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cost accounting

Cost Accounting Foundations and Evolutions 8th Edition Michael R. Kinney, Cecily A. Raiborn - Solutions

Why are support department costs often allocated to operating departments? Is such an allocation process always useful from a decision-making standpoint? How might support department cost allocation create a feeling of cost responsibility among managers of operating departments?
The four criteria for selecting an allocation base for support department costs should be applied equally. Discuss the merits of this statement.
Compare and contrast the direct, step, and algebraic methods of allocating support department costs. What are the advantages and disadvantages of each method?
When the algebraic method of allocating support department costs is used, total costs for each support department increase from what they were prior to the allocation. Why does this occur, and how are the additional costs treated?
What are transfer prices, and why do companies use them? How could the use of transfer prices improve or impair goal congruence?
What problems might be encountered when attempting to implement a cost-based transfer pricing system? A market-based transfer pricing system?
What type of transfer price would you recommend be used in each of the following selling and buying responsibility centers: cost, revenue, profit, and investment? How and why would such prices be set?
What is dual pricing? What is the intended effect of dual pricing on the performance of each division affected by the dual price?
How can support departments use transfer prices, and what advantages do transfer prices have over cost allocation methods?
Explain why the determination of transfer prices is more complex in a multinational, rather than in a domestic, setting.
Indicate whether a firm exhibiting each of the following characteristics would more likely be centralized (C) or decentralized (D).a. Large number of employees who telecommuteb. Slow growth ratec. Few employeesd. Subordinates highly trained and mentored in decision-making skillse. Stable market
Indicate whether each of the following is a potential advantage (A) or disadvantage (D) of decentralization. If an item is neither an advantage nor a disadvantage, use N.a. Provision of increased job satisfactionb. Development of leadership qualitiesc. Speed of decisionsd. Support of training in
Many companies are trying to determine the best organizational structure for information technology (IT) operations. Although IT operations had been decentralized in the past, there has been a growing trend to bring such operations back to a central location. Use the Internet to gather research to
For each of the following organizational units, indicate whether the unit would most likely be classified as a cost center (C), a revenue center (R), a profit center (P), or an investment center (I):a. Laundry of a large bed-and-breakfastb. Corporate-owned local outlet of a fast-food restaurantc.
Go to your university's Web site and review the various organizational units within the university. Assuming no transfer pricing exists, make a list of the units that you believe would be classified as cost centers and profit centers.
Multiple-doctor medical practices are often structured with each doctor acting as a profit center.a. Discuss why such an organizational structure would be useful.b. Go to the Web and find some software packages that could be used to account for such an organizational structure.c. List some costs of
For 2010, Wagner Company planned to sell 460,000 units at a $37 selling price. In early 2011, the marketing manager was asked to explain why budgeted revenue had not been achieved. Investigation revealed the following information:Actual sales volume ......443,000 unitsActual selling price
You have asked your sales manager to explain why budgeted revenues for your division are below expectations. The budget indicated $472,500 of revenues based on a sales volume of 630,000 units. Sales records indicate that 645,000 product units were actually sold, but revenues were only $464,400.
Francis Mendez delivers two-day statistical process control seminars for manufacturing workers. For each program, a $4,200 fee is normally paid. In 2009, Mendez presented 30 seminars, and he budgeted a 30 percent increase in seminars for 2010. At the end of 2010, Mendez is disappointed that his
Andreka Inc. uses the direct method to allocate support department costs to production departments (fabricating and finishing). Information for June 2010 follows.a. What amounts of human resources and administration costs should be assigned to Fabricating for June?b. What amounts of human resources
Prosperous Bank has three support areas (administration, human resources, and accounting) and three revenue-generating areas (checking accounts, savings accounts, and loans). Monthly direct costs and the interdepartmental support structure are shown in the following benefits-provided
Use the information in Exercise 25 to compute total cost for each revenue-generating area if Prosperous Bank uses the step method of cost allocation.
Leander Mfg. has three support departments (human resources, administration, and maintenance) and two revenue-generating departments (assembly and finishing). The company uses the step method to allocate support department costs to operating departments. In October 2010, human resources incurred
Use the information for Prosperous Bank in Exercise 25 to compute the total cost for each revenue-generating area using the algebraic method.
