Solution manual cost aaccounting 14e by carter ch02

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com CHAPTER DISCUSSION QUESTIONS Q2-1 (a) Cost is the current monetary value of economic resources given up or to be given up in obtaining goods and services Economic resources may be given up by transferring cash or other property, issuing capital stock, performing services, or incurring liabilities Costs are classified as unexpired or expired Unexpired costs are assets and apply to the production of future revenues Examples of unexpired costs are inventories, prepaid expenses, plant and equipment, and investments Expired costs, which most costs become eventually, are those that are not applicable to the production of future revenues and are deducted from current revenues or charged against retained earnings Expense in its broadest sense includes all expired costs; i.e., costs which not have any potential future economic benefit A more precise definition limits the use of the term “expense” to the expired costs arising from using or consuming goods and services in the process of obtaining revenues; e.g., cost of goods sold and marketing and administrative expenses (b) (1) Cost of goods sold is an expired cost and may be referred to as an expense in the broad sense of the term On the income statement, it is most often identified as a cost Inventory held for sale which is destroyed by an abnormal casualty should be classified as a loss (2) Uncollectible accounts expense is usually classified as an expense However, some authorities believe that it is more desirable to classify uncollectible accounts as a direct reduction of sales revenue (an offset to revenue) An uncollectible account which was not provided for in the annual adjustment, such as bankruptcy of a major debtor, may be classified as a loss (3) Depreciation expense for plant machinery is a component of factory overhead and represents the reclassification of a portion of the machinery cost to product cost (inventory) When the product is sold, the depreciation becomes a part of the cost of goods sold which is an expense Depreciation of plant machinery during an unplanned and unproductive period of idleness, such as during a strike, should be classified as a loss The term “expense” should preferably be avoided when making reference to production costs (4) Organization costs are those costs that benefit the firm for its entire period of existence and are most appropriately classified as a noncurrent asset When there is initial evidence that a firm’s life is limited, the organization costs should be allocated over the firm’s life as an expense or should be amortized as a loss when a going concern foresees termination In practice, however, organization costs are often written off in the early years of a firm’s existence (5) Spoiled goods resulting from normal manufacturing processing should be treated as a cost of the product manufactured When the product is sold, the cost becomes an expense Spoiled goods resulting from an abnormal occurrence should be classified as a loss Q2-2 Cost objects are units for which an arrangement is made to accumulate and measure cost They are important because of the need for multiple dimensions of data (e.g., by product, contract, or department) to accomplish the various purposes of cost accounting, including cost finding, planning, and control Q2-3 (a) To classify costs as direct or indirect, the cost accountant must first know the answers to the questions “Directly traced to what?” and “Indirectly identified with what?” Otherwise, there is no way to assess the direct or indirect nature of a cost It is the choice of a cost object that answers those two questions (b) For example, the cost of a department manager’s salary cannot be classified as 2-1 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2-2 direct or indirect without selecting the cost object first If the cost object is a product unit produced in the manager’s department, then the salary is indirect If the cost object is the department, the salary is direct Q2-4 (a) The product unit, batch, or lot is the cost object (Be careful about the lack of clarity of the term “the product” when it is not known whether it is intended to mean (a) a single unit, batch, or lot of a product, as opposed to (b) any large number of identical units It could easily be taken to mean, say, product #321, as opposed to some other item in the company’s catalog, and that could suggest the grand total of all identical pieces of #321 produced during the entire product life cycle The significance of this distinction is that some costs, such as product design, prototyping, and initial worker training, are direct costs with respect to the total of all units ever produced, but are indirect with respect to a single unit, batch, or lot.) (b) A disaggregation of overhead would be useful for any study of how to better manage costs, or of what causes costs to be incurred Relatively few of the costs incurred in a factory are caused by the