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business
cost accounting

Fundamentals of Cost Accounting 3rd Edition William Lanen, Shannon Anderson, Michael Maher - Solutions

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?
Refer to the In Action 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?
Refer to the In Action 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?
Why does a cost accountant need to be familiar with new developments in information technology?
Will studying cost accounting increase the chances that Carmen’s Cookies will succeed? How? Will it guarantee success? Explain.
Apple, Inc. incurs many types of costs in its operations.RequiredFor each cost in the following table, identify the stage in the value chain where this cost isincurred.
Pine Ridge Cabinets (PRC) produces cabinets for new home builders. You have been called in to settle a dispute between PRC and Eastern Homes, a builder of custom homes.Eastern Homes buys 10,000 units of a particular cabinet from PRC every year. It insists that PRC keep a one-month inventory to
As an analyst in an airline’s finance department, you are asked to help the operations staff. Personnel 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 $1.00
Beige Computers operates retail stores in both downtown (City) and suburban (Mall) 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. Beige's CEO is concerned
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
Refer to Exhibit 1.5, which shows budgeted versus actual costs. Assume that Carmen’s Cookies is preparing a budget for the month ending June 30. Management prepares the budget by starting with the actual results for April 30 that appear in Exhibit 1.5. Next, management considers what the
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
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
Graphic Components (GC) has offered to supply the Federal Aviation Agency (FAA) with computer monitors at "cost plus 20 percent." GC operates a manufacturing plant that can produce 22,000 monitors per year, but it normally produces 20,000. The costs to produce 20,000 monitors follow:Based on these
Ringer Company makes a variety of products. It is organized in two divisions, East and West. West Division normally sells to outside customers but, on occasion, also sells to the East Division. When it does, corporate policy states that the price must be cost plus 15 percent to ensure a “fair”
Pete€™s Taxi & Limo provides transportation services in and around Centerville. Its profits have been declining, and management is planning to add a package delivery service that is expected to increase revenue by $400,000 per year. The total cost to lease the necessary package delivery
Valley Lawn & Tree, Inc., provides landscaping services in Eastmont. Renee Moffo, 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
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
Tom€™s Tax Services is a small accounting firm that offers tax services to small businesses and individuals. One of Tom€™s major clients, the Orange CafÃ©, is considering moving its business to another tax service closer to its location that has promised lower fees.
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
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.
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
The managers of Quince Products (Problem 1-31) 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
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
Why do companies allocate costs? What are some of the advantages and disadvantages to doing so?
What are the similarities and differences among the direct method, the step method, and the reciprocal method of allocating costs?
What criterion should be used to determine the order of allocation from service departments when the step method is used? Explain why.
What is the objective of joint cost allocation?
Why would a number of accountants express a preference for the net realizable value method of joint cost allocation over the physical quantities method?
When would a physical quantities method for allocation be preferred?
What is the basic difference between the allocations of joint costs to (a) Joint products and (b) By-products?
What costs are irrelevant for the decision of whether to sell a joint product or process it further?
If cost allocations are arbitrary and potentially misleading, why do companies, including successful ones, continue to allocate costs?
One critic of cost allocation noted, “You can avoid the problem of arbitrary cost allocations by not allocating any common costs to other cost objects.” What are your thoughts on this comment?
If the reciprocal method is conceptually superior, why don’t all firms use it?
Service department cost allocation is the first stage in a two-stage system. Suppose a company has a purchasing department that is responsible for buying all materials, including miscellaneous supplies for the company’s three production departments. Each production department produces multiple
What argument(s) could be given in support of the reciprocal method as the preferred method for distributing the costs of service departments?
Under what conditions are the results from using the direct method of allocation the same as those from using the other two methods? Why?
Consider a company with two producing departments and one service department. The service department distributes its costs to the producing departments on the basis of the number of employees in each department. If the costs in the service department are fixed, what effect would the addition of
What are some of the factors that a company needs to consider in addition to cost savings when deciding whether to outsource a service department, such as Information Services?