The following chart indicates the percentage of support department services used by other departments. Service departments are designated S1, S2, and S3; operating departments are designated RP1 and RP2.Direct costs of the period were $170,000, $360,000, and $600,000 for S1, S2, and S3,
Indicate whether each of the following statements constitutes a potential advantage (A), disadvantage (D), or neither (N) of using transfer prices for support department costs.a. Can put all support departments on an equal footingb. Can cause certain services to be under-or-overutilizedc. Can make
Qvat Division, a subsidiary of Imogene Ltd., manufactures a product with the following costs:Direct material ........$15.00Direct labor ........ 26.25Variable overhead ....... 12.75Fixed overhead ........ 18.00Total ...........$72.00Some of the chips are sold externally for $162; others are
Elba Division of Haimes Industries manufactures product #54B89. Three-fourths of the production is transferred to the Crete Division of Haimes Industries; the remainder is sold externally for $67 per unit. The following information is available about product #54B89:Total production annually
Peyvandi Co., a profit center of California Enterprises, manufactures Product BP3751-9S to sell internally to other company divisions as well as externally. One unit of Product BP3751-9S sells for $72. Production and selling costs for a unit of Product BP3751-9S follow.Direct material
Great Taste Food Stores operates 20 large supermarkets in the East. Each store is evaluated as a profit center, and store managers have complete control over their purchases and inventory policy. Company policy is that transfers between stores will be made at cost if a store runs short of an item
Walsdorf Company's information technology department is developing a support department transfer price based on minutes of computer time. For 2010, its expected capacity was 700,000 minutes, and theoretical capacity was 1,000,000 minutes. Costs of the IT department for 2010 were expected to total
Use the Internet to identify a multinational company encountering tax problems related to transfer pricing between its organizational units in different countries. Prepare a brief discussion of the issues and the actual or potential consequences.
A large U.S. corporation participates in a highly competitive industry. Company management has decided that decentralization will best allow the company to meet the competition and achieve profit goals. Each responsibility center manager is evaluated on the basis of profit contribution, market
Although centralization and decentralization are commonly discussed in the context of business organizations and distinct, often "far-flung" subunits, the concepts are also applicable within a single building! Consider that, in the 1970s, most hospitals began shifting from centralized nursing
Hippolito Inc. manufactures industrial tools and has annual sales of approximately $3.5 million with no evidence of cyclical demand. R&D is very important to Hippolito because its market share expands only in response to product innovation.The company controller has designed and implemented a new
To respond to increased competition and a reduction in profitability, the nationwide law firm of O'Brien New & Cave recently instituted a responsibility accounting system. One of the several responsibility centers established was the Civil Litigation Division. This division is treated as a cost
Swimmingly Corp. buys raw fish, cooks and processes it, and then cans it in single-portion containers. The canned fish is sold to several wholesalers, who specialize in providing food to school lunch programs in the northwest United States and western Canada. All processing is conducted in the
The accounting department at Kerrville College has decided to off er a three-day ethics workshop for local CPAs in March 2010. Rose Morris, a tenured professor, will supervise the seminar's planning process and has submitted the following budget to the departmental chairperson:The $3,600 facilities
Organizational spending on outsourced contact centers (previously referred to as call centers) continues to increase.Contact centers are critical to organizational success because these units often have primary responsibility for interactions with customers. In some companies, the contact centers
Many companies provide on-site child care facilities for employees' children. In some situations, this service is provided free of charge; in other situations, employees are charged, usually on a sliding-scale basis relative to pay, for such services.a. If a company provides, but does not charge
Cardiff Sports sells footballs and shoulder pads. For 2010, company management budgeted the following:At the end of 2010, management was told that actual sales of footballs were 21,000 units and the sales price variance was $63,000 unfavorable. Sales of shoulder pads generated $1,680,000 of
Kessla Taub manages the marketing department at Electronic Village. Company management has been concerned about the sales of three products and has informed Taub that, regardless of other sales, her performance in 2010 will be evaluated on whether she has met the sales budget for the following
Folsom Fashions sells a line of women's dresses. Folsom's performance report for November 2010 is shown below. The company uses a flexible budget to analyze its performance and measure the effect on operating income of the various factors affecting the difference between budgeted and actual
Management of Shreveport Community Hospital has decided to allocate the budgeted costs of its three support departments (administration, public relations, and maintenance) to its three operating programs (surgery, in-patient care, and out-patient services). Budgeted information for 2010
Leyh Management Co. classifies its operations into three departments: commercial sales, residential sales, and property management. The owner, Ellen Leyh, wants to know the full cost of operating each department. Direct departmental costs and several allocation bases associated with each follow:The
Lombardi Printing has two support departments (administration and editorial) and two operating divisions (college texts and professional publications).Following are the direct costs and allocation bases for each of these areas:Company management has decided to allocate administration and editorial