routine production of one more unit of one product (c) (1) A batch of identical units (2) The sum of all identical units ever produced (3) An activity or process carried out in production (4) A group or “cell” of machines and workers within a department (5) A department in which production occurs (6) A plant or other production facility (7) A strategic goal of the firm (e.g., improved quality) Q2-5 A cost system is a combination of procedures and records designed to provide the various types of information required in the conduct of the enterprise; including cost finding, planning, and control Q2-6 A good information system requires the establishment of (a) long-range objectives; (b) an organization plan showing delegated responsibilities in detail; (c) detailed plans for future operations, both long- and short-term; Chapter Q2-7 Q2-8 Q2-9 Q2-10 Q2-11 and (d) procedures for implementing and controlling these plans A chart of accounts is necessary to classify accounting data, so that the data may be uniformly recorded in journals and posted to the ledger accounts Advantages of the electronic data processing system for record keeping are: speed, larger storage, single entry of multiple transactions, automatic control features, and flexibility in report formats The following perceived weaknesses were mentioned in the text: (a) Traditional measures attempt to serve many purposes, and as a result they are not universally regarded as serving any one purpose ideally (b) Traditional measures are affected by accounting choices that are not always relevant to the purpose at hand; examples of these choices are cost flow assumptions and arbitrary fixed cost allocations (c) Traditional measures are calculated by systems that are usually slow to respond to changing conditions (d) Traditional measures of plant utilization can seem to encourage overutilization of capacity (e) Traditional measures of efficiency are often reported too late, are too aggregated, and are easy to misinterpret Nonfinancial performance measures are based on simple counts or other physical data rather than allocated accounting data, they are unconnected to the general financial accounting system, and they are chosen to reflect one specific aspect of performance Four examples of nonfinancial performance measures given in the text, and the aspects of performance they might be used to monitor, are (a) scrap weight as a percentage of total shipped weight; to monitor efficiency of a process, particularly efficiency of material usage (b) processing time as a percentage of total time; to monitor cycle efficiency or inventory velocity (c) distance moved by a unit while inside the plant; to monitor simplification of a process (d) suggestions per year per employee; to monitor employee involvement To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter Q2-12 The challenge posed by the increased interest in nonfinancial performance measures is to define the cost accountant’s role broadly enough to include more measures that are not preceded by dollar signs and that are not tied to the financial accounting system Q2-13 Costs are most commonly classified based on their relationship to (a) the product (a single batch, lot, or unit of the good or service); (b) the volume of activity; (c) the manufacturing departments, processes, cost centers, or other subdivisions; (d) the accounting period; (e) a proposed decision, action, or evaluation Q2-14 Indirect materials are those materials needed for the completion of the product but whose consumption is either so small or so complex that their treatment as direct materials would not be feasible For example, nails used to make the product are indirect materials Q2-15 Indirect labor, in contrast to direct labor, is labor expended that does not affect the construction or the composition of the finished product For example, the labor of custodians is indirect labor Q2-16 (a) A service department is one that is not directly engaged in production, but renders a particular type of service for the benefit of other departments Examples of service departments are receiving, storerooms, maintenance, timekeeping, payroll, and cafeteria (b) Producing departments classify their share of service department expenses as indirect overhead expenses Q2-17 (a) Capital expenditures are intended to benefit more than one accounting period The expenditures should therefore be recorded by a charge to an asset account for allocation to the periods benefited Revenue expenditures benefit the operations of the current period only They should be recorded by charges to the appropriate expense accounts (b) If a capital expenditure is improperly classified as an expense, assets, retained earnings, and income for the period will be understated In future periods, income will be overstated by any amount that would have been amortized had the expenditure been properly capitalized Assets and retained earnings will be understated on future balance sheets by 2-3 successively smaller amounts until the