Cornerstones of Managerial Accounting 0th Edition

1 INTRODUCTION TO MANAGERIAL ACCOUNTING DISCUSSION QUESTIONS 1. Managerial accounting is the provision of accounting information for internal users in a firm. 2. The three broad objectives of managerial accounting are to provide information for planning, controlling, and decision making. 3. The users of managerial accounting information are generally managers and other employees of a firm. Managerial accounting

10 STANDARD COSTING: A MANAGERIAL CONTROL TOOL DISCUSSION QUESTIONS 1. Standard costs are essentially budgeted amounts on a per-unit basis. Unit standards serve as inputs in building budgets. 2. Unit standards are used to build flexible budgets. Unit standards for variable costs are the variable cost component of a flexible budgeting formula. 3. Historical experience is often a poor choice for

CHAPTER 10: Standard Costing: A Managerial Control Tool P 10-42 1. Standard Price Direct materials……………………… Direct labor…………………………… Variable overhead………………… Fixed overhead……………………… Standard cost per unit…………… 2. Standard Cost 25.000 0.768 0.768 0.768 $100.00 11.52 6.14 9.22 $126.88 There would be unfavorable labor efficiency variances for the first 320 units because the standard hours are much lower than the actual hours at this level. Actual hours would be approximately 409.60 (320 × 1.28), and standard

11 FLEXIBLE BUDGET AND OVERHEAD ANALYSIS DISCUSSION QUESTIONS 1. A static budget is for a particular level of activity. A flexible budget is one that can be established for any level of activity. 2. For performance reporting, it is necessary to compare the actual costs for the actual level of activity with the budgeted costs for the actual level

CHAPTER 11 Flexible Budget and Overhead Analysis P 11-47 (Continued) Before-the-fact flexible budgeting allows managers to assess risk and uncertainty. In this example, managers would see very quickly that the most likely scenario promises an expected loss. Only if the sales are in the optimistic range will the company show a positive return. 3. The financial performance as

12 PERFORMANCE EVALUATION AND DECENTRALIZATION DISCUSSION QUESTIONS 1. In centralized decision making, decisions are made at the very top level, and lower-level managers are responsible for implementing these decisions. For decentralized decision making, decisions are made and implemented by lower-level managers. 2. Decentralization is the delegation of decision-making authority to lower levels. 3. Reasons for decentralization include access to local information,

13 SHORT-RUN DECISION MAKING: RELEVANT COSTING DISCUSSION QUESTIONS 1. Tactical decisions are short run in nature; they involve choosing among alternatives with an immediate or limited end in view. Strategic decisions involve selecting strategies that yield a long-term competitive advantage. 2. A manager can identify alternatives by using his or her own knowledge and experience and by obtaining input from

CHAPTER 13 Short-Run Decision Making E 13-34 1. Price of Carved Bear Candle = $12.00 + (0.80 × $12) = $21.60 2. Price of Scented Votive Candle = $1.10 + (0.80 × $1) = $1.98 3. The financial manager might encounter one or more common challenges to using cost-plus (or markup) pricing. One challenge might be identifying the

14 CAPITAL INVESTMENT DECISIONS DISCUSSION QUESTIONS 1. Independent projects are such that the acceptance of one does not preclude the acceptance of another. With mutually exclusive projects, acceptance of one precludes the acceptance of others. 2. The timing and quantity of cash flows determine the present value of a project. The present value is critical for assessing whether

CHAPTER 14 Capital Investment Decisions P 14-37 (Continued) 10 Revenues……………………………………………………………… Operating expenses………………………………………………… Salvage………………………………………………………………… Recovery of working capital……………………………………… Total………………………………………………………………… 2. Year Discount Factor Cash Flow 1.00000 0 $(1,840,000) 3.60478 1–5 330,000 0.50663 6 180,000 0.45235 330,000 7 0.40388 330,000 8 0.36061 330,000 9 10 520,000 0.32197 NPV………………………………………………………… $ 1,650,000 (1,320,000) 100,000 90,000 $ 520,000 Present Value $(1,840,000) 1,189,577 91,193 149,276 133,280 119,001 167,424 $ 9,751 The new process should be accepted. P 14-38 1. df = Investment Annual Cash Flow $339,000 $60,000 = = 5.65000 The IRR is essentially 12%. The company should acquire the new system. 2. Since I = P for the IRR: I $339,000 $339,000 ÷ 6.71008 $50,521 = = = = df × CF 6.71008* × CF CF CF * Discount

