Solution manual cost accounting 14th ed by carter

To download more slides, ebook, solutions and test bank, visit

CHAPTER 1
DISCUSSION QUESTIONS

Q1-1. Planning is the development of a consistent
set of actions, resources, and measurements
by which the achievement of objectives can
be assessed. Planning takes into account the
interactions between the organization and its
environment in whatever is to be done.
Control is the process by which managers
assure that resources are obtained and used
in an efficient and effective manner to carry
out the plan and accomplish the organization’s objectives. Control implies that performance measurements are reviewed to
determine if corrective action is required.
Planning and control are interrelated.
Control is carried out within the established
planning framework and serves to evaluate
conformance to the plan so that organizational objectives are achieved.
Q1-2. Short-range plans usually deal with a period
of a quarter or a year, while long-range plans
usually cover three to five years. Short-range
plans are detailed enough to permit preparation of a complete set of financial statements
as of a future date, while long-range plans
culminate in a very summarized set of
expected results or a few quantified objectives, such as financial ratios.
Q1-3. Long-range plans contain quantitative results,
while strategic plans are the least quantifiable
of all plans. Long-range plans usually extend
three to five years into the future, while strategic plans may contemplate shorter or much

longer periods. Long-range plans covering a
three-to-five-year period would be prepared
every three to five years, or might be systematically updated each year to maintain a complete plan, while strategic plans are
formulated at irregular intervals by an essentially unsystematic process.
Q1-4. Accountability is identical with responsibility
accounting. Accountability deals with the discharge of an individual’s responsibility to
achieve assigned objectives within the costs
and expenses allowed for the performance
and agreed to by the individual.

Q1-5. The controller does not control, but aids the
control task of the managerial levels by issuing reports pointing out deviations from the
predetermined course of action.
Q1-6. The cost department keeps detailed records
of materials, labor, factory overhead, and
marketing and administrative expenses; analyzes these costs; issues control reports; prepares cost studies for planning and decision
making; and coordinates cost and budget
data with other departments.
Q1-7. For product research and design, the manufacturing departments need estimates of
materials, labor, and machine process costs;
for measuring and efficiency of scheduling,
producing, and inspecting products, the
departments need to know the costs incurred.
The personnel department supplies employees’ wage rates. The treasury department
needs accounting, budgeting, and related
reports in scheduling cash requirements. The
marketing department needs cost information
in setting prices. The public relations department needs information on prices, wages,
profits, and dividends in order to inform the
public. The legal department needs cost information for keeping many affairs of the company in conformity with the law.

Q1-8. Modern techniques in communications give
the controller and staff the means to transmit
information in the form of results, analyses,
and forecasts in a way never before possible.
Profit opportunities or control actions have
been delayed or missed entirely because
timely information that might have improved
the cost and profit position of the company
was poorly communicated.
Q1-9. The budget is an essential cost planning tool
because it (a) supplies information and serves
as a standard of performance for cost control
by the supervisors responsible for cost; (b) provides an easy method for anticipating profits at
an anticipated sales level; (c) helps in forecasting sales, costs, expenses, and profits for a
period of one year or more in advance.

1-1


To download more slides, ebook, solutions and test bank, visit

1-2

Q1-10. These standards will not necessarily be able
to prevent management fraud, but they do
give internal accountants some guidance on
how to proceed if they encounter a questionable practice.
Q1-11. CASB standards: (a) enunciate a principle or
principles to be followed; (b) establish prac-

Chapter 1

tices to be applied; (c) specify criteria to be
employed in selecting from alternative principles and practices in estimating, accumulating, and reporting contract costs. The
standards are backed by the full force and
effect of the law.


To download more slides, ebook, solutions and test bank, visit

Chapter 1

1-3

EXERCISES
E1-1 The exercise requires two examples of the inseparability of planning and control.
Three are listed here, and the third one gives two illustrations:
The most obvious example of the inseparability of planning and control is
found in the definition of control: management’s systematic effort to achieve
objectives by comparing performance to plans and taking appropriate action to
correct important differences. The definition shows that the specific results of
planning are an essential input to the control phenomenon; there cannot be any
such thing as a control effort without reference to some set of plans.
A second example of the inseparability of planning and control results from
the fact that they are simultaneous. In practice, the implementation of the first
steps of a plan, and any control action needed in those steps, are begun before
all parts of planning are complete. Early results and the early findings of control
activity can then be used in finalizing later parts of the same plan. An example
is that a single annual budget is usually not completely finalized before customer orders begin to be received for that year, and consideration of the number
of these actual customer orders may point to trends that need to be considered