error has been fully counterbalanced If a revenue expenditure is improperly capitalized, assets, retained earnings, and income for the period will be overstated Income will be understated in subsequent periods as the improperly capitalized item is charged to the operations of those periods Assets and retained earnings will continue to be overstated in subsequent balance sheets by successively smaller amounts until the improperly capitalized item has been completely written off (c) The basic criterion for classifying outlays as revenue or capital expenditures is the period of benefit The amount of detail necessary to maintain subsidiary records, the materiality of the expenditures, and the consistency with which various expenditures recur from period to period are other criteria generally considered in establishing a capitalization policy Firms frequently establish an arbitrary amount below which all expenditures are expensed, irrespective of their period of benefit The level at which this amount is set is determined by its materiality in relation to the size of the firm The objective of such a policy is to avoid the expense of maintaining excessively detailed subsidiary records Expenditures for items that fall below the set amount but are material in the aggregate should be capitalized, if total expenditures for these items vary significantly from period to period A capitalization policy that reasonably applies these criteria, although it disregards the period of benefit and is therefore lacking in theoretical justification, will not significantly misstate periodic income Q2-18 Appendix In a typical balanced scorecard, the names of the four perspectives are growth and learning, internal business process, customer, and financial Q2-19 Appendix A balanced scorecard’s growth and learning perspective is a report on three kinds of intangible resources: human capital, information, and the alignment of incentives Q2-20 Appendix The internal business process perspective of a balanced scorecard reports on the organization’s most important work, the work in which the organization must excel in order to be successful To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2-4 Q2-21 Appendix Performance measures found in the financial perspective of most organizations’ balanced scorecards are likely to include the amount or the growth rate of net income, or of operating income, or of return on investment For a new, start-up organization, the most important financial measures may be net sales and gross margin For an organization whose products and technology face obsolescence, the key financial measure may be cash flow Q2-22 Appendix The predictions reflected in a balanced scorecard follow this sequence through Chapter the four perspectives: growth and learning, internal business process, customer, and financial Q2-23 Appendix When the desired result is success in the financial perspective, the other three perspectives of a balanced scorecard report what management believes are necessary conditions The other three perspectives not list sufficient conditions for financial success Sufficient conditions would constitute a guarantee A necessary condition, in contrast, is an essential prerequisite To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 2-5 EXERCISES E2-1 (1) (2) (3) (4) $6 + $3 = $9 prime cost $3 + $1 = $4 variable conversion cost $6 + $3 + $1 = $10 variable manufacturing cost $1,000 fixed + ($10 × 500) = $6,000 E2-2 (1) (2) (3) (4) $10 + $15 + $6 = $31 conversion cost $32 + $10 = $42 prime cost $32 + $10 + $15 + $3 = $60 variable cost (($32 + $10 +$15 + $6 + $4) × 12,000) + ($3 × 8,000) = $804,000 + $24,000 = $828,000 total cost incurred with 12,000 units produced and 8,000 units sold E2-3 First Method: Sales ($19,950,000 × 85%) Less: Variable costs ($11,571,000 × 85%) $9,835,350 Fixed costs 7,623,000 Operating loss Second Method: 1st Step: Variable costs $11, 571, 000 20A sales $19,950,000 = d b b a f e c f 17,458,350 $ (500,850) 58 variable cost ratio 2nd Step: Sales ($19,950,000 × 85%) $16,957,500 Less: Variable costs ($16,957,500 × 58) $ 9,835,350 Fixed costs 7,623,000 Operating loss E2-4 $16,957,500 17,458,350 $ (500,850) To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2-6 E2-5 E2-6 Chapter The cost of direct labor per computer is $100,000, calculated as follows: Total manufacturing cost Less prime cost Equals overhead cost $600,000 (given) 300,000 (given) $300,000 Conversion cost Less overhead cost Equals direct labor $400,000 (given) 300,000 (calculated above) $100,000 The amount of factory overhead cost per blade is $300, calculated as follows: Total manufacturing cost Less conversion cost Equals direct material cost $1,000 (given) 400 (given) $ 600 Direct labor cost = 1/6 of direct material cost = 1/6 × $600 = $100 Conversion cost Less direct labor cost Equals overhead cost E2-7 $ 400 (given) 100 (calculated above) $ 300 The direct labor cost per system is $200, calculated as follows: Total manufacturing costs Less prime cost Equals