = 260,000 + 246,000 (req. 5)
18-45
CHAPTER 10 - Standard Costing, Operational
Performance Measures, and the Balanced Scorecard
processing time
1.
Manufacturing cycle efficiency = processing
time+ inspection
time
+ waiting
time+ movetime
=
4.25
hours
= 85%
4.25 + .25hour
hours + .25hour
+ .25hour
2. total
production
time
perbatch
Manufacturing cycle time =
units
per
batch
5hours
= = 0.25 hour (or
20units
perbatch
15 minutes) per unit
units
perbatch 20units
3. Velocity = = = 4units
perhour
total
production
time
perbatch 5hours
1. No. The variances are favorable and small, with each being
less than 2% of budgeted cost amounts ($350,000).
However, by simply reporting total variances for material
and labor, one cannot get a totally clear picture of
performance. Price, quantity, rate, and efficiency variances
should be calculated for further insight.
2. Direct-material variances:
Price variance = (Standard price - Actual price) x Actual
quantity purchased
45,000 pounds x $8.80 396,000
45,000 pounds x $7.70 $346,500
Direct-material price variance $ 49,500
Favorable
18-46
Quantity variance = (Standard quantity allowed - Actual
quantity used) x Standard price
39,900 pounds (9,500 units x 4.2 pounds) 351,120
x $8.80
45,000 pounds x $8.80 $396,000
Direct-material quantity variance $ 44,880
Unfavorable
Efficiency variance:
Actual hours used x standard rate
20,900 hours x $14.00 $292,600
Standard hours allowed x
standard rate
24,700 hours (9,500 units x 2.6 345,800
hours) x $14.00
Direct-labor efficiency variance $ 53,200
Favorable
18-47
consuming fewer hours than expected. This may be the
result of the team-building/morale-boosting exercises, as a
contented, well-trained work force tends to be more
efficient. However, another plausible explanation could be
that Solar Prime is paying premium wages (as indicated by
the unfavorable rate variance) to hire laborers with above-
average skill levels.
As a side note, the favorable direct-labor efficiency
variance may partially explain the unfavorable material
quantity variance. That is, laborers may be rushing through
their jobs and using more material than the standards allow.
18-48
PROBLEM 10.55 (45 MINUTES)
2. Memorandum
Date: Today
To: Management, Diagnostic Technology, Inc.
From: I. M. Student
Subject:
Performance of Albany plant during 1st quarter
18-49
The number of defective finished products, number of products
returned, and warranty claims all show improvement over the
period. All three measures suggest excellent performance in
quality control.
c. Customer acceptance:
Customer complaints are steady with an average of 5.5
complaints during a two-week period.
The number of unresolved complaints improved during the
period from 2 to 0. Performance in this area is very high, but
there is a little room for improvement.
d. In-process quality control:
The number of products rejected in process has increased. This
speaks well for the in-process inspection effort. The cause of
these defective in-process units should be investigated and
corrected.
e. Productivity:
Both the aggregate productivity measure and the number of
units produced per day per employee remained relatively steady
throughout the period. The latter of these two measures
exhibited a slight, favorable trend.
f. Delivery performance:
Both performance measures (percentages of on-time deliveries
and orders filled) were very high through the period, finishing at
100 % in period 6.
g. & h. Raw material and scrap; inventory:
Inventory value/sales revenue remained consistently low through
the period (average of 1.83%).
i. Machine maintenance:
Machine downtime was low through the period (average of 84
minutes each two-week period). Bottleneck machine downtime
was low except in period 5. The cause of that incident should be
investigated.
Overall evaluation:
The Albany plant has performed at a very high level of efficiency
in virtually every phase of its operations during the 1st quarter.
18-50
ISSUE 10-65
“WHEN HYBRID CARS COLLIDE,” THE WALL STREET JOURNAL,
FEBRUARY 6, 2003, P. B1, NORIHIKO SHIROUZU.
At this early stage in the product development cycle there is
little historical data on which to base cost estimates for the new
processes. Accordingly, many of the standard costs will be set
based on task analysis; managers will be applying their
significant prior knowledge of what each process should cost.
Some of the processes are likely identical to those for other car
models, and so costs for these processes could be estimated
using historical data.
The manufacturers in this cost-sensitive industry are still trying
to generate enough sales volumes to leverage economies of
scale for hybrid cars. Manufacturers stand to benefit from
significantly reduced costs by adopting one standard across the
industry, and each individual manufacturer stands to benefit the
most by having its standard adopted. These savings will result
largely from economies of scale for materials and components to
build the engines. In light of the business objective to be the
standard-setter, there is added pressure on each manufacturer
to demonstrate the lowest standard costs among the
competitors in order to become the de facto industry standard.
