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Fundamentals of Cost Accounting

William Lanen, Shannon Anderson, Michael Maher

Chapter 1

Cost Accounting: Information for Decision Making - all with Video Answers

Educators

Chapter Questions

01:45

Problem 1

Explain the differences between financial accounting and cost accounting. Why are these differences important?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
00:15

Problem 2

Place the letter of the appropriate accounting cost in Column 2 in the blank next to each decision category in Column 1.
$$
\begin{array}{|ll|}
\hline \text { Column } 1 & \text { Column } 2 \\
\hline \text { Providing cost information for financial reporting } & \text { A. Costs for performance evaluation } \\
\hline \text { Identifying the best store in a chain } & \text { B. Costs for inventory valuation } \\
\hline \text { Determining which plant to use for production } & \text { C. Costs for decision making } \\
\hline
\end{array}
$$

Tara Palmer
Tara Palmer
Numerade Educator

Problem 3

Distinguish between the value chain, the supply chain, and the distribution chain.

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Problem 4

Who are the customers of cost accounting?

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Problem 5

How can cost accounting information together with a classification of activities into those that are value-added and those that are nonvalue-added help managers improve an organization's performance?

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03:38

Problem 6

Identify three key financial managers in an organization and their major responsibilities.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator

Problem 7

Does the passage of Sarbanes-Oxley mean that codes of ethics are no longer necessary?

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01:34

Problem 8

A manager once asked, "How would you calculate the cost of a checking account?" What will be your first question to the manager?

Ameer Said
Ameer Said
Numerade Educator
02:05

Problem 9

You are considering lending a car to a friend so she can drive to Aspen. What costs would you ask her to reimburse? How would your answer change, if at all, if you decided to go along? Identify the possible options and explain your choices.

Yang Su
Yang Su
Numerade Educator

Problem 10

"It's not the job of accounting to determine strategy. It is only used to measure results." Discuss.

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01:21

Problem 11

Would you support a proposal to develop a set of "generally accepted" accounting standards for measuring executive performance that would be used to determine compensation? Why or why not?

Ameer Said
Ameer Said
Numerade Educator

Problem 12

Airlines are well known for using complex pricing structures. For example, it is often (but not always) less expensive to buy a ticket in advance than it is on the day of the flight. However, if the airline offered this lower ("discount") fare for all seats, it could not remain in business. Why offer fares with different prices? What, if any, costs are different?

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Problem 13

Nabisco (a unit of Kraft Foods) makes a variety of cookies (Oreos ${ }^{\mathrm{TM}}$, for example) just like Carmen's Cookies. In what ways are the cost accounting issues the same? In what ways are they different?

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Problem 14

What potential conflicts might arise between marketing managers and the controller's staff? How might these potential conflicts be resolved with a minimum of interference from the chief executive officer?

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04:12

Problem 15

Refer to the Business Application discussion of supply chain costs. A colleague says, "We don't have to worry about other firms in the supply chain. If every firm in the chain minimizes its own cost, we can minimize the total cost and give the customer the best value." Do you agree?

Jennifer Stoner
Jennifer Stoner
Numerade Educator

Problem 16

Refer to the Business Application discussion of options backdating. If stock options and other forms of performance-based compensation result in some managers engaging in unethical or illegal behavior, why do firms still use them?

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12:40

Problem 17

Why does a cost accountant need to be familiar with new developments in information technology?

Paul A.
Paul A.
California State Polytechnic University, Pomona

Problem 18

Will studying cost accounting increase the chances that Carmen's Cookies will succeed? How? Will it guarantee success? Explain.

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Problem 19

Value Chain and Classification of Costs
Apple, Inc. incurs many types of costs in its operations.
Required
For each cost in the following table, identify the stage in the value chain where this cost is incurred:
$$
\begin{array}{|ll|}
\hline \text { Cost } & \text { Stage In the Value Chain } \\
\hline \text { Programmer costs for a new operating system } & \text { 1. Marketing } \\
\hline \text { Costs to ship computers to customers } & \text { 2. Customer Service } \\
\hline \text { Call center costs for support calls } & \text { 3. Design } \\
\hline \text { Salaries for employees working on new product designs } & \text { 4. Research and development } \\
\text { Costs to purchase advertising at university stores } & \text { 5. Production } \\
\hline \text { Costs of memory chips to make computers } & \text { 6. Distribution } \\
\hline
\end{array}
$$

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02:21

Problem 20

Supply Chain and Supply Chain Costs
Coastal Cabinets produces cabinets for new home builders. You have been called in to settle a dispute between Coastal Cabinets and Executive Homes, a builder of custom homes.