overhead cost $1,000 (given) 800 (given) $ 200 Conversion cost Less overhead cost Equals direct labor cost $ 400 (given) 200 (calculated above) $ 200 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter E2-8 2-7 The amount of factory overhead cost per machine is $1,500, calculated as follows: Total manufacturing cost Less conversion cost Equals direct material cost $3,000 (given) 2,000 (given) $1,000 Direct labor cost = 1/2 of direct material cost = 1/2 × $1,000 = $500 Conversion cost Less direct labor cost Equals overhead cost $2,000 (given) 500 (calculated above) $1,500 E2-9 (1) The relevant cost objects are: (a) An item of merchandise (b) The use of a bank credit card (2) It implies that cash-paying customers are paying a part of the cost of the banks’ fees for processing credit card transactions, because these fees are paid by the merchant who then recovers them in the form of slightly higher prices for all merchandise (3) The competitive implications are that the prices paid by cash customers are too high to be competitive with the prices charged by merchants who deal only in cash, and the prices paid by customers using bank credit cards are too low to reflect all the costs of a credit sale (4) The reason for not reducing all prices and charging extra for the use of a credit card is because of the psychological effect of an extra charge To customers, it sounds like a penalty, as if the merchant wants to discourage the use of bank credit cards A discount for cash customers has a positive connotation, even if prices marked on merchandise are higher to begin with Raising all prices and offering a cash discount yields the same net revenue as leaving prices alone and charging extra for using a bank credit card, but the former method feels better to the customer than the latter To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2-8 Chapter E2-10 (1) The relevant cost objects are: (a) A repair (b) A pickup and delivery (2) JTRS’s repair prices include an allocation of the cost of picking up and delivering tractors, in addition to the cost of the repairs, administrative costs, marketing costs, and profit Competitors’ repair prices reflect only the cost of the repairs, administrative and marketing costs, and profit Competitors should be able to price their repair services lower, because they not have to reflect pickup and delivery costs in repair prices E2-11 (1) Direct labor $ Variable factory overhead Fixed factory overhead Conversion cost $11 (2) Direct material (lumber) $12 Direct labor Prime cost $14 (3) Direct material (lumber) $12 Direct labor Variable factory overhead Variable manufacturing cost $19 (4) Direct material (lumber) $12 Direct labor Variable factory overhead Variable marketing Total variable cost $20 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 2-9 E2-11 (Concluded) (5) Total cost = total variable manufacturing cost + total variable marketing cost + total fixed cost = 2,000 × ($12 + $2 + $5) + 1,900 × $1 + 2,000* × ($4 + $3) = $38,000 + $1,900 + $14,000 = $53,900 *The volume used here to calculate total fixed cost is the 2,000-unit volume level that was used originally to calculate the amounts of fixed costs per unit, as stated in the data given in the exercise The 2,000-unit level of production stated in requirement (5) is not the reason that 2,000 is used here to calculate total fixed cost (6) The data indicate the bookcases are made of lumber, and some examples of the indirect materials used in making wooden bookcases would be glue, sandpaper, and nails (7) An estimate of costs referred to in the answer to requirement (6) would be included in the variable factory overhead of $5 per unit E2-12 Factory overhead Total manufacturing cost = 1/3 × prime cost, so: = prime cost + factory overhead = prime cost + (1/3 × prime cost) = 4/3 × prime cost; multiplying both sides by 3/4 gives: Total 3/4 × manufacturing cost 3/4 × $20,000 $15,000 = 3/4 × 4/3 × prime cost = × prime cost = prime cost Prime cost Less direct material cost Direct labor cost $15,000 12,000 (given) $ 3,000 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2-10 Chapter E2-13 APPENDIX 10 11 12 13 GL (This is a measure of information systems.) GL C IBP F IBP F F IBP (This measure and the next one are measures of innovation, which is part of the internal business process perspective.) IBP C GL GL To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 2-11 CASES C2-1 (1) The percentage profit margin will be 82.5%, calculated as follows: Revenues ($2 × 4) Cost of juice ($.20 × 4) $.80 Cost of one delivery 60 Profit $8.00 1.40 $6.60 Percentage profit margin = $6.60 profit divided by $8 revenue = 82.5% (2) The percentage profit margin will be 60%, calculated as follows: Revenues ($2 × 1) Cost of juice ($.20 × 1) $.20 Cost of one delivery 60 Profit $2.00 80 $1.20 Percentage profit margin = $1.20 profit divided by $2 revenue = 60% (3) The manager is treating the menu item as the cost object, for example, one glass of orange juice (4) The refinement of the definition