Management at C. Pier Press has decided to allocate costs of the paper's two support departments (administration and human resources) to the two revenue-generating departments (advertising and circulation). Administration costs are to be allocated on the basis of dollars of assets employed; human
Wakowski Company's annual budget for its three support departments (administration, legal/accounting, and maintenance/engineering) and its two production departments (processing and finishing) is as follows:a. Prepare a cost distribution that allocates support department costs using the step
Kensington Corporation is a diversified manufacturing company with corporate headquarters in Easton, Massachusetts. The three operating divisions are Kennedy Division, Consumer Products Division, and Outerspace Products Division. Much of Kennedy Division's manufacturing activity is related to work
In each of the following cases, the Speaker Division can sell all of its production of audio speakers externally or some internally to the Sound System Division and the remainder to outside customers. The Speaker Division's production capacity is 400,000 units annually. The data related to each
Ludmilla Corp. has two divisions: Engine and Mobile Systems. The Engine Division produces engines used by both the Mobile Systems Division and a variety of external industrial customers. External sales orders are generally produced in 50-unit lots. Using this typical lot size, the cost per engine
Worldly Traveler’s Roll-Em-On Division makes computer bags. The bags are sold to another internal division, SkyWheels, for inclusion in a luggage set and to external buyers. During the month just ended, SkyWheels acquired 4,000 bags from the Roll-Em-On Division, whose standard unit costs
Cookie Delight Company has two divisions: Plain Cookies and Decorated Cookies. Lars Linden is the manager of Plain Cookies Division and Theresa Davis is the manager of Decorated Cookies Division. Company president Marie Strauss wants to develop a transfer pricing system that will instill goal
The president of Charlottetown Inc. has given the managers of the company's three decentralized divisions (O'Leary, Alberton, and Summerside) the authority to decide whether to sell externally or internally at a transfer price the division managers determine. Market conditions are such that
Tobias & Barfield LLC has three revenue departments: litigation (Lit.), family practice (FP), and legal consulting (LC).In addition, the company has two support departments, administration and EDP.Administration costs are allocated to the three revenue departments on the basis of number of
Eekaydo Inc. is organized on a divisional basis with considerable vertical integration. Mary Sue Oehlke is the new controller of the CarryOn! Division of Eekaydo.CarryOn! Division makes a variety of leather products, including a portfolio. Product sales have been steady, and the marketing
Rowling Inc. is a decentralized company, and each investment center has its own sales force and production facilities. Top management uses return on investment (income divided by assets) for performance evaluation.Potter Division has just been awarded a contract for a product that uses a component
Des Moines Industries consists of eight divisions that are evaluated as profit centers. All transfers between divisions are made at market price.I-O-WoW, a division of Des Moines, sells approximately 20 percent of its output externally. The remaining 80 percent of I-O-WoW's output is transferred to
APAs are determined in advance of the time in which they are used. Discuss problems that may be generated in a recessionary business climate for companies that have preapproved APAs.
How can a company evaluate whether it is effectively managing its costs?
What is a control system? What purpose does a control system serve in an organization?
Why does a cost management system necessarily have both a short-term and long-term focus?
Why is it not possible simply to take a cost management system "off the shelf "?
How does the choice of organizational form influence the design of a firm's cost management system?
What information could be generated by a cost management system that would help an organization manage its core competencies?
How could an organization's culture be used as a control mechanism?
How does a product's life cycle stage influence the nature of information required to successfully manage costs of that product?
In the present highly competitive environment, why has cost management risen to such a high level of concern whereas price management has declined in importance?
What is CAM-I, and why is it organized?
A few years after graduation, Ibrahim and four of his friends from college organized an engineering consulting business called 5Q. All five individuals had earned degrees in engineering fields and were anxious to pool their expertise and work together in a successful business venture. Even though
Following are activities that are components of a management control system in a production department. For each item listed, discuss whether it is a detector, assessor, effector, or communications network:a. Comparing actual costs to budgeted costs and calculating cost variancesb. Reporting
As a financial analyst, you have just been handed the 2010 financial report of Firm A, a large, global pharmaceutical company.Firm A competes in both traditional pharmaceutical products and in evolving biotechnology products. The following data (in billions) on Firm A and the pharmaceutical
Following are descriptions of three businesses. For each, assume that you are the CEO. Identify the most critical information you would need to manage the strategic decisions of that business.a. Private hospital that competes on the basis of delivering high-quality services to an upscale
Write a paper that compares and contrasts the corporate, general partnership, limited partnership, LLP, and LLC forms of business.At a minimum, discuss issues related to formation, capital generation, managerial authority and responsibility, taxation, ownership liability, and implications for
Many firms now engage in some form of B2B (business-to-business) Internet-based commerce. A specific type is B2B buy-side, which is Internet technology that allows firms to solicit bids on inputs that firms require to support production, sales, and administration. Interested and qualified vendors
Prepare an oral presentation discussing how accounting information can (a) help and (b) hinder an organization's progress toward its mission and objectives. Be sure to differentiate between the effects of what you perceive as "traditional" versus "nontraditional" accounting information.