Surf Beach State College (SBSC) has a business school with three products, undergraduate degrees, graduate degrees, and executive education. SBSC has three service departments, Computer Support, Career Development, and the Library. The dean would like to measure product line profitability and wants
This chapter indicated that joint costing is used for inventory valuation and regulatory purposes. Under what conditions might the method of joint cost allocation have an impact on other decisions?
How is joint cost allocation like service department cost allocation?
What are three industries that have joint products?
You are the division president of Stable Division of Giga-Corp. Your friend, Ligia, is the division president of Giga-Corp.’s Turmoil Division. These are the only divisions. Each division has 5,000 employees. Last year, Stable Division had a turnover of 1,000 employees (1,000 employees left and
Warren Ltd. has two production departments, Building A and Building B, and two service departments, Maintenance and Cafeteria. Direct costs for each department and the proportion of service costs used by the various departments for the month of June follow:RequiredCompute the allocation of service
Refer to the facts in Exercise 11-22. Assume that both Building A and Building B work on just two jobs during the month of June: RW-12 and RW-13. Costs are allocated to jobs based on labor-hours in Building A and machine-hours in Building B. The number of labor- and machine-hours worked in each
University Printers has two service departments (Maintenance and Personnel) and two operating departments (Printing and Developing). Management has decided to allocate maintenance costs on the basis of machine-hours in each department and personnel costs on the basis of labor-hours worked by the
Refer to the data for Warren Ltd. in Exercise 11-22.RequiredUse the step method to allocate the service costs, using the following:a. The order of allocation starts with Maintenance.b. The allocations are made in the reverse order (starting with Cafeteria).
Refer to the data for University Printers in Exercise 11-24.RequiredAllocate the service department costs using the step method, starting with the Maintenance Department. What effect does using this method have on the allocation of costs?
Refer to the data for Warren Ltd. in Exercise 11-22.RequiredUse the reciprocal method to allocate the service costs. (Matrix algebra is not required.)
During the past month, the following costs were incurred in the three production departments and two service departments of Postaic Company:RequiredAllocate service department costs to Fabrication, Assembly, and Finishing using the reciprocal method, and determine the total costs of Fabrication,
Refer to the data for University Printers in Exercise 11-24.RequiredAllocate the service department costs using the reciprocal method. (Matrix algebra is not required because there are only two service departments.)
Refer to Exercises 11-24, 11-26, and 11-29 (University Printers).Requireda. Which method do you think is best?b. How much would it be worth to the company to use the best method compared to the worst of the three methods?
Refer to the facts in Exercise 11-22. Warren estimates that the variable costs in the Maintenance Department total $145,000, and in the Cafeteria variable costs total $160,000. Avoidable fixed costs in the Maintenance Department are $90,000.RequiredIf Warren outsources the Maintenance Department,
Refer to the facts in Exercise 11-24. University Printers estimates that the variable costs in the Personnel Department total $20,000 and in the Maintenance Department variable costs total $8,750. Avoidable fixed costs in the Personnel Department are $6,000.RequiredIf Warren outsources the
A company processes a patented chemical, D-12, and produces two outputs, C-30 and C-40. In March, the costs to process D-12 are $450,000 for materials and $900,000 for conversion costs. C-30 has a sales value of $2,000,000 and C-40 has a sales value of $500,000.RequiredUsing the net realizable
Blasto, Inc., operates several mines. At one, a typical batch of ore run through the plant yields three products: lead, copper, and manganese. At the split-off point, the intermediate products cannot be sold without further processing. The lead from a typical batch sells for $40,000 after incurring
GG Products, Inc., prepares tips and stems from a joint process using asparagus. It produced 240,000 units of tips having a sales value at the split-off point of $63,000. It produced 240,000 units of stems having a sales value at split-off of $15,750. Using the net realizable value method, the
Alpha Company manufactures products XX-1 and XX-2 from a joint process. Total joint costs are $300,000. The sales value at split-off was $350,000 for 4,000 units of product XX-1 and $150,000 for 1,000 units of product XX-2.RequiredAssuming that total joint costs are allocated using the net
Grand Company manufactures products Alpha and Beta from a joint process, which also yields a by-product, Gamma. Grand accounts for the revenues from its by-product sales as other income. Additional information follows:RequiredAssuming that joint product costs are allocated using the net realizable