18-51
CHAPTER 11 - Flexible Budgeting and the Management
of Overhead and Support Activity Costs
PROBLEM 11-44
Please turn to the excel file ‘Solution additional exercises in
excel’.
18-52
) labor hours hours per unit
10,000 hr. = X × 2 hr. per unit
Therefore, planned production (X) equals 5,000 units.
18-53
13,500
kg.*
= = 3 kg.
4,500
units
18-54
*PQ = AQ, because all materials were used during the month of
purchase.
+
AP = actual total cost (given) ÷ actual quantity
18-55
f. Variable-overhead efficiency variance = SVR (SH*- AH)
3 × 225,000 625,000
= $32.40 − =
60 60
$27,000 F
*SH = (3 minutes per unit, or pound × 225,000 units, or
pounds) ÷ 60 minutes
h. Sales-volume variance =
actual − budgeted × budgeted
unit
sales
volume sales contributi
volume onm arg
in
= (225,000 − 200,000) × $4.09* = $102,250
F
*Budgeted unit contribution margin = $818,000 ÷
200,000 units
Summary of variances:
Direct-material price variance.................... $66,500 U
Direct-material quantity variance............... 39,750 U
Direct-labor rate variance.......................... 0
Direct-labor efficiency variance.................. 15,000 F
Variable-overhead spending variance......... 37,500 U
Variable-overhead efficiency variance......... 27,000 F
Sales-price variance................................... 22,500 U
Sales-volume variance............................... 102,250 F
Total.......................................................... $ 22,000 U
18-56
requires considerably more power than mixing does; this
difference could distort product costs.
2b. ABC may solve the problems described in requirement 2(a) and
therefore is an alternative that management should consider.
Since direct labor does not seem to have a direct cause-and-
effect relationship with variable overhead, the company should
try to identify the activity or activities that drive variable
overhead. If the same proportion of these activities is used in all
of Colonial’s products, then ABC may not be beneficial. However,
if the products require a different mix of these activities, then
ABC could be beneficial.
18-57
CHAPTER 12 - Responsibility Accounting, Quality
Control, and Environmental Cost Management
QUESTION 12-27
Private environmental costs are environmental costs borne by a
company or individual.
Social environmental costs are environmental costs borne by the
public at large.
Visible environmental costs are costs that are clearly identified
as environmental costs.
Hidden environmental costs are caused by environmental issues,
but are not identified as such.
Monitoring costs: costs of monitoring the production process to
determine if pollution is created.
Abatement costs are costs incurred to reduce or eliminate
pollution.
On-site remediation costs are costs of reducing or eliminating
the discharge into the environment of pollutants that have been
generated in the production process.
Off-site remediation costs are costs of reducing or eliminating
pollutants from the environment after they have been
discharged.
QUESTION 12-28
End-of-pipe strategies: Under this approach, a company
produces a pollutant and cleans it up before discharging it into
the environment.
Process improvement strategies: Under this approach,
companies modify products or production processes to produce
little or no pollution, or recycle wastes internally.
Prevention strategies: Companies do not generate any pollutants
in the first place.
18-58
(By designating the college of engineering as a profit center,
this subunit is encouraged to generate research grants and
to operate effectively. The term "profit center" is used in a
slightly different way here. No subunit in a university really
makes a profit. However, treating the college of engineering
like a profit center means that its management will have
considerable authority in managing the subunit's revenues
and expenses.)
(3) European division of a multinational manufacturing company:
Investment center.
(4) Outpatient clinic in a profit-oriented hospital: Profit center.
(5) Mayor's office of a city: Cost center. (8) Claims
department: Cost center.
(6) Movie theater: Cost center or profit center. (9) Ticket sales
division of an
airline: Revenue center.
(7) Radio station: Profit center. (10) Bottling plant:
Cost center.
PROBLEM 12-51 (40 MINUTES)
18-59
• Appraisal costs have decreased by 43.4% [($205,000 –
$116,000) / $205,000]. Higher quality is reducing the demand
for final testing.
• Quality costs have shifted to the area of prevention, where
problems are solved before the customer becomes involved.
Maintenance, training, and design reviews have increased
from 5.8% of total production cost to 6% and from 24.9% of
total quality cost to 45.7%. The $30,000 increase is more than
offset by decreases in other quality costs.