In recent years, many firms have been forced to restate the earnings that they previously reported in their public financial reports. A number of these restatements have been linked to attempts by top management to manipulate the reported accounting information for the purpose of achieving higher
The use of stock options to compensate executives has become much more common in recent years. The increased use of options to compensate executives is based on efforts of boards of directors to align the interests of managers and stockholders. Prior to the implementation of FAS 123R, firms would
Susan Cheng is the CFO of Automotive Solutions, a small company that makes specialized lighting equipment for the car industry. Because of intensified competition from foreign companies, Automotive Solutions has experienced extreme price pressure for its products. In response to this pressure, top
Star International manufactures after-market parts for lawn mowers and recreational all-terrain vehicles (ATVs). Because of the growth in the ATV market, sales of Star International's products have grown at double-digit rates over the past five years and the firm's information systems no longer
In many organizations, the operating budget is the primary control tool. The use of a budget to control activities is more appropriate in some circumstances than in others, and always a key criterion in evaluating the efficacy of a control is whether that control is helping to implement the firm's
You are the product manager at a silicone chip manufacturer. One of your products is a commodity chip that the electronics industry widely uses in cell phones, printers, digital cameras, and computers.As product manager, you have full profit responsibility for the commodity chip.The commodity chip
In 1993, Procter & Gamble (P&G) management tried to control costs by eliminating many of its brands' coupons while increasing print advertising. Only a miniscule portion of the hundreds of billions of coupons distributed annually by P&G were ever redeemed by customers. Eliminating coupons allowed
Companies sometimes experience difficult financial times -often so drastic that bankruptcy is declared.If a firm does not invest sufficient resources in its growth, then at some point it will experience diminishing revenues as its product revenues decline. Alternatively, if a firm invests too
Ohio Steel produces steel products for a variety of customers. One division of the company is the Garage Door Division, created in the late 1940s. Since that time, this division's principal products have been galvanized steel components used in garage door installations. The division has been
After graduating last year from an Ivy League university, Joe Tyler was hired as a stock analyst. Wanting to make his mark on the industry, Tyler issued a scathing report on a major discount department store retailer, Smart-Mart. The basis of his attack was a comparative analysis between Smart-Mart
In August 2007, Heelys, a Texas-based maker of wheeled shoes, reported quarterly profits that beat the street estimates by three cents per share. Upon receiving the news, the market price of Heelys dropped 48 percent. Why? Although the profit reported for the current quarter was better than the
Laura Thompson, newly appointed controller of Allied Networking Services Inc. (ANSI), a rapidly growing company, has just been asked to serve as lead facilitator of a team charged with designing a cost management system (CMS) at ANSI. Also serving on the team are Tom Weiss, company president; Susan
The value of an oil and gas company is tied to two fundamental facts. The first is the amount of oil and gas the company is presently producing. This amount, along with unit prices, determines the revenue and cash inflow that the company generates. The second circumstance is the level of oil and
Through its three sets of elements (motivational, informational, and reporting), a CMS focuses the attention of a given decision maker on the data and information that are crucial to that decision maker's responsibilities in the organization. However, the nature and scope of information generated
New England Bottling was founded in the late 1800s and was owned by the same family until 1960 when the firm went public.Throughout its life as a public firm, the company has been continuously profitable and recorded slow, but steady, growth. Historically, the company has maintained a steady focus
How does the cost control system interact with the overall cost management system?
Why does the general control model begin with planning activities?
At what points in time is cost control for any specific organizational activity exercised? Why are these points of cost control important?
What factors can cause costs to change? Which of these factors are subject to cost containment and which are not? What creates the difference in controllability?
Differentiate between committed and discretionary costs. Could a cost be considered discretionary by one firm and committed by another? If so, discuss and give an example. If not, discuss why not.
Why is it often difficult to measure the output of activities funded by discretionary costs?
Define the terms efficiency and effectiveness and distinguish one from the other. Why is measuring the efficiency of discretionary costs often difficult? Explain how the effectiveness of discretionary cost activities can be measured.
What types of discretionary costs are subject to control as engineered costs? Provide several examples.
Why do firms hold cash balances? Why do some firms hold larger cash balances than other firms?

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