CHAPTER 15 Statement of Cash Flows P 15-42 1. a. Indirect Method: Cash flows from operating activities: Net income…………………………………………… $122,400 Add (deduct) adjusting items: Increase in accounts receivable………………… Increase in accounts payable…………………… Depreciation expense……………………………… Loss on sale of equipment………………………… Net cash from operating activities……………… Income Statement b. Direct Method: $ 920,000 (620,000) (177,600) (18,000) 18,000 19,800 1,800 Adjustments $(18,000) 18,000 19,800 1,800 Net cash from operating activities…………………………….……… Revenues…………………………… Cost of goods sold……………… Operating expenses……………… $144,000 Cash Flows $ 902,000 (602,000) (156,000) $ 144,000 15-17 © 2014 Cengage Learning. All

15 STATEMENT OF CASH FLOWS DISCUSSION QUESTIONS 1. Cash equivalents such as money market funds and CDs are highly liquid investments that can be readily converted into cash. They are treated as cash. 2. Operating activities are the ongoing, day-to-day, revenue-generating activities of an organization. Investing activities involve the sale or purchase of long-term assets. Financing activities stem from

CHAPTER 16 Financial Statement Analysis E 16-37 1. Income Before Taxes + Interest Expense Interest Expense Times-Interest-Earned Ratio = $3,500,000 + $1,000,000 $1,000,000 = = 4.50 2. Debt Ratio = Total Liabilities Total Assets = $10,250,000 $16,400,000 = 0.63 3. Debt-to-Equity Ratio = Total Liabilities Total Equity = $10,250,000 $6,150,000 = 1.67 E 16-38 1. Return on Sales = Net Income Sales = $2,100,000 $11,300,000 = 0.1858, or 18.58% 2. The return on sales ratio illustrates the number of cents from each sales dollar that is left over after covering all

16 FINANCIAL STATEMENT ANALYSIS DISCUSSION QUESTIONS 1. The two major types of financial statement analysis discussed in this chapter are common-size analysis and ratio analysis. 2. Horizontal analysis expresses line items of financial statements as a percentage of a priorperiod amount. Vertical analysis expresses the line item as a percentage of some other line item for the same

2 BASIC MANAGERIAL ACCOUNTING CONCEPTS DISCUSSION QUESTIONS 1. Cost is the amount of cash or cash equivalent sacrificed for goods and/or services that are expected to bring a current or future benefit to the organization. An expense is an expired cost; the benefit has been used up. 2. Accumulating costs is the way that costs are measured and recorded.

CHAPTER 2 Basic Managerial Accounting Concepts E 2-42 (Concluded) So, COGM = Direct Materials Used in Production + Direct Labor Used in Production + MOH Costs Used in Production + Beginning WIP Inventory – Ending WIP Inventory COGM = $50,000 + $53,000 + $76,000 + $14,000 – $19,000 = $174,000 Therefore, e = $7,000 + $174,000 – $11,000 =

3 COST BEHAVIOR DISCUSSION QUESTIONS 1. Knowledge of cost behavior allows a manager to assess changes in costs that result from changes in activity. This allows a manager to examine the effects of choices that change activity. For example, if excess capacity exists, bids that at least cover variable costs may be totally appropriate. Knowing what costs

CHAPTER 3 E 3-39 1. SUMMARY OUTPUT Regression Statistics Multiple R 0.917226463 R Square 0.841304384 Adjusted R Square 0.825434822 Standard Error 164.5461114 Observations 12 ANOVA df Regression SS MS 1 1435368.689 1435368.689 Residual 10 270754.2279 27075.42279 Total 11 1706122.917 Coefficients Standard Error t Stat F Significance F 53.01371284 P-value 2.6597E-05 Lower 95% Upper 95% Lower 95.0% Upper 95.0% Intercept 942.1029802 88.16653478 10.68549402 8.62887E-07 745.6556994 1138.550261 745.6556994 1138.550261 Deliveries 1.78781384 0.245543354 7.28105163 2.6597E-05 1.240709154 2.334918525 1.240709154 2.334918525 2. Delivery Cost = $942 + ($1.79 × Number of Deliveries) 3. The R² is 0.841, or 84.1%. In other words, 84.1% of the variation in the monthly cost of delivery from month to month can be