Executive Homes buys 20,000 units of a particular cabinet from Coastal Cabinets every year. It insists that Coastal keep a one-month inventory to accommodate fluctuations in Executive's demand. Coastal does not want to keep any inventory and says that Executive Homes should buy components in advance and store them.

You determine that the inventory storage costs per unit are $$\$50$$ at Coastal and $$\$125$$ at Executive Homes.
Required
How do you suggest the two companies settle their dispute?

Anand Jangid
Anand Jangid
Numerade Educator
View

Problem 21

Cost Data for Managerial Purposes
As an analyst at Delta Airlines, you are asked to help the operations staff. Operations has identified a new method of loading baggage that is expected to result in a 30 percent reduction in labor time but no changes in any other costs. The current labor cost to load bags is $$\$2$$ per bag. Other costs are $$\$ 1$$ per bag.

Required
a. What differential costs should the operations staff consider for the decision to use the new method next year? What would be the cost savings per bag using it?
b. Describe how management would use the information in requirement ( $a$ ) and any other appropriate information to proceed with the contemplated use of the new baggage loading method.

Victor Salazar
Victor Salazar
Numerade Educator

Problem 22

Cost Data for Managerial Purposes
Betty's Fashions operates retail stores in both downtown and suburban locations. The company has two responsibility centers: the City Division, which contains stores in downtown locations, and the Mall Division, which contains stores in suburban locations. Betty's CEO is concerned about the profitability of the City Division, which has been operating at a loss for the last several years. The most recent City Division income statement follows. The CEO has asked for your advice on shutting down the City Division's operations. If the City Division is eliminated, corporate administration is not expected to change, nor are any other changes expected in the operations or costs of the Mall Division.
(TABLE CANT COPY)
Required
What revenues and costs are probably differential for the decision to discontinue City Division's operations? What will be the effect on Betty's profits if the division is eliminated?

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Problem 23

Cost Data for Managerial Purposes
State University Business School (SUBS) offers several degrees, including Bachelor of Business Administration (BBA). The new dean believes in using cost accounting information to make decisions and is reviewing a staff-developed income statement broken down by the degree offered. The dean is considering closing down the BBA program because the analysis, which follows, shows a loss. Tuition increases are not possible. The dean has asked for your advice. If the BBA degree program is dropped, school administration costs are not expected to change, but direct costs of the program, such as operating costs, building maintenance, and classroom costs, would be saved. There will be no other changes in the operations or costs of other programs.

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Problem 27

Trends in Cost Accounting
The chapter identified five financial management titles with responsibilities.
Required
Match the financial management title in the first column with the major responsibility in the second column of the following table:
$$
\begin{array}{|ll|}
\hline \text { Title } & \text { Responsibility } \\
\hline \text { CFO } & \text { 1. Maintains accounting records. } \\
\hline \text { Treasurer } & \text { 2. Signs off on financial statements. } \\
\hline \text { Controller } & \text { 3. Ensures procurement rules are followed. } \\
\hline \text { Internal auditor } & \text { 4. Evaluates costs of products. } \\
\hline \text { Cost accountant } & \text { 5. Determines where to invest cash balances. } \\ \hline
\end{array}
$$

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Problem 28

Ethics and Channel Stuffing
Continental Condiments is a large food products firm in Pennsylvania. Its sales staff has a strong incentive plan tied to meeting quarterly budgets. On June 25, Maria Tuzzi, a divisional controller, learns that some of the sales staff asked customers to take delivery of sizable quantities of products before June 30 . The customers were told they could return the products after July 1 if they determined the items were not needed. (This is referred to as "channel stuffing.") The sales staff also offered to reimburse the customers for any storage costs incurred.