18-60
Store maintenance 0 15,000 1,200
Advertising 100,000 10,000
Rent and other costs $180,000 120,000 90,000
District general 75,000
administrative 144,000 126,000
expenses (allocated) 25,200
Regional general and 150,000 110,000 110,000
administrative 300,000 $ 591,000 $ 426,450
expenses (allocated) $ 105,000 $ 182,550
Total expenses 360,000
Net Income
330,000
$1,420,20
0
$
312,300
18-61
• Because the bonus is based on sales over $1,140,000, the
manager has concentrated on maximizing sales and has paid
little attention to costs. The store's net income is less than 9%
of sales and only 34% of total net income, although sales were
40% of district sales.
• In an effort to maximize sales, the New Haven store spent 10
times as much as the Boston store on advertising but
generated only $150,000 more in sales.
b. Boston Store:
• Because the manager of the Boston store is motivated to
maximize net income, there appears to be a tendency to cut
back on discretionary expenses, such as store maintenance
and advertising. While management is seeking cost control,
the lack of spending on these discretionary items may have an
adverse long-term effect.
• The manager of the Boston store will be unhappy with the
inclusion of allocated district and regional expenses in the
calculation of net income. These expenses are not likely to be
controlled by the store manager and will reduce the bonus
received by the manager.
Competence:
• Prepare complete and clear reports and recommendations
after appropriate analysis of relevant and reliable information.
Integrity:
• Communicate unfavorable and favorable information and
professional judgments.
• Refrain from engaging in any activity that would discredit the
profession.
Objectivity:
• Communicate information fairly and objectively.
• Disclose fully all relevant information that could reasonably be
expected to influence an intended user's understanding of the
reports, comments, and recommendations presented.
18-62
CHAPTER 13 – Investment Centers and Transfer Pricing
Explanatory notes:
a income $8,000,000
Sales =
margin = = 20%
sales
revenue$40,000,00
0
b sales
revenue$40,000,00
0
Capital =
turnover = =4
invested
capital$10,000,00
0
c
ROI = sales margin × capital turnover = 20% × 4 = 80%
d
Residual income = income – (imputed interest
rate)(invested capital)
= $8,000,000 – (8%)($10,000,000) = $7,200,000
e
income
Sales =
sales
revenue
margin
$1,600,000 Therefore, sales revenue =
20% =
revenue $8,000,000
sales
f
sales
revenue
Capital =
invested
capital
turnover
$8,000,000
1 = Therefore, invested capital =
invested
capital
$8,000,000
18-63
g
= sales margin × capital turnover
ROI
ROI = 20% × 1 = 20%
h
Residual = income – (imputed interest rate)(invested
income capital)
= $1,600,000 – (8%)($8,000,000) = $960,000
i
ROI = sales margin × capital turnover
20 = 25% × capital turnover Therefore, capital
% turnover = .8
j
income
ROI = = 20%
invested
capital
Therefore, income = (20%)(invested capital)
Residual = income – (imputed interest rate)(invested
income capital) = $480,000
Substituting from above for income:
(20%)(invested capital) – (8%)(invested capital) = $480,000
Therefore, (12%)(invested capital) = $480,000 So,
invested capital = $4,000,000
income
k
=
invested
capital
ROI
income
20 = Therefore, income = $800,000
$4,000
,000
%
l
income
Sales =
sales
revenue
margin
$800
,000
25% = Therefore, sales revenue =
sales
revenue
$3,200,000
18-64
1. Three ways to increase Division I's ROI:
(a Increase income, while keeping invested capital the same.
) Suppose income increases to $9,000,000. The new ROI is:
income $9,000,000
ROI= = = 90%
invested
capital$10,000,000
18-65
3. Yes. A drastic cutback in advertising could lead to a loss of
customers and a reduced market share. This could translate
into reduced profits over the long term. With respect to
repairs and maintenance, reduced outlays could prove costly
by unintentional shortening of the useful lives of plant and
equipment. Such action would likely result in an accelerated
asset replacement program.
Current Current +
Current + Anderson +
Anderso Palm Beach
n
Income $ $ $ 2,010,000**
540,00 1,440,00
0 0*
Invested 9,000, 16,500, 23,625,000
capital 000 000
ROI 6% 8.73% 8.51%
* $540,000 + ($4,500,000 - $3,600,000)
** $540,000 + ($4,500,000 - $3,600,000) +
($6,750,000 - $6,180,000)
18-66
PROBLEM 13-44 (35 MINUTES)
18-67
PROBLEM 13-48 (40 MINUTES)
18-68
The Mining Division would like to sell to the Metals Division for
the same price it can obtain on the outside market, $270 per
unit. However, Mining would be willing to sell the toldine for
$255 per unit, because the $15 variable selling cost would be
avoided.