CHAPTER 4 Cost-Volume-Profit Analysis: A Managerial Planning Tool E 4-35 (Continued) 2. d. Both fixed cost and unit variable cost increase: $70,000 $60,000 $50,000 $40,000 $30,000 $20,000 $10,000 $0 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Units Sold Break-Even Point = 5,000 units E 4-36 1. Unit Contribution Margin = $791,700/54,600 = $14.50 Break-Even Units = $801,850/ $14.50 = 55,300 2. Operating Income = 10,000 × $14.50 = $145,000 3. Contribution Margin Ratio = $14.50/$34.00 =

4 COST-VOLUME-PROFIT ANALYSIS: A MANAGERIAL PLANNING TOOL DISCUSSION QUESTIONS 1. CVP analysis allows managers to focus on selling prices, volume, costs, profits, and sales mix. Many different “what-if” questions can be asked to assess the effect of changes in key variables on profits. 2. The units sold approach defines sales volume in terms of units of product

CHAPTER 5 Job-Order Costing E 5-43 (Continued) 4. Work in Process: Beginning balance…………………………………………… Direct materials……………………………………………… Direct labor…………………………………………………… Applied overhead……………………………………………… Jobs completed: Job 58……………………………………………………… Job 59……………………………………………..………… Ending balance………………………………………………… 5. $ $27,440 22,580 Finished Goods: Beginning balance…………………………………………… Jobs transferred in: Job 58……………………………………………….……… Job 59……………………………………………………… Jobs sold: Job 57……………………………………………………… Job 58……………………………………………….……… Ending balance………………………………………………… 0 24,500 32,400 8,640 (50,020) $ 15,520 $ 25,600 $27,440 22,580 $25,600 27,440 50,020 $(53,040) $ 22,580 E 5-44 1. Allocation ratios for Power based on number of machine hours: Battery = 7,000/(7,000 + 1,000) = 0.8750 Small Motors = 1,000/(7,000

5 JOB-ORDER COSTING DISCUSSION QUESTIONS 1. Job-order costing accumulates costs by jobs, and process costing accumulates costs by processes. Job-order costing is suitable for operations that produce custom-made products that receive different doses of manufacturing costs. Process costing, on the other hand, is suitable for operations that produce homogeneous products that receive equal amounts of manufacturing costs in

6 PROCESS COSTING DISCUSSION QUESTIONS 1. Process costing collects costs by process (department) for a given period of time. Unit costs are computed by dividing these costs by the department’s output measured for the same period of time. Job-order costing collects costs by job. Unit costs are computed by dividing the job’s costs by the units produced

CHAPTER 6 Process Costing P 6-50 (Continued) Costs accounted for: Goods transferred out ($5.20 × 120,000)……………… Transferred Out Ending Work in Process $624,000 Total $ 624,000 Goods in ending WIP: Conversion ($5.20 × 24,000)…… Total costs accounted for…… $624,000 P 6-51 1. Units to account for: Units in beginning WIP……… Units started*………………… Total…………………………… 15,000 35,000 50,000 $124,800 $124,800 Units accounted for: Transferred out……… Units in ending WIP… Total………………… 124,800 $748,800 45,000 5,000 50,000 *50,000 – 15,000 = 35,000 2. Equivalent Units Transferred out………………………………………..…………………………… Ending WIP (5,000 × 0.25)…………..……………………………………………… Total………………………………………………………………..……………… 45,000 1,250 46,250 3. Unit cost [($1,656

7 ACTIVITY-BASED COSTING AND MANAGEMENT DISCUSSION QUESTIONS 1. For plantwide rates, overhead is first collected in a plantwide pool, using direct tracing. Next, an overhead rate is computed and used to assign overhead to products. 2. First stage: Overhead is assigned to production department pools using direct tracing, driver tracing, and allocation. Second stage: Individual departmental rates are used to

CHAPTER 7 Activity Based Costing and Management P 7-54 1. Plantwide Rate = $990,000/440,000 DLHs = $2.25 per DLH Overhead cost per unit: Model A: ($2.25 × 140,000)/10,000 units = $31.50 Model B: ($2.25 × 300,000)/100,000 units = $6.75 Activity rates: Activity Setups Inspections Machining Maintenance 2. 3. Activity Rate Driver Production runs Inspection hours Machine hours Maintenance hours $270,000/100 runs = $2,700 per run $210,000/2,000 hours = $105 per hour $240,000/220,000 hours