in finalizing the budget. Even actual financial results of the early weeks and
months of the year can provide a basis for better establishing the budget for the
later portion of the year.
The most elegant example of the inseparability of planning and control
results from the fact that both planning and control are complex human activities, and almost all complex human activities are planned activities and also
controlled activities. In other words, planning can be so complex that the planning effort is itself controlled (and planned), and control can be so complex that
control activities are themselves planned (and controlled). Two illustrations of
this are provided as follows:
(1) A case in which planning is itself planned and controlled is when a complicated budget (plan) is to be prepared. To facilitate the creation of the budget,
a detailed weekly schedule (another plan) is first agreed upon, showing
which steps in the preparation of the budget are to be carried out during
each week. Because it is desired that the creation of the budget not be
allowed to fall far behind schedule, the responsible manager will exercise
control by making comparisons between (a) the actual progress made on
the budget each week and (b) the schedule. The manager will also take some
corrective action if the difference between the schedule and the actual
progress is considered important.
(2) A case in which control is itself planned is when a manager decides what
kinds of control reports will be used to compare actual results with plans in
each future period of business operations. That decision, any efforts made
to acquire a supply of preprinted report forms to be filled in each period, and
any changes in the design of the cost accounting system to capture and
compile the needed information about actual results represent evidence that
the future control activity is being planned.


To download more slides, ebook, solutions and test bank, visit

1-4

Chapter 1

E1-2
(1)
(2)
(3)
(4)
(5)
(6)

B
A
C
A
C
B—although the time frame involved in this kind of plan may be extremely long,
there is nothing strategic about this kind of plan or decision. In fact, the plan and
obligation to pay off the bonds when they come due is so routine that management would not consciously approach it as a decision.

E1-3
(1)

(2)

Paragraph (b) comes closest to describing the kind of control used in managing
a business, although it is described in a nonbusiness setting. There is a plan formulated in advance, there is a measure of actual results, there is a decision
maker who compares actual results with plans, there is a selection of a corrective action to bring results closer in line with the plan, and there is a foreshadowing of repeated periodic control activities (the remaining quizzes).
The fact that the measures of planning and actual performance are nonfinancial measures is not the governing consideration. Much planned and actual
information used in controlling a business is non-financial, including some cost
accounting information such as the number of units produced, the percentage of

units that were defective, and the percentage of available machine time that was
utilized.
Paragraph (a) is a perfect example of an engineering control, rather than the kind
of control managers use in business. The simple device described, which is
found in any home bathroom, is the kind of control device designed to monitor
a physical condition, and so it is analogous to a thermostat or any of a variety of
devices called “industrial controls.” Of course, devices of this kind are used in
manufacturing and other businesses, but they do not possess the essential
attributes of control in the sense used in business and in cost accounting. The
device achieves a continuous monitoring of the results, rather than a periodic
comparison of results with plans. There is no human decision maker who selects
a corrective action to be taken. A human decision maker is probably the salient
attribute of control in managing a business that is missing in paragraph (a).


To download more slides, ebook, solutions and test bank, visit

Chapter 1

1-5

E1-3 (Concluded)
Paragraph (c) could be interpreted as an example of planning, but it lacks
some essential ingredients of control (even though the word “control” is used in
its last sentence). There is no periodic comparison of actual results with plans
and no provision for modifying the treatment based on periodic results. For
example, the contract requires five treatments each year, even if no weeds are
visible. The actions taken are entirely preemptive.
Paragraph (d) refers to the concept of control that applies to police work and
military science. It consists of being able to physically determine each event that

occurs in some location and being able to prevent certain events from occurring.
The potential use of coercive force, which is very clear in paragraph (d), is
always present in achieving this kind of control. In paragraph (d), there is no indication that results were periodically compared with plans. A rule that says
“Obtain the objective at any cost” is sometimes associated with these activities.


