Chapter 01 – Cost Accounting: Information for Decision Making
1-1
Chapter 1
Cost Accounting: Information for Decision
Making
Solutions to Review Questions
1-1.
Financial accounting is designed to provide information about the firm to external users.
External users include investors, creditors, government authorities, regulators,
customers, competitors, suppliers, labor unions, and so on. Cost accounting systems
1-2.
B Providing cost information for financial reporting
1-3.
The value chain is the set of activities that transforms raw resources into the goods and
1-4.
The customers of cost accounting are managers, from plant managers to the CEO.
1-5.
Value-added activities are activities that customers perceive as adding utility to the
goods or services they purchase. Nonvalue-added activities do not add value to the
Chapter 01 – Cost Accounting: Information for Decision Making
1-6.
Answers will vary, but should include some of the following:
Title
Major Responsibilities and Major Duties
Chief financial officer (CFO) ………
Manages entire finance and accounting function
Treasurer ………………………………..
Manages liquid assets
Conducts business with banks and other
financial institutions
Oversees public issues of stock and debt
Controller ………………………………..
Plans and designs information and incentive
systems
Internal auditor ………………………..
Ensures compliance with laws, regulations, and
company policies and procedures
Provides consulting and auditing services within
the firm
Cost accountant ………………………
Records, measures, estimates, and analyzes
costs
Works with financial and operational manager to
provide relevant information for decisions
1-7.
No. Sarbanes-Oxley is a law and violations of it are legal issues. Codes of ethics are
Chapter 01 – Cost Accounting: Information for Decision Making
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Solutions to Critical Analysis and Discussion Questions
1-8.
The calculation of cost depends on the decision being made. Therefore, the first
question to ask is, “What decision (or decisions) are you trying to make?”
1-9.
Costs that you could ask to be reimbursed might include the fuel, a share of the
maintenance costs, “wear and tear,” or depreciation, and insurance. To avoid
1-10.
Although it is not the “job” of accounting to determine strategy, accounting provides
1-11.
Executive performance evaluation systems are designed for a specific company’s
needs. The systems should be flexible to adapt to the circumstances that exist in that
1-12.
Airlines are characterized by the need to own a substantial amount of capacity costs.
Managers at airlines require very sophisticated load management information that
Chapter 01 – Cost Accounting: Information for Decision Making
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The costs are unlikely to be much different among passengers. The variable costs are
1-13.
The cost accounting issues for Nabisco are the same as for Carmen’s Cookies in the
sense that managers at Nabisco want the same kind of information as Carmen: what
1-14.
In decision-making, managers or supervisors may wish to take actions that they believe
will increase the firm’s value that are difficult to justify given available information. Often,
these situations arise when managers are using their intuition and their experience to
identify new business opportunities and cannot point to data that support their views.
viewed as placing restrictions on management actions. Under these circumstances the
Chapter 01 – Cost Accounting: Information for Decision Making
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1-15.
This is a tricky question. The problem is that if each firm tries to minimize its own cost,
some of the necessary processes might not be done satisfactorily. For example, if every
1-16.
The purpose of bonuses is to provide incentives to managers to “work harder” when the
owner (or, for example, the CEO) cannot observe the manager’s efforts. As we will see,
1-17.
The cost accountant provides information to decision makers in the firm. He or she
1-18.
Studying cost accounting will most likely increase Carmen’s chances of success with
her store. As illustrated in the chapter, she has a better idea of the costs of her business
Chapter 01 – Cost Accounting: Information for Decision Making
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Solutions to Exercises
1-19. (10 Min.) Value Chain and Classification of Costs: Apple, Inc.
Cost
Stage in the Value Chain
Programmer costs for a new operating system.
4. Research & Development
Costs to ship computers to customers.
6. Distribution
Call center costs for support calls.
2. Customer Service
Salaries for employees working on new product
designs.
3. Design
Costs to purchase advertising in university stores.
1. Marketing
Costs of memory chips to make computers.
5. Production
1-20. (5 Min.) Supply Chain and Supply Chain Costs: Coastal Cabinets.