Required
a. From the viewpoint of the IMA's "Statement of Ethical Professional Practice," what are Maria's responsibilities?
b. What steps should she take to resolve this problem?

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Problem 29

Ethics and Cost Analysis
Refer to the information in Exercise 1-24. Jon Blake, the cost analyst working in the CFO's office at the Business School, learns that the building to be rented for the evening program is owned by a company in which the dean is a principal investor. After some research, Jon also identifies another comparable site, which rents for $$\$ 75,000$$ per year.

Required
a. From the viewpoint of the IMA's "Statement of Professional Practice," what are Jon's responsibilities?
b. What steps should he take to resolve this problem?

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Problem 30

Responsibility for Ethical Action
Dewi Hartono is an assistant controller at Giant Engineering, which contracts with the Defense Department to build and maintain roads on military bases. Dewi recently determined that the company was including the direct costs of work for private clients in overhead costs, some of which are charged to the government. She also discovered that several members of management appeared to be involved in altering accounting invoices to accomplish this. She was unable to determine, however, whether her superior, the controller, was involved. Dewi considered three possible courses of action. She could discuss the matter with the controller, anonymously release the information to the local newspaper, or discuss the situation with an outside member of the board of directors whom she knows personally.

Required
a. Does Dewi have an ethical responsibility to take a course of action?
b. Of the three possible courses of action, which are appropriate and which are inappropriate?

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Problem 31

Cost Data for Managerial Purposes
Alameda Instruments (AI) has offered to supply the Air Force with computer monitors at "cost plus 20 percent." AI operates a manufacturing plant that can produce 44,000 monitors per year, but it normally produces 40,000 . The costs to produce 40,000 monitors follow:
(TABLE CANT COPY)
Based on these data, company management expects to receive $$\$ 174$$ (= $$\$ 145 \times 120$$ percent) per monitor for those sold on this contract. After completing 500 monitors, the company sent a bill (invoice) to the government for $$\$ 87,000$$ (= 500 monitors $$\times\$ 174$$ per monitor).

The president of the company received a call from an Air Force auditor, who stated that the per monitor cost should be:
(TABLE CANT COPY)
Therefore, the price per monitor should be $$\$ 108(=\$ 90 \times 120$$ percent). The Air Force ignored marketing costs because the contract bypassed the usual selling channels.

Required
What price would you recommend? Why? (Note: You need not limit yourself to the costs selected by the company or by the government auditor.)

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Problem 32

Cost Data for Managerial Purposes
T-Comm makes a variety of products. It is organized in two divisions, North and South. South Division normally sells to outside customers but, on occasion, also sells to the North Division. When it does, corporate policy states that the price must be cost plus 15 percent to ensure a "fair" return to the selling division. South received an order from North Division for 600 units. South's planned output for the year had been 2,400 units before North's order. South's capacity is 3,000 units per year. The costs for producing those 2,400 units follow:
$$
\begin{array}{|c|c|c|}
\hline & \text { Total } & \text { Per Unit } \\
\hline & \$ 480,000 & \$ 200 \\
\hline \text { Direct labor. } & 230,400 & 96 \\
\hline & 153,600 & 64 \\
\hline \text { Fixed costs } & 2,016,000 & 840 \\
\hline \text {................................. } & \$ 2,880,000 & \overline{\$ 1,200} \\
\hline
\end{array}
$$
Based on these data, South's controller calculated that the unit price for North's order should be $$\$ 1,380(=\$ 1,200 \times 115$$ percent). After producing and shipping the 600 units, South sent an invoice for $$\$ 828,000$$. Shortly thereafter, South received a note from the buyer at North stating that this invoice was not in accordance with company policy. The unit cost should have been
The price per unit would be $$\$ 414$ (= $\$ 360 \times 115$$ percent).
Required
If the corporation asked you to review this intercompany policy, what policy would you recommend? Why? (Note: You need not limit yourself to the East or West Division's calculation.)