To download more slides, ebook, solutions and test bank, visit

1-6

Chapter 1

CASES
C1-1
(1)

(2)

(3)

Yes, Williams has an ethical responsibility to take action.
The IMA’s Standards of Ethical Conduct states that management accountants
“shall not commit acts contrary to these standards nor shall they condone the
commission of such acts by others within their organizations.”
(The requirement does not ask which standards have been violated, but, rather,
which ones apply to Williams’ situation.)
Management accountants have a responsibility to:
Competence: Perform their professional duties in accordance with relevant
laws, regulations, and technical standards. (Dumping toxic wastes in a residential landfill is generally a violation of law.)
Confidentiality: Refrain from disclosing confidential information acquired in

the course of their work except when authorized, unless legally obligated to do
so (Williams may be legally obligated to take action and make certain disclosures.)
Integrity: Refrain from either actively or passively subverting the attainment
of the organization’s legitimate and ethical objectives. (Williams’ avoidance of
the issue would passively subvert attainment of ethical objectives.)
Communicate unfavorable as well as favorable information and professional
judgments or opinions. (Williams is obligated to report his unfavorable findings
to appropriate persons.)
Refrain from engaging in or supporting any activity that would discredit the
profession. (Williams’ silence would provide support to the dumping activity
and, thus, could discredit the profession.)
Objectivity: Disclose fully all relevant information that could reasonably be
expected to influence an intended user’s understanding of the reports, comments, and recommendations presented. (Williams should disclose his findings
to the appropriate persons.)
Alternative (a), to seek the advice of his immediate superior, is appropriate. This
is the first step he is required to take, unless the superior is involved.
Alternative (b), communication of confidential information to persons outside
the company, such as the local newspaper, is inappropriate unless there is a
legal obligation to do so. If required by law, Williams should contact the proper
authorities.
Alternative (c), contacting a member of the board of directors, would be inappropriate at this time. Williams should report the problem to successively higher
levels within the company and turn to the board of directors only if the problem
is not resolved at lower levels.


To download more slides, ebook, solutions and test bank, visit

Chapter 1

1-7

C1-1 (Concluded)
(4)

Williams should follow the company’s established policies for resolving such
issues, if such policies exist. If the issue is not resolved through existing policies, he should report the problem to successively higher levels within the company until it is resolved. (Williams is not required to report this action to his
superior if his superior appears to be involved in the conflict. He is not to disclose the matter to persons outside the organization, unless required by law.)
During these steps, Williams may clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible
courses of action. If the conflict is not resolved after exhausting all these
courses of action, Williams may have no other recourse than to resign and submit an informative memorandum to an appropriate representative of the organization. Consultation with one’s personal attorney is also appropriate.

C1-2
(1)

(The requirement does not ask which standards have been violated, but, rather,
which ones apply to the CFO’s behavior.)
Management accountants have a responsibility to:
Competence: Perform their professional duties in accordance with relevant
laws, regulations, and technical standards. (The CFO has asked Deerling to
account for information in a way that is not in accordance with generally
accepted accounting principles.)
Prepare complete and clear reports and recommendations after appropriate
analyses of relevant and reliable information. (The CFO’s restrictions on disclosure will result in incomplete reports.)
Confidentiality: Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage, either
personally or through third parties. (The CFO is attempting to use confidential
information to protect the job security and bonuses of top management.)
Integrity: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. (The CFO has failed to avoid a conflict of
interest and has not informed the stockholders of the conflict.)
Refuse any gift, favor, or hospitality that would influence or would appear to
influence their actions. (The CFO’s bonus appears to be an influence on his

actions.)
Refrain from either actively or passively subverting the attainment of the
organization’s legitimate and ethical objectives. (The CFO has subverted the
attainment of the organization’s legitimate objective, profit for stockholders, by
pursuing, instead, the job security and bonuses of top management.)
Communicate unfavorable as well as favorable information and professional
judgments or opinions. (The CFO is attempting to restrict disclosure of information about the acquisition.)


To download more slides, ebook, solutions and test bank, visit

1-8

Chapter 1

C1-2 (Continued)

(2)

Refrain from engaging in or supporting any activity that would discredit the
profession. (The CFO’s actions could discredit the profession.)
Objectivity: Communicate information fairly and objectively. (The CFO is
attempting to unfairly control the information reported, resulting in a report that is
not objective.)
Disclose fully all relevant information that could reasonably be expected to
influence an intended user’s understanding of the reports, comments, and recommendations presented. (The CFO is attempting to restrict disclosure of relevant information.)
(The requirement does not ask which standards have been violated, but, rather,
which ones apply to Deerling’s situation.)
Management accountants have a responsibility to:
Competence: Perform their professional duties in accordance with relevant