Douglas manufactures four grades of lubricant, W-10, W-20, W-30, and W-40, from a joint process. Additional information follows:RequiredAssuming that total joint costs of $240,000 were allocated using the sales value at split-off (net realizable value method), what joint costs were allocated to
The following questions relate to Kyle Company, which manufactures products KA, KB, and KC from a joint process. Joint product costs were $126,000. Additional information follows:Requireda. Assuming that joint product costs are allocated using the physical quantities (units produced) method, what
Trans-Pacific Lumber runs a mill in the Northwest that produces two grades of lumber, A and B, and a by-product, sawdust. The company chooses to allocate the costs on the basis of the physical quantities method.Last month, it processed 125,000 logs at a total cost of $270,000. The output of the
Model, Inc., produces model automobiles made from metal. It operates two production departments, Molding and Painting, and has three service departments, Administration, Accounting, and Maintenance. The accumulated costs in the three service departments were $270,000, $375,000, and $198,000,
GB Service Corporation has two service departments, Administration and Accounting, and two operating departments, East and West. Administration costs are allocated on the basis of employees, and Accounting costs are allocated on the basis of number of transactions. A summary of GB operations
Pat's Print Shops has a warehouse that supplies paper and other supplies to its store locations. It has two service departments, Information Services (S1) and Operation Support (S2), and two operating departments, Printing (P1) and Customer Service (P2). As an internal auditor, you are checking the
Steamco Corporation is reviewing its operations to see what additional energy-saving projects it might adopt. The company's manufacturing plant generates its own electricity using a process capturing steam from its production processes. A summary of the use of service departments by other service
Using the reciprocal method spreadsheet (shown in Exhibit 11.21), show the costs allocated to production for Steamco Corporation. Use the data in Problem 11-44.
Manzano Bank has two operating departments (Branches and Electronic) and three service departments (Processing, Administration, and Maintenance). During November, the following costs and service department usage ratios were recorded:Requireda. Allocate the service department costs to the two
Farmington Components has two production departments (Fabrication and Assembly) and three service departments (Engineering, Administration, and Maintenance). During July, the following costs and service department usage ratios were recorded:RequiredAllocate the service department costs to the two
Not-A-Mega Bank has three service departments (Administration, Communications, and Facilities), and two production departments (Deposits and Loans). A summary of costs and other data for each department prior to allocation of service department costs for the year ended December 31 follows:The
Fifth Street Publishing (FSP) was founded many years ago as a printing cooperative offering printing services to members. Most members were charitable and religious organizations. Ten years ago, FSP became a for-profit corporation, although it retained its commitment to the original member groups.
Refer to the facts in Problem 11-42. GB estimates that the cost structure in the their operations is as follows:Requireda. If GB outsources the Administration Department, what is the maximum they can pay an outside vendor without increasing total costs?b. If GB outsources the Accounting Department,
Refer to the facts in Problem 11-46. The cost accountant at Manzano Bank estimates that the cost structures in their departments are as follows:a. If Manzano outsources the Processing Department, what is the maximum they can pay an outside vendor without increasing total costs?b. If Manzano
Refer to the facts in Problem 11-47. Cost records obtained from Farmington Components show the following cost structure in their departments:Requireda. If Farmington outsources the Engineering Department, what is the maximum they can pay an outside vendor without increasing total costs?b. If
Toledo Chemical Company buys A-123 for $2.40 a gallon. At the end of distilling in Department 1, A-123 splits off into three products: B-1, B-2, and B-3. Toledo sells B-1 at the split-off point, with no further processing; it processes B-2 and B-3 further before they can be sold. B-2 is fused in
Fletcher Fabrication, Inc., produces three products by a joint production process. Raw materials are put into production in Department X, and at the end of processing in this department, three products appear. Product A is sold at the split-off point with no further processing. Products B and C
Athens, Inc., manufactures argon, xon, and zeon from a joint process. Each gas can be liquefied and sold for a higher price. Data on the process are as follows:RequiredDetermine the value for each lettereditem.