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Problem 33

Cost Data for Managerial Purposes
Campus Package Delivery (CPD) provides delivery services in and around Paradise. Its profits have been declining, and management is planning to add an express service that is expected to increase revenue by $$\$ 100,000$$ per year. The total cost to lease the necessary additional package delivery vehicles from the local dealer is $$\$ 7,500$$ per year. The present manager will continue to supervise all services at no increase in salary. Due to expansion, however, the labor costs and utilities would increase by 50 percent. Rent and other costs will increase by 20 percent.
(TABLE CANT COPY)
Required
a. Prepare a report of the differential costs and revenues if the express service is added. (Hint: Use the format of Exhibit 1.3.)
b. Should management start the express service?
c. Are there factors beyond the differential costs and revenues that management should consider?

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Problem 34

Cost Data for Managerial Purposes
KC Services provides landscaping services in Edison. Kate Chen, the owner, is concerned about the recent losses the company has incurred and is considering dropping its lawn services, which she feels are marginal to the company's business. She estimates that doing so will result in lost revenues of $$\$ 100,000$$ per year (including the lost tree business from customers who use the company for both services). The present manager will continue to supervise the tree services with no reduction in salary. Without the lawn business, Kate estimates that the company will save 15 percent of the equipment leases, labor, and other costs. She also expects to save 20 percent on rent and utilities.

Required
a. Prepare a report of the differential costs and revenues if the lawn service is discontinued.
b. Should Kate discontinue the lawn service?
c. Are there factors other than the differential costs and revenues that Kate should consider?

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Problem 35

Cost Data for Managerial Purposes
B-You is a consulting firm that works with managers to improve their interpersonal skills. Recently, a representative of a high-tech research firm approached B-You's owner with an offer to contract for one year with B-You to improve the interpersonal skills of a newly hired manager. B-You reported the following costs and revenues during the past year:
(TABLE CANT COPY)
If B-You decides to take the contract to help the manager, it will hire a full-time consultant at $$\$ 85,000$$. Equipment lease will increase by 5 percent. Supplies will increase by an estimated 10 percent and other costs by 15 percent. The existing building has space for the new consultant. No new offices will be necessary for this work.

Required
a. What are the differential costs that would be incurred as a result of taking the contract?
b. If the contract will pay $$\$ 90,000$$, should B-You accept it?
c. What considerations, other than costs, do you think are necessary before making this decision?

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Problem 36

Cost Data for Managerial Purposes
Tom's Tax Services is a small accounting firm that offers tax services to small businesses and individuals. A local store owner has approached Tom about doing his taxes but is concerned about the fees Tom normally charges. The costs and revenues at Tom's Tax Services are presented on the following page.

If Tom gets the store's business, he will incur an additional $$\$ 60,000$$ in labor costs. Tom also estimates that he will have to increase equipment leases by about 10 percent, supplies by 5 percent, and other costs by 15 percent.
(TABLE CANT COPY)
Required
a. What are the differential costs that would be incurred as a result of adding this new client?
b. Tom would normally charge about $$\$ 75,000$$ in fees for the services the store would require. How much could he offer to charge and still not lose money on this client?
c. What considerations, other than costs, are necessary before making this decision?

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Problem 37

Cost Data for Managerial Purposes-Budgeting
Refer to Exhibit 1.5. Assume that Carmen's Cookies is preparing a budget for the month ending September 30. Management prepares the budget by starting with the actual results for April that appear in Exhibit 1.5. Then, management considers what the differences in costs will be between April and September.

Management expects cookie sales to be 20 percent greater in September than in April, and it expects all food costs (e.g., flour, eggs) to be 20 percent higher in September than in April because of the increase in cookie sales. Management expects "other" labor costs to be 25 percent higher in September than in April, partly because more labor will be required in September and partly because employees will get a pay raise. The manager will get a pay raise that will increase the salary from $$\$ 3,000$$ in April to $$\$ 3,500$$ in September. Utilities will be 5 percent higher in September than in April. Rent will be the same in September as in April.

Now, fast forward to early October and assume the following actual results occurred in September:
(TABLE CANT COPY)
Required
a. Prepare a statement like the one in Exhibit 1.5 that compares the budgeted and actual costs for September.
b. Suppose that you have limited time to determine why actual costs are not the same as budgeted costs. Which three cost items would you investigate to see why actual and budgeted costs are different? Why would you choose those three costs?