of cost object that would result in the planned profit margin is the use of two different kinds of cost object, the item and the delivery, which can be priced separately at $.80 and $2.40, respectively To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2-12 Chapter C2-1 (Concluded) (5) For an order consisting of four glasses of orange juice, the profit margin will be 75%, calculated as follows: Revenues: ($.80 × 4) + ($2.40 × 1) Cost of juice ($.20 × 4) Cost of one delivery Profit $3.20 2.40 $5.60 $.80 60 1.40 $4.20 Percentage profit margin = $4.20 profit divided by $5.60 revenue = 75% For an order consisting of one glass of orange juice, the profit margin will also be 75%, calculated as follows: Revenues: ($.80 × 1) + ($2.40 × 1) Cost of juice Cost of one delivery Profit $ 80 2.40 $3.20 $.20 60 80 $2.40 Percentage profit margin = $2.40 profit divided by $3.20 revenue = 75% (6) The food service manager’s plan allocates the delivery costs over an arbitrarily selected number of items (two) This plan would result in higher-than-planned profit margin percentages on room service orders that contain more than two items, as demonstrated in the answer to requirement (1) Prices on these orders would be higher than those of a competitor who traces costs more carefully to cost objects and sets prices accordingly The plan would also result in lowerthan-planned profit margins on room service orders containing only one item, as demonstrated in the answer to requirement (2) Prices on these orders would be lower than what is needed to achieve the target profitability To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 2-13 C2-2 (1) The cost objects for which some amount of cost is identified in the case, and the amount of cost identified for each, are: (a) A new product variation, Zeggo (which means all units of Zeggo ever to be produced), $250,000 (b) A batch of Zeggo, $1,000 (c) A unit of Zeggo, $5 + $10 = $15 (Notice the $10 indirect cost amount includes all indirect production costs, so it must include the $1 amount stated in the problem, along with an allocation or averaging of the $1,000-per-batch setup costs, a share of the $250,000 cost amount, and a share of any other indirect manufacturing costs It would be double-counting to add the $1 and arrive at a total of $16 per unit.) (2) The other items mentioned in the case that could serve as cost objects, and a purpose each one could serve, are: (a) CCN Company, which is the relevant cost object when external financial statements are prepared (b) The assembly line on which Zeggo and other products are to be produced This cost object would be relevant in a decision on whether to discontinue production of all the products produced on the particular line, or a decision to shut down the line and shift its production to other lines due to a reduction in customer orders (3) The total cost expected to result from producing the first batch of 300 units of Zeggo is: Cost accounted for as direct cost of a unit $ Cost treated as indirect by the CCN system $ × 300 units $1,800 Add: setup cost 1,000 Total cost $2,800 (4) The cost expected to result from producing one more unit of Zeggo is $5 + $1 = $6 (5) For the first batch of 300 units, the CCN cost accounting system will report a cost of: ($5 direct cost + $10 indirect cost allocation) × 300 units = $15 × 300 = $4,500 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 2-14 Chapter C2-2 (Concluded) (6) For the one additional unit, the CCN cost accounting system will report a cost of $5 + $10 = $15 (7) The additional costs allocated by the CCN accounting system are of two types: (a) Costs caused by activities other than the production of product units Two examples of these activities are mentioned in the problem: setting up the assembly line and perfecting new product variations Other activities would include maintaining the assembly line and the department, ordering and inspecting raw materials, training newly hired workers, maintaining a cost accounting system, and expediting rush orders (These are related to total volume in the long run; therefore, most accounting systems classify them as variable overhead, but they are unrelated to the production of a single unit or batch of product.) (b) Fixed costs that are incurred regardless of whether activities are carried out, such as plant depreciation, insurance, and property taxes These are the costs of having capacity, not of using it  ... prime cost + factory overhead = prime cost + (1/3 × prime cost) = 4/3 × prime cost; multiplying both sides by 3/4 gives: Total 3/4 × manufacturing cost 3/4 × $20,000 $15,000 = 3/4 × 4/3 × prime cost. .. conversion cost Equals direct material cost $3,000 (given) 2,000 (given) $1,000 Direct labor cost = 1/2 of direct material cost = 1/2 × $1,000 = $500 Conversion cost Less direct labor cost. .. manufacturing cost Less conversion cost Equals direct material cost $1,000 (given) 400 (given) $ 600 Direct labor cost = 1/6 of direct material cost = 1/6 × $600 = $100 Conversion cost