laws, regulations, and technical standards. (Deerling is being asked to violate
generally accepted accounting principles.)
Prepare complete and clear reports and recommendations after appropriate
analyses of relevant and reliable information. (Deerling is being asked to prepare
an incomplete report.)
Confidentiality: Refrain from using or appearing to use confidential information acquired in the course of their work for unethical or illegal advantage either
personally or through third parties. (Deerling must not use the confidential information about the possible takeover to his own advantage or to that of the person(s) mounting the takeover attempt.)
Integrity: Refuse any gift, favor, or hospitality that would influence or would
appear to influence their actions. (The last sentence of the case suggests that
Deerling is considered a member of the top management group, so he may be
eligible for a bonus.)
Refrain from either actively or passively subverting the attainment of the
organization’s legitimate and ethical objectives. (Deerling is being asked to subvert the attainment of the organization’s legitimate objective, profit for stockholders, by pursuing instead the job security and bonuses of top management.)
Communicate unfavorable as well as favorable information and professional
judgments or opinions. (Deerling is being asked to restrict disclosure of information about the acquisition.)
Refrain from engaging in or supporting any activity that would discredit the
profession. (Deerling is being asked to take actions that could discredit the profession.)
Objectivity: Communicate information fairly and objectively. (Deerling is
being asked to prepare a report that is not objective.)
Disclose fully all relevant information that could reasonably be expected to
influence an intended user’s understanding of the reports, comments, and recommendations presented. (Deerling is being asked to restrict disclosure of relevant information.)


To download more slides, ebook, solutions and test bank, visit

Chapter 1

1-9

C1-2 (Concluded)

(3)

(4)

If the company has established policies for dealing with such issues, Deerling
should first follow these policies. If such policies do not exist, or if they are
unsuccessful in resolving the problem, Deerling should present the problem to
the chairman of the board. Deerling’s immediate superior is involved, so he need
not be informed of this action. If the matter remains unresolved, Deerling should
report to the audit committee, the board of directors, and finally the majority
owners. During these steps, Deerling may clarify relevant concepts by confidential discussion with an objective advisor to obtain an understanding of possible
courses of action. If the conflict is not resolved after exhausting all these
courses of action, Deerling may have no other recourse than to resign and submit an informative memorandum to an appropriate representative of the organization. Consultation with one’s personal attorney is also appropriate.
The primary responsibility the company must fulfill before taking defensive
actions is its fiduciary responsibility to stockholders. Other responsibilities
include the effects that the takeover and defensive actions would have on creditors, bondholders, employees, customers, and the community. The company
also has a responsibility to inform its external auditors and legal counsel to
avoid putting them in a compromising position.

C1-3
(1)

(The requirement does not ask which standards have been violated, but, rather,
which ones apply to Dixon’s behavior.)
Management accountants have a responsibility to:
Competence: Maintain an appropriate level of professional competence by
ongoing development of their knowledge and skills. (By systematically rejecting
all minority applicants, Dixon is jeopardizing the level of competence among the
staff.)
Perform their professional duties in accordance with relevant laws, regulations,

and technical standards. (Equal opportunity in employment is required by law.)
Integrity: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict. (Dixon’s prejudice is in conflict with the
company’s legal obligation to provide equal opportunity employment, and with
the company’s need for the most competent staff regardless of race.)
Refrain from either actively or passively subverting the attainment of the
organization’s legitimate and ethical objectives. (The company’s objective of
equal opportunity employment is being subverted by Dixon’s prejudice.)


To download more slides, ebook, solutions and test bank, visit

1-10

Chapter 1

C1-3 (Concluded)

(2)

(3)

(4)

Refrain from engaging in or supporting any activity that would discredit the
profession. (Such persistent, systematic discrimination in hiring could discredit
the profession.)
(The requirement does not ask which standards have been violated, but rather,
which ones apply to Foxworth’s situation.) Because management accountants
may not condone the commission of unethical acts by others within their organizations, all of the responsibilities listed in the solution to requirement (1) also
apply to Foxworth’s situation.