It is important that costs are minimized in the supply chain. Because it is cheaper for
1-21. (10 min.) Cost Data for Managerial Purposes: Delta Airlines.
a. Differential costs are costs that would change, which are the labor costs in this
situation. Other costs would presumably not be affected by the change in labor.
Chapter 01 – Cost Accounting: Information for Decision Making
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1-22. (20 Min.) Cost Data for Managerial Purposes: Betty’s Fashions.
Considering the following costs as differential shows that closing the City Division will
lower profits for the chain.
Betty’s Fashions, City Division
Divisional Income Statement
Differential Revenues and Costs
For the Year Ending January 31
Sales revenue ……………………………………....
$ 4,300,000
Differentiala
Costs
Advertising ………………………………………...
175,000
Differentialb
Cost of goods sold ……………………………...
2,150,000
Differentiala
Divisional administrative salaries …………..
290,000
Differential
Selling costs (sales commissions) ………...
580,000
Differentiala
Rent ………………………………………………....
735,000
Differential
Share of corporate administration ………....
–0–
Not differential
Total costs ………………………………………..
$ 3,930,000
Net differential gain before income tax ……...
$ 370,000
Tax expense at 40% rate ………………………..
148,000
Differential
Net differential gain from store ………………....
$ 222,000
a These revenues and costs are differential if the sales (and the associated cost of
sales) will be lost to the chain. If customers go to other stores in the chain when the
City Division is closed, these revenues and costs will not be differential.
b If some of the advertising is “brand” advertising that benefits all stores, some of the
advertising costs may not be differential.
Chapter 01 – Cost Accounting: Information for Decision Making
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1-23. (20 Min.) Cost Data for Managerial Purposes: State University Business
School.
Considering the following costs as differential shows that dropping the BBA degree will
lower profits for the school.
State University Business School
Degree Income Statement
Differential Revenues and Costs
For the Academic Year Ending June 30
Revenue ……………………………………………....
$ 2,000,000
Differentiala
Costs
Advertising – BBA program …………………...
75,000
Differentialb
Faculty salaries …………………………..……...
1,020,000
Differentiala
Degree operating costs ………………………..
130,000
Differentiala
Building maintenance …………………………..
185,000
Differentiala
Classroom costs ………………………………....
425,000
Differentiala
Allocated school administration costs …....
–0–
Not differential
Total costs ………………………………………..
$ 1,835,000
Net differential gain from BBA program ……...
$ 165,000
a These revenues and costs are differential to the school, but might not be to the
university if students will transfer to other programs and if the faculty and buildings will
continue to be maintained by the university.
b If some of the advertising is “brand” advertising that benefits all programs, some of the
advertising costs may not be differential.
Chapter 01 – Cost Accounting: Information for Decision Making
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1-24. (20 Min.) Cost Data for Managerial Purposes: State University Business
School.
a. The following differential analysis shows that the combined contribution of the BBA
program will be positive.
State University Business School
Degree Income Statement
Differential Revenues and Costs, BBA Programs
For the Academic Year Ending June 30
Revenue …………………………..………………..…
$ 2,000,000 x 2
$4,000,000
Costs
Advertising – BBA program ……………………
75,000 + (75,000 x 3)
300,000
Faculty salaries …………………………..………
1,020,000 x 2
2,040,000
Degree operating costs ……………………..…
130,000 x 1.5
195,000
Building maintenance ………………………..…
unchanged
185,000
Classroom costs ……………………………….…
unchanged
425,000
Classroom rental ……………………………….…
given
100,000
Differential school administration costs ……
given
10,000
Total costs ……………………………………..…
$3,255,000
Net gain from BBA programs ……………………
$ 745,000
b. The Dean should consider whether there are sufficient applicants with necessary
qualifications. Similarly, the Dean should ensure that there is sufficient faculty to expand
the program to this extent.
Chapter 01 – Cost Accounting: Information for Decision Making
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1-25. (20 Min.) Cost Data for Managerial Purposes––Budgeting
1-26. Trends in Cost Accounting
Answers will vary.
a. Activity-based costing might be used in the Design component to help designers