The Metals Division would like to continue paying the bargain
price of $198 per unit. However, if Mining does not sell to
Metals, Metals would be forced to pay $270 on the open market.
Therefore, Metals would be satisfied to receive a price
concession from Mining equal to the costs that Mining would
avoid by selling internally. Hence a negotiated transfer price
between $255 and $270 would be acceptable to both divisions
and benefits the company as a whole.
4. General transfer-pricing rule: Transfer price = outlay cost +
opportunity cost
= ($36 + $48 + $72)* + ($114 - $15) **
= $156 + $99 = $255
*Outlay cost = direct material + direct labor + variable overhead
[see requirement (2)]
**Opportunity cost = forgone contribution margin from outside
sale on open market
= $114 contribution margin from internal sale calculated in
requirement (2), less the additional $15 variable selling cost
incurred for an external sale
Therefore, the general rule yields a minimum acceptable transfer
price to the Mining Division of $255, which is consistent with the
conclusion in requirement (3).
18-69
CHAPTER 14 - Decision Making: Relevant Costs and
Benefits
Utilities .................................................................... $
4,350
Depreciation of building ........................................... 6,000
Deli manager’s salary ............................................... 4,50
0
Total ........................................................................ $14,85
0
18-70
*Depreciation on the counter equipment and furnishings is
included because it is traceable to the ice cream operation and
is an expense in the determination of income. If a cash-flow
analysis is desired, this non-cash expense should be excluded.
18-71
0
Decreased CM from paint and supplies (15,20
($76,000 x 20%) 0)
Increased advertising (12,50
0)
Income (loss) from closure $
(6,400)
* The current CM ratio for carpeting is 30% ($69,000 ÷
$230,000). This ratio will increase to 35%, producing a new
contribution for the line of $101,500 [($230,000 + $60,000) x
35%]. Carpeting’s CM will rise by $32,500 ($101,500 - $69,000),
boosting firm profitability by the same amount.
2. This cost should be ignored. The inventory cost is sunk (i.e., a
past cost that is not relevant to the decision). Regardless of
whether the department is closed, Contemporary Trends will
have a wallpaper inventory of $11,850.
3. The Internet- and magazine-based firms likely have several
advantages:
• These companies probably carry little or no inventory. When a
customer places an order, the firm simply calls its supplier and
acquires the goods. The result may be lower expenditures for
storage and warehousing.
• These firms do not need retail space for walk-in customers.
• Internet- and magazine-based firms can conduct business
globally. Contemporary Trends, on the other hand, is confined
to a single store in Baltimore.
18-72
10%; $495 x 10% 50 50
Total unit variable cost 138 195
.00 .00
Unit contribution margin $237 $300
.00 .00
2. The following costs are not relevant to the decision:
• Development costs—sunk
• Fixed manufacturing overhead—will be incurred regardless
of which product is selected
• Sales salaries—identical for both products
• Market study—sunk
3. Martinez, Inc. expects to sell 10,000 Standard units (40,000
units x 25%) or 8,000 Enhanced units (40,000 units x 20%). On
the basis of this sales forecast, the company would be advised
to select the Standard model.
Standar Enhanc
d ed
Total CM: 10,000 units x $237; 8,000 $2,370, $2,400,
units x $300 000 000
Less: Marketing and advertising 195, 300,
000 000
Income $2,175, $2,100,
000 000
4. The quantitative difference between the profitability of
Standard and Enhanced is relatively small, which may prompt
the firm to look at other factors before a final decision is
made. These factors include:
- Competitive products in the marketplace
- Data validity
- Growth potential of the Standard and Enhanced models
- Production feasibility
- Effects, if any, on existing product sales
- Break-even points
18-73
Selling price $116 $130 $160
Direct material 32 40 38
Direct labor 20 30 40
Variable overhead 16 24 32
Total variable cost $ 68 $ 94 $110
Contribution margin $ 48 $ 36 $ 50
18-74
Eclipse
500
400
Mixing department constraint Material constraint
Objective function
300
Optimal solution
(N=200, E =150)
200
Nova
100 200 300 400 500
18-75
Direct labor ($16.00 × 500) $ 8,000
Variable overhead ($12.00 × 500) 6,000
Administrative cost 2,000
Total traceable out-of-pocket costs $16,000
totaltraceabl
eout-of-pocket
costs $16,000
Minimum price per dose = = =
1,000,000
doses 1,000,000
$.016
total
bidprice $29,900
Bid price per dose = = = $0.0299 per
1,000,000
doses 1,000,000
dose
18-76
PROBLEM 15-44 (25 MINUTES)
Since total revenue must equal $6,915,000, the revenue per hour
must be $276.60 ($6,915,000 ÷ 25,000 hours).