In addition, the following apply:
Management accountants have a responsibility to:
Confidentiality: Refrain from disclosing confidential information acquired in
the course of their work except when authorized, unless legally obligated to do
so. (Foxworth’s suspicions about Dixon’s behavior should not be disclosed inappropriately. See requirement (3)).
Objectivity: Communicate information fairly and objectively. (Foxworth is
obligated to make objective hiring recommendations to Dixon, in spite of his
belief that Dixon will be prejudiced in acting on them.)
Alternative (a), discussion with the director of personnel, who is one of Dixon’s
peers, is inappropriate at this time. If, however, Foxworth believes the director of
personnel is an objective party, Foxworth may discuss the matter with the director, confidentially, to clarify the relevant concepts and to obtain an understanding of possible courses of action.
Alternative (b), informal discussion with a group of MAD senior management
accountants, is inappropriate.
Alternative (c), private discussion with the CFO, Dixon’s superior, is appropriate. Because Foxworth has already approached his immediate superior, Dixon,
who is involved in the conflict, it is not necessary for Foxworth to inform him of
this action.
Foxworth should follow the company’s established policies for dealing with this
type of conflict, if such policies exist. If policies do not exist, or if they are unsuccessful in resolving the conflict, Foxworth should discuss the issue with the
CFO. If the matter remains unresolved, discussions with successively higher levels of management, including the audit committee and the board of directors,
should follow. During these steps, Foxworth may discuss the matter confidentially with an objective advisor to clarify the relevant concepts and to obtain an
understanding of possible courses of action. If the matter remains unresolved
after exhausting all of these steps, Foxworth may have no recourse other than to
resign and submit an informative memorandum to an appropriate representative
of the company. Consultation with one’s personal attorney is also appropriate.


To download more slides, ebook, solutions and test bank, visit

Chapter 1

1-11

C1-4
(1)

(2)

(The requirement does not ask for a list of responsibilities Rodriquez has violated, merely which of the fifteen responsibilities apply to his situation.)
Management accountants have a responsibility to:
Competence: Perform their professional duties in accordance with relevant
laws, regulations, and technical standards. (The figures Rodriquez is being
asked to prepare might amount to fraud in the loan application.)
Prepare complete and clear reports and recommendations after appropriate
analyses of relevant and reliable information. (The reliability of the information is
in doubt, and the fact that certain sales figures are or are not sufficient to justify
the bank loan are not relevant to preparation of the budget.)
Integrity: Refrain from either actively or passively subverting the attainment
of the organization’s legitimate and ethical objectives. (There is a push to subvert legitimate objectives to the immediate need for a bank loan.)
Recognize and communicate professional limitations or other constraints
that would preclude responsible judgment or successful performance of an
activity. (Rodriquez has not expressed to Czeisla the conflict between his desire
to be a team player and his ethical responsibilities.)
Communicate unfavorable as well as favorable information and professional
judgments or opinions. (Rodriquez is being asked to report information that
reflects so favorably on the company that it may not be justifiable.)
Refrain from engaging in or supporting any activity that would discredit the
profession. (Preparing a deliberately misleading budget as part of a loan application could amount to obtaining money by fraud.)
Objectivity: Communicate information fairly and objectively. (Rodriquez feels
pressured to abandon his objectivity in preparing the budget.)
Disclose fully all relevant information that could reasonably be expected to

influence an intended user’s understanding of the reports, comments, and recommendations presented. (A comparison of the new targeted sales figure with
the actual sales of the corresponding periods of past years would be likely to
influence the bank’s understanding of just how large an increase in sales is
being portrayed.)
Rodriquez could have clearly stated his concerns to Czeisla at each stage of the
budget’s creation and revision. He could have consulted with the marketing manager and production manager at every stage, rather than only upon receiving the
initial budget data. He could present the budget, or a summary of it, in a comparative form to highlight the differences between each quarter’s budget and the actual
results of the corresponding quarter of the preceding year, and he could even calculate the percentage increase being budgeted and compare it with actual percentage increases that were achieved annually in the past. He could have
consulted with his staff superior at the headquarters of Northwestern (the parent company)—Czeisla is his line superior, according to the second sentence of
the case.


To download more slides, ebook, solutions and test bank, visit

1-12

Chapter 1

C1-4 (Concluded)
(3)

In addition to his ethical responsibilities to CD, Rodriquez has ethical responsibilities to:
(a) The banks
(b) The management accounting profession

C1-5
(1)

(The requirement does not ask for a list of responsibilities Jones has violated,
merely which of the fifteen responsibilities apply to his situation.)