8 ABSORPTION AND VARIABLE COSTING, AND INVENTORY MANAGEMENT DISCUSSION QUESTIONS 1. The only difference between absorption costing and variable costing is the way in which fixed overhead costs are assigned. Under variable costing, fixed overhead is a period cost; under absorption costing, it is a product cost. 2. Absorption-costing income is greater because some of the period's fixed overhead is

CHAPTER 8 E 8-32 1. EOQ = = √ √ Absorption and Variable Costing, and Inventory Management 2 × 17,280 × $10 $6 345,600 6 = 240 units 2. Number of Orders Annual Number of Units Used Number of Units in an Order = = 17,280 units 240 units = 72 orders per year 3. Total Ordering Cost = Number of Orders × Cost per Order = 72 orders × $10 = $720 4. Total

9 Profit Planning DISCUSSION QUESTIONS 1. Budgets are the quantitative expressions of plans. Budgets are used to translate the goals and strategies of an organization into operational terms. 2. Control is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates materially from planned performance. Budgets are standards, and they are

CHAPTER 9 Profit Planning P 9-51 (Continued) 7. Schedule 7: Ending Finished Goods Inventory Budget Unit cost computation: Direct materials (3 units @ $80)……………………………………………… Direct labor (5 units @ $10)…………………………………………………… Overhead: Variable (5 units @ $6)………………………………………………………… Fixed ($4,000,000/310,000)*…………………………………………………… Total unit cost……………………………………………………………………… Finished goods (10,000 × $332.90)……………………………………………. $ 240.00 50.00 30.00 12.90 $332.90 $3,329,000 *Rounded 8. Schedule 8: Cost of Goods Sold Budget Direct materials used (Schedule 3)……………………………………………… Direct labor used (Schedule 4)…………………………………..……………… Overhead

CHAPTER 9 Profit Planning P 9-47 (Continued) d. Schedule 4: Direct Labor Budget January Units to be produced (Schedule 2)……………… × Direct labor time per unit (hours)………… Total hours needed……………………… × Cost per hour Total cost………………… February March Total 48,000 58,000 60,000 166,000 3 3 3 3 144,000 $ 14.25 $2,052,000 174,000 $ 14.25 $2,479,500 180,000 $ 14.25 $2,565,000 498,000 $ 14.25 $7,096,500 January February e. Schedule 5: Overhead Budget Budgeted direct labor (Schedule 4)………… × Variable overhead rate……………… Budgeted variable overhead………… Budgeted fixed overhead…………… Total overhead………… March Total 144,000 174,000 180,000 498,000 $2.40 $2.40 $2.40 $2.40 $345,600 $417,600 $432,000 $1,195,200 338,000 $683,600 338,000 $755,600 338,000 $770,000 1,014,000 $2,209,200 9-21 © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted

Making the Connection: INTEGRATIVE EXERCISE (Chapters 5–10) COST SYSTEM CHOICES, BUDGETING, AND VARIANCE ANALYSES FOR SACRED HEART HOSPITAL The Two Cost Systems: 1. Hospital-Wide Rate (Current System) = = Total Hospital Nursing Costs Total Patients $300,000 2,000 total patients = $150 per patient 2. Current Rate × Number of Service Line Patients: $150 × 1,000 ER patients = $150,000 assigned to the ER line $150 × 1,000

Making the Connection: INTEGRATIVE EXERCISE (Chapters 11–14) RELEVANT COSTING, COST-BASED PRICING, COST BEHAVIOR, AND NET PRESENT VALUE ANALYSIS FOR NOFAT Special Sales Offer Relevant Analysis: 1. Note: Sales commission costs and advertising costs are irrelevant because they are marketing in nature. Similarly, customer hotline service costs are irrelevant because they are customer service in nature (see bulleted

Making the Connection: INTEGRATIVE EXERCISE (Chapters 1–4) COST BEHAVIOR AND COST-VOLUME-PROFIT ANALYSIS FOR MANY GLACIER HOTEL 1. The variable and fixed costs for each product line—canoes and paddles— possess both a manufacturing and a marketing component. However, the manufacturing and marketing data are recorded separately, which means that four separate high-low analyses must be conducted. The manufacturing and marketing