18-77
CHAPTER 17 - Absorption, Variable, and Throughput
Costing
18-78
PROBLEM 17-33 (40 MINUTES)
1. Standard throughput cost per unit:
Direct material cost per unit* $40
Total standard throughput cost per unit $40
*Direct material is the only throughput cost.
18-79
units, thereby lowering the reported product cost per unit.
Throughput costing avoids this potential problem by not
assigning fixed manufacturing overhead as a product cost.
Against throughput costing: Many managers prefer
absorption-costing data for cost-based pricing decisions. They
argue that fixed manufacturing overhead is a necessary cost
of production. To exclude this fixed cost from the inventoried
cost of a product, as is done under throughput (and variable)
costing, is to understate the cost of the product. This, in turn,
could lead to setting cost-based prices too low.
18-80
Less: Cost of goods sold (10,000,000 at $2)…….
(20,000,000)
Margin…………………………………………………… $ 40,000,000
Less: Fixed manufacturing overhead……………..
(48,000,000)
Less: Selling and administrative costs……………
(10,000,000)
Operating loss…………………………………………. $(18,000,000)
18-81
CHAPTER 18 - Allocation of Support Activity Costs and
Joint Costs
18-82
230,000
107,33 122,66
Maintenance (35/75) 3* (40/75) 7
350,000
262,50 87,500
Design (45/60) 0 (15/60)
$830,000 $480,9 $349,0
Total 44 56
18-83
PROBLEM 18-25 (CONTINUED)
1. Step-down method:
Service Departments Production Departments
HR Maintenance Design Machining Finishing
Costs prior to $250,00 $230,00 $350,0
allocation 0 0 00
Allocation of
HR
Department $250,00 (5/10 (5/10 $100,0(40/1 $125,0(50/10
costs 0 12,5000) 12,5000) 0000) 000)
Allocation of
Maintenance
Department $242,50 *(5/8 106,09*(35/ 121,25(40/80
costs 0 15,1560) 480) 0)
Allocation of
Design
Department $377,6 283,24(45/6 (15/60
costs 56 20) 94,414)
Total cost
allocated to
each $489,3 $340,6
department 36 64
*Rounded
18-84
CASE 18-36 (50 MINUTES)
18-85
2. Allocation of joint costs:
a. Physical-units method:
Joint Joint Quantity at Relative Allocatio
Cost Products Split-Off Proportion n of Joint
Point Cost
$630,0 Resoline 8,000 8/10 $504,000
00 pounds
Krypto 2,000 2/10 126,000
pounds
Total 10,000 $630,000
pounds
b. Relative-sales-value method:
Joint Joint Sales Value Relative Allocatio
Cost Products at Proportion n of Joint
Split-Off Cost
Point
$630,0 Resoline $600,000 2/3 $420,000
00
Krypto 300,000 1/3 210,000
Total $900,000 $630,000
c. Net-realizable-value method:
1-86
Sales Separable Net Allocatio
Joint Value of Cost of Realizabl Relative n
Joint Product Final Processin e Proporti of Joint
Cost s Product g Value on Cost
Resolite $840,000 $120,000 $ 0.60 $378,00
$630,0 Kryptite 720,000 0
00 570,000 90,000 0.40
480,000 252,000
Total $1,200,0 $630,00
00 0
3. Decision analysis:
Incremental revenue per pound:
Sales price of Omega ........................... $390
Sales price of Kryptite ......................... 285
Incremental revenue ........................... $105
Incremental cost per pound:*
Separable processing .......................... $120
Packaging ........................................... 18
Incremental cost ................................. 138
Incremental loss per pound .................... $(33)
Conclusion: The Kryptite should not be processed further into
Omega.
*Notice that these are the separable costs incurred after Kryptite
has already been produced. The separable costs of processing
Krypto into Kryptite are properly excluded.
4. The joint cost allocation should not be used in the decision
analysis. The total joint cost will not be affected by the
decision.
1-87