1
Cost Accounting: Information for Decision
Making
Solutions to Review Questions
1-1.
Among the goals of an organization, a central one is to create and increase value. Cost
1-2.
Financial accounting is designed to provide information about the firm to external users.
External users include investors, creditors, government authorities, regulators,
1-3.
1-4.
The value chain is the set of activities that transforms raw resources into the goods and
1-5.
1-6.
Value-added activities are activities that customers perceive as adding utility to the
1-7.
Answers will vary, but should include some of the following:
Title
Major Responsibilities and Major Duties
Chief financial officer (CFO) ………
• Oversees public issues of stock and debt
• Manages entire finance and accounting function
1-8.
Solutions to Critical Analysis and Discussion Questions
1-9.
We would not agree. The role of accountants is to help manage the organization. Part of
1-10.
The calculation of cost depends on the decision being made. Therefore, the first
1-11.
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
1-12.
Although it is not the “job” of accounting to determine strategy, accounting provides
1-13.
Executive performance evaluation systems are designed for a specific company’s
1-14.
Although not-for-profit organizations are not seeking to make a profit, they must remain
1-15.
Airlines are characterized by the need to own a substantial amount of capacity costs.
Managers at airlines require very sophisticated load management information that
1-16.
The cost accounting issues for Nabisco are the same as for Carmen’s Cookies in the
1-17.
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,
1-18.
This is a tricky question. The problem is that if each firm tries to minimize its own cost,
1-19.
The purpose of bonuses is to provide incentives to managers to “work harder” when the
1-20.
The cost accountant provides information to decision makers in the firm. He or she
1-21.
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
1-22.
There are two types of costs the airline or hotel incur with such upgrades. One type of
cost results from the incremental resources that are a part of the upgraded service
Solutions to Exercises
1-23. (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.
3. Customer Service
designs.
5. Design
Costs to purchase advertising in university stores.
1. Marketing
1-24. (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
1-25. (10 Min.) Accounting Systems: McDonald’s.
Decision Maker
a. Investor* ……………………………..
b. Marketing manager ………………
c. Competitor* …………………………
d. Labor organization* ………………
e. Advertising manager …………….
system, but they would be unlikely to be given access to this information.
1-26. (10 Min.) Accounting Systems: Ford Motor Company.
Answers will vary, but examples include the following.
Manager
Example Decision
a. Plant manager …………………….
How to layout the plant.
b. Purchasing manager ……………
Which supplier to use.
c. Quality supervisor ………………..
Where to focus quality improvement efforts.
d. Personnel manager ……………..
Where to recruit workers
e. Maintenance supervisor ………
Whether to repair or replace a machine
1-27. (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.
1-28. (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 ……………………………………….
$ 8,600,000
Differentiala
Costs
Advertising …………………………………………
350,000
Differentialb
Cost of goods sold ………………………………
4,300,000
Differentiala
Divisional administrative salaries …………..
580,000
Differentiala
Rent ………………………………………………….
Share of corporate administration ………….
Not differential
Total costs ………………………………………..
Net differential gain before income tax ………
1-29. (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 ……………………………………………….
$ 6,000,000
Differentiala
Costs
Advertising – BBA program ……………………
225,000
Differentialb
Differentiala
Degree operating costs ………………………..
390,000
Differentiala
Building maintenance …………………………..
555,000
Differentiala
Differentiala
Not differential
Total costs ………………………………………..
$ 5,505,000
1-30. (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 ……………………………………………….
$ 6,000,000 x 2
$12,000,000
Costs
Advertising – BBA program ……………………
225,000 + (225,000 x 3)
900,000
Faculty salaries …………………………..………
3,060,000 x 2
6,120,000
Classroom costs ………………………………….
Classroom rental …………………………..……..
1-31. (20 Min.) Cost Data for Managerial Purposes––Budgeting
1-32. Trends in Cost Accounting
Answers will vary.
a. Activity-based costing might be used in the Design component to help designers
identify designs that will lead to less costly production requirements.
b. Benchmarking might be used in Purchasing to ensure the firm is not paying too
much for inputs.
1-33. Trends in Cost Accounting
Title
Responsibility
5 CFO
Signs off on financial statements.
3 Treasurer
Determines where to invest cash balances.
1 Internal auditor
Ensures procurement rules are followed.
2 Cost accountant
Evaluates costs of products.