Management accountants have a responsibility to:
Confidentiality: Refrain from disclosing confidential information acquired in
the course of their work except when authorized, unless legally obligated to do
so. (If Jones accepts the consulting engagement with Crimson, it is likely she
will be asked to disclose confidential SMI information about the desired computer system.)
Refrain from using or appearing to use confidential information acquired in
the course of their work for unethical or illegal advantage either personally or
through third parties. (The size of the consulting fee suggests Crimson is seeking to buy confidential information to help win the job.)
Integrity: Avoid actual or apparent conflicts of interest and advise all appropriate parties of any potential conflict (The consulting job would constitute an
apparent conflict of interest, and probably an actual one, because Jones has
been named to the SMI committee that will evaluate and rank all the proposals,
including Crimson’s proposal, which she would have helped to write.)
Refrain from engaging in any activity that would prejudice their ability to
carry out their duties ethically. (The consulting job with Crimson would prejudice
Jones’ ability to evaluate and rank the proposals for SMI, because one of the proposals would be Jones’ own work.)
Refuse any gift, favor, or hospitality that would influence or would appear to
influence their actions. (Regardless of whether the size of the consulting fee is
construed as being a gift or favor, it is likely that other gifts, favors, or hospitality will be extended to Jones by Crimson during the course of the consulting
engagement.)
Refrain from either actively or passively subverting the attainment of the
organization’s legitimate and ethical objectives. (SMI’s legitimate objective of
obtaining the best computer system at the best price would be subverted to
Jones’ personal need for money, as a result of Jones’ disclosing crucial information for Crimson to include in its proposal, especially if Crimson might not
deliver a system with the crucial attributes.)


To download more slides, ebook, solutions and test bank, visit

Chapter 1

1-13

C1-5 (Concluded)

(2)
(3)

(4)

Recognize and communicate professional limitations or other constraints
that would preclude responsible judgment or successful performance of an
activity. (Accepting the consulting job would preclude responsible judgment in
evaluating and ranking the proposals for SMI; on the other hand, ethical limitations of Jones’ employment at SMI would preclude successful performance of
the consulting engagement for Crimson, especially if Crimson does expect her
to reveal crucial information to help win the job—her ethical duty to SMI would
prevent her from delivering what Crimson is paying for.)
Refrain from engaging in or supporting any activity that would discredit the
profession. (Selling confidential SMI information to a vendor would be a discreditable act.)
Objectivity: Communicate information fairly and objectively. (Jones would be
unlikely to communicate objective evaluations of proposals if she had helped
write one of them.)
Disclose fully all relevant information that could reasonably be expected to
influence an intended user’s understanding of the reports, comments, and recommendations presented. (Jones’ role in writing the Crimson proposal would be
relevant information in SMI’s use of her evaluations of proposals.)
Jones might have disclosed, either orally or on her personal vita sheet or job application, the extent of her involvement on the SMI task force and the committee.
Jones could have first investigated all her career opportunities with firms that
presented no potential conflict of interest of this kind, but for the sake of the
argument, it is reasonable to assume she did exactly that before applying for a
position at Crimson. Knowing that Crimson is a supplier of computer systems,
Jones might have revised her personal vita sheet and the wording of her application for this one job interview to lessen the chances of Crimson’s being

tempted to pursue an unethical plan. (Of course, her involvement in SMI’s
upcoming purchase might have become known to Crimson anyway, or it might
have been known to Crimson from other sources before her interview or even
before her application for the position.)
In addition to her ethical responsibilities to SMI (and her financial responsibility
to the hospital that provides treatment for her child), Jones has ethical responsibilities to:
(a) her family
(b) the management accounting profession
(c) Crimson


To download more slides, ebook, solutions and test bank, visit

CHAPTER 2
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 do 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

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 2

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

Chapter 2

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

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 2

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 do
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

Chapter 2

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

=

1.
2.
3.
4.
5.
6.
7.
8.

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

2-6

E2-5

E2-6

Chapter 2

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

Chapter 2

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

2-8

Chapter 2

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 do not have to reflect
pickup and delivery costs in repair prices.

E2-11
(1)

Direct labor...................................................................................... $ 2
Variable factory overhead..............................................................
5
Fixed factory overhead ..................................................................
4
Conversion cost.............................................................................. $11

(2)

Direct material (lumber) ................................................................. $12
Direct labor......................................................................................
2
Prime cost ....................................................................................... $14

(3)

Direct material (lumber) ................................................................. $12
Direct labor......................................................................................

2
Variable factory overhead..............................................................
5
Variable manufacturing cost ......................................................... $19

(4)

Direct material (lumber) ................................................................. $12
Direct labor......................................................................................
2
Variable factory overhead..............................................................
5
Variable marketing..........................................................................
1
Total variable cost .......................................................................... $20


To download more slides, ebook, solutions and test bank, visit

Chapter 2

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

= 1 × 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

2-10

Chapter 2

E2-13 APPENDIX
1.
2.
3.
4.
5.
6.
7.
8.
9.
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

Chapter 2

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

2-12

Chapter 2

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.