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Problem 38

Cost Data for Managerial Purposes-Budgeting
Refer to Exhibit 1.5, which shows budgeted versus actual costs. Assume that Carmen's Cookies is preparing a budget for the month ending November 30 . Management prepares the budget for the month ending November 30 by starting with the actual results for April that appear in Exhibit 1.5. Then, management considers what the differences in costs will be between April and November.

Management expects cookie sales to be 100 percent greater in November than in April because of the holiday season. Management expects that all food costs (e.g., flour, eggs) will be 120 percent higher in November than in April because of the increase in cookie sales and because prices for ingredients are generally higher in the high demand holiday months. Management expects "other" labor costs to be 120 percent higher in November than in April, partly because more labor will be required in November and partly because employees will get a pay raise. (120 percent higher means that the amount in November will be 220 percent of the amount in April.) The manager will get a pay raise that will increase the salary from $$\$ 3,000$$ in April to $$\$ 3,500$$ in November. Utilities will be 5 percent higher in November than in April. Rent will be the same in November as in April.

Now, move ahead to December and assume the following actual results occurred in November:
(TABLE CANT COPY)
Required
a. Prepare a statement like the one in Exhibit 1.5 that compares the budgeted and actual costs.
b. Suppose that you have limited time to determine why actual costs are not the same as budgeted costs. Which three cost items would you investigate to see why actual and budgeted costs are different? Why would you choose those three costs?

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Problem 39

Cost Data for Managerial Purposes-Finding Unknowns
Quince Products is a small company in southern California that makes jams and preserves. Recently, a sales rep from one of the company's suppliers suggested that Quince could increase its profitability by 50 percent if it introduced a second line of products, packaged fruit. She offered to do the analysis and show the company her assumptions.

When Quince's management opened the spreadsheet sent by the sales rep, they noticed that there were several blank cells. In the meantime, the sales rep had taken a job with a competitor and told the managers at Quince that she could no longer advise them. Although they were not sure they should rely on the analysis, they asked you to see if you could reconstruct the sales rep's analysis. They had been considering this new business already and wanted to see if their analysis was close to that of an outside observer. The incomplete spreadsheet is shown on the following page.
(TABLE CANT COPY)
Required
Fill in the blank cells.

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Problem 40

Identifying Unethical Actions (Appendix)
The managers of Quince Products (Problem 1-39) decide they will hire a management accountant to help them analyze the decision to expand their product line. They solicit bids from various accountants in the city and receive three proposals. In describing their qualifications for the job, the three state:

Accountant A: "I have recently advised the symphony on how to raise money and therefore I know the local area well."

Accountant B: "I have advised several small firms on expansion plans."
Accountant C: "I have advised Pear Company [Quince's main competitor] and can share its experiences and insights with you."

All of the proposals have the same price.
Required
a. As the accounting manager of Quince Products, prepare a memo recommending which accountant you would prefer to retain. Be sure to include your reasons.
b. Which, if any, of the accountants making a proposal are violating the IMA's code of ethics? What is (are) the violation(s)?

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Problem 41

Cost Data for Managerial Purposes-Finding Unknowns
Miller Cereals is a small milling company that makes a single brand of cereal. Recently, a business school intern recommended that the company introduce a second cereal in order to "diversify the product portfolio." Currently, the company shows an operating profit that is 20 percent of sales. With the single product, other costs were twice the cost of rent.

The intern estimated that the incremental profit of the new cereal would only be 2.5 percent of the incremental revenue, but it would still add to total profit. On his last day, the intern told Miller's marketing manager that his analysis was on the company laptop in a spreadsheet with a file name, NewProduct.xlsx. The intern then left for a 12-month walkabout in the outback of Australia and cannot be reached.

When the marketing manager opened the file, it was corrupted and could not be opened. She then found an early (incomplete) copy on the company's backup server. The incomplete spreadsheet is shown on the following page. The marketing manager then called a cost management accountant in the controller's office and asked for help in reconstructing the analysis.