1-34. (15 Min.) Ethics and Channel Stuffing: Continental Condiments.
a. As a management accountant, Maria has a responsibility to perform her professional
duties with competence in accordance with relevant laws and regulations. Channel
stuffing borders on illegal activity, especially if it is done to defraud investors by
confront the next higher level of management that she believes is not involved in the
marketing scheme. This could be the Controller or the CFO. If the matter remains
1-35. (15 Min.) Ethics and Cost Analysis: State University Business School.
a. As a management accountant, Jon has a responsibility to perform his professional
duties with competence in accordance with relevant laws and regulations. Choosing
Solutions to Problems
1-36. (15 Min.) Responsibility for Ethical Action: Giant Engineering.
a. As a management accountant Dewi has a responsibility to perform her professional
duties with competence in accordance with relevant laws and regulations. Clearly,
b. The first possible course of action is to discuss the situation with the controller. This
is an appropriate approach to the problem. Always take a problem to your immediate
1-37. (20 Min.) Cost Data for Managerial Purposes: Imperial Devices.
This problem demonstrates the ambiguity of cost-based contracting and, indeed, the
measurement of “cost.” This problem can stimulate a lively discussion in class.
Recommended prices may range from the $324 suggested by the state government to
the $522 charged by Imperial Devices. The key is to negotiate the cost-based price prior
to the signing of the contract. Considerations that affect the base costs are reflected in
the following options:
Options:
A. Only the differential production costs could be considered as the cost basis.
B. The total cost per device for normal production of 60,000 devices could be
used as the cost basis.
C. The total cost per device for production of 66,000 devices, excluding
marketing costs, could be used as the cost basis.
D. The total cost per device for production of 66,000 devices, including
marketing costs, could be used as the cost basis.
Costs
Unit Cost Options
(One Unit = One Device)
A
B
C
D
Materials (variable) ………………………………………
$75.00
$75.00
$75.00
$75.00
$75.00
Supplies (variable) ……………………………………….
Indirect costs (fixed) …………………………………….
Administrative (fixed) ……………………………………
Per device cost basis …………………………………..
a $45.00 = $2,700,000 ÷ 60,000 units.
We believe the most justifiable options exclude marketing costs and reflect the potential
1-38. (20 Min.) Cost Data for Managerial Purposes: Marco and Jenna.
b. If Jenna was not going to take the trip, then some of the “wear and tear” costs, for
1-39. (20 Min.) Cost Data for Managerial Purposes: T-Comm.
This problem demonstrates the ambiguity in measuring “costs.”
South Division’s controller included the “per unit” fixed costs, which were calculated for
allocation purposes under normal production volume, when he or she calculated the per
unit cost of the additional production. The controller charged North Division on that
basis, ignoring the differential costs as a basis for interdivision sales.
Possible options available are as follows:
Costs
Unit Cost Options:
A
B
C
Direct materials (variable) …………………………….
$ 200 a
$ 200
$ 200
$ 200
Direct Labor (variable) …………………………………
96 b
96
96
96
Other variable costs …………………………………….
64 c
64
64
64
Fixed costs ………………………………………………..
840
d
e
Per unit cost ……………………………………………….
Cost plus 15% ……………………………………………
If fixed costs are not differential and South has no alternative uses of the excess
1-40. (20 Min.) Cost Data for Managerial Purposes: Campus Package Delivery.
a.
b. The decision to expand and offer the express service results in differential profits of
1-41. (20 Min.) Cost Data for Managerial Purposes: KC Services.
a.
b. The decision to drop the lawn service results in a differential loss of $16,800 [=
1-42. (20 Min.) Cost Data for Managerial Purposes: B-You
a. The following differential costs would be incurred:
b. Since acceptance of the contract would result in a decrease of operating profits by
1-43. (20 Min.) Cost Data for Managerial Purposes: Tom’s Tax Services.
a. The following differential costs would be incurred:
b. Since the addition of the customer would result in an increase of operating profits by
1-44. (20 Min.) Cost Data for Managerial Purposes––Budgeting
a.
b. The three items that we would investigate would be (a) utilities; (b) chocolate; and,
1-45. (20 Min.) Cost Data for Managerial Purposes––Budgeting
a.
b. The three items that we would investigate would be (a) eggs; (b) chocolate; and, (c)
1-46. (20 Min.) Cost Data for Managerial Purposes––Finding Unknowns:Quince
Products.
Solutions to Integrative Cases
1-47. (20 Min.) Identifying Unethical Action – Appendix
a. We recommend that Accountant B be retained to help Quince Products with their
1-48. (20 Min.) Cost Data for Managerial Purposes––Finding Unknowns
1-49. (20 Min.) Identifying Unethical Actions (Appendix)
1-50. (20 Min.) Responsibility for Unethical Action
b. People in this situation should contact a personal attorney (not the company
attorney) for advice. The next step would normally be to contact the most trustworthy