West Coast Designs produces three products: super, deluxe, and generic. Super and deluxe are its main products; generic is a by-product of super. Information on the past month’s production processes follows:• In Department A, 330,000 units of the raw material X-1 are processed at a total cost
Ticon Corporation’s manufacturing operation produces two joint products. Product delta sells for $24 per unit at the split-off point. After an additional $225,000 of processing costs are incurred, product omega sells for $81 per unit. In a typical month, 76,000 units are processed; 60,000 units
Black Corporation processes xyrex into three outputs: Xy-1, Xy-2, and Xy-3. Xy-1 accounts for 60 percent of the net realizable value at the split-off point, Xy-2 accounts for 30 percent, and Xy-3 accounts for the balance. The joint costs total $365,500. If Xy-3 is accounted for as a by-product, its
Western Woods, Inc., processes logs into grade A and grade B lumber. Logs cost $12,000 per load. The milling process produces 4,000 units of grade A with a market value of $28,000, and 12,000 units of grade B with a market value of $4,000. The cost of the milling process is $5,120 per
Ag-Coop is a large farm cooperative with a number of agriculture-related manufacturing and service divisions. As a cooperative, it pays no federal income taxes. The company owns a fertilizer plant that processes and mixes petrochemical compounds into three brands of agricultural fertilizer:
How is accounting useful in addressing the management control problem, such as the one illustrated at the beginning of the chapter?
Accounting is objective and precise. Therefore, performance measures based on accounting numbers must be objective and precise. Do you agree?
Is the CEO ever an agent in a principal-agent relationship as discussed in the chapter?
Is a division president ever a principal in a principal-agent relationship as discussed in the chapter?
Some people argue that paying contingent compensation is unnecessary. Instead, the firm should just pay a “fair salary” and the manager will do what is expected. Do you agree?
How does the separation of duties help prevent financial fraud?
The management control system collects information from local managers for planning purposes. It then uses the plan to evaluate the local managers. What are the advantages of this? What are the disadvantages?
Salespeople are often paid a commission based on sales revenue. How might that incentive system lead to dysfunctional consequences?
On December 30, a manager determines that income is about $9.9 million. The manager has a compensation plan that calls for a bonus of 25 percent (of salary) if income exceeds $10 million and no bonus if it is below $10 million. What problems might arise with this bonus plan?
Surveying the accounts payable records, a clerk in the controller’s office noted that expenses appeared to rise significantly within one month of the close of the budget period. The organization did not have a seasonal product or service to explain this behavior. Can you suggest an explanation?
The manager of an operating department just received a cost report and has made the following comment with respect to the costs allocated from one of the service departments: “This charge to my division doesn’t seem right. The service center installed equipment with more capacity than our
A company has a bonus plan that states that managers with division income ranked below the average of all managers receive no bonus for the year. What biases might arise in this system?
Each April, it is common to find news articles contrasting executive pay with firm performance. For example, on April 9, 2009, The Wall Street Journal reported that the top three executives at Kilroy Realty (a California property developer and manager) were paid the “highest amount permitted by
The Treadway Commission commented that the forces leading to financial fraud were present in all companies to some extent, but fraudulent financial reporting resulted from the right combustible mixture of forces and opportunities to commit fraud. Based on your reading of current news stories, give
The Treadway Commission commented that a factor giving rise to fraud is the existence of pressures on division managers to achieve unrealistic profit objectives. Why might top management set unrealistic profit targets?
The Treadway Commission indicated that bonus plans based on achieving short-run financial results have been a factor in financial frauds, particularly when the bonus is a large component of an individual’s compensation. Why is this so?

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