Required
As the management accountant, fill in the blank cells.
(TABLE CANT COPY)

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Problem 42

Identifying Unethical Actions (Appendix)
Before Miller Cereals can introduce the new cereal, the board of directors has to give their approval. The marketing manager really wants to introduce the new product and believes (honestly) that it will be profitable and an important next step in the firm's evolution. However, she knows that with the forecasted profit, the board will not give their approval.

She asks the management accountant what she can do. He tells her that he has reviewed the numbers generated by the intern and he thinks they are reasonable. However, he tells her that "other" costs consist of many different things, so it would be difficult to question a lower number. He suggests that he lower the estimated other costs by an amount sufficient to get board approval.

Required
Is the management accountant violating the IMA's code of ethics? If so, what is (are) the violation(s)?

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Problem 43

Responsibility for Unethical Action
The following story is true except that all names have been changed and the time period has been compressed:

Charles Austin graduated from a prestigious business school and took a job in a public accounting firm in Atlanta. A client hired him after five years of normal progress through the ranks of the accounting firm. This client was a rapidly growing, publicly held company that produced software for the health care industry. Charles started as assistant controller. The company promoted him to controller after four years. This was a timely promotion. Charles had learned a lot and was prepared to be controller.

Within a few months of his promotion to controller, the company's chief financial officer abruptly quit. Upon submitting her resignation, she walked into Charles's office and said, "I have given Holmes (the company president) my letter of resignation. I'll be out of my office in less than an hour. You will be the new chief financial officer, and you will report directly to Holmes. Here is my card with my personal cell phone number. Call me if you need any advice or if I can help you in any way."

Charles was in over his head in his new job. His experience had not prepared him for the range of responsibilities required of the company's chief financial officer. Holmes, the company president, was no help. He gave Charles only one piece of advice: "You have lots of freedom to run the finance department however you want. There is just one rule: Don't ever cross me. If you do, you'll never work again in this city." Charles believed his boss could follow through on that threat because he was so well-connected in the Atlanta business community.

The end of the company's fiscal year came shortly after Charles's promotion to chief financial officer. After reviewing some preliminary financial amounts, Holmes stormed into Charles's office and made it clear that the results were not to his liking. He instructed Charles to "find more sales." Charles was shocked, but he did as he was told. He identified some ongoing software installation work that should not have been recorded as revenue until the customer signed off on the job. Charles recorded the work done as of year-end as revenue, even though the customer had not signed off on the job. He sent an invoice to the customer for the amount of the improper revenue, then called her to say that the invoice was an accounting error and she should ignore it.

Next year, Charles's work life was better but his personal life was not. He went through a costly divorce that resulted in limited time spent with his two small children. Now he was particularly concerned about not crossing his boss because of the threat that he would never work in Atlanta if he did. He could not bear to look for a new job that would take him away from his children. Further, it would be difficult to find a job anywhere that came close to paying the salary and benefits of his current job. With high alimony and child support payments, Charles would feel a dire financial strain if he had to take a cut in pay.

The company struggled financially during the year. Clearly, the company would not generate the level of revenues and income that Holmes wanted. As expected, he again instructed Charles to find some way to dress up the income statement. It did not matter to Holmes whether what Charles did was legal or not.

Charles had exhausted all legitimate ways of reducing costs and increasing revenues. He faced an ethical dilemma. He could resign and look for a new job, or he could illegitimately record nonexistent sales. He now understood why the former chief financial officer had resigned so abruptly. He wished that he could talk to her, but she was traveling in Australia and could not be contacted. The board of directors would be no help because they would take the president's side in a dispute.

After considering his personal circumstances, Charles decided to record the illegitimate sales as the president had instructed. Charles knew that what he did was wrong. He believed that if the fraud was discovered, Holmes, not he, would be in trouble. After all, Charles rationalized, he was just following orders.

Required
a. Can you justify what Charles did?
b. What could Charles have done to avoid the ethical dilemma that he faced? Assume that the company president would have made it impossible for Charles to work in Atlanta in a comparable job.
c. What if the Securities and Exchange Commission discovered this fraud? Would Charles's boss get in trouble? Would Charles?

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