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

A company permits its decentralized units to “lease” space to one another. Uptown Division has leased some of its idle warehouse space to Downtown Division for $60 per square foot per month. Recently, Uptown obtained a new five-year contract, which will increase its production sufficiently so
Division A offers its product to outside markets for $30. It incurs variable costs of $11 per unit and fixed costs of $75,000 per month based on monthly production of 4,000 units. Division B can acquire the product from an alternate supplier for $31 per unit or from Division A for $30 plus $2 per
Seattle Transit Ltd. operates a local mass transit system. The transit authority is a state governmental agency. It has an agreement with the state government to provide rides to senior citizens for 50 cents per trip. The government will reimburse Seattle Transit for the “cost” of each trip
Carmen Seville and Don Turco jointly own Bright Green Temp Services (BGTS). Carmen owns 60 percent and Don owns 40 percent. The company provides temporary clerical services at a rate of $40 per hour. During the past year, its clients used 14,000 hours of temporary services.Big City Developers
Trans Atlantic Metals has two operating divisions. Its forging operation in Finland forges raw metal, cuts it, and then ships it to the United States where the company’s Gear Division uses the metal to produce finished gears. Operating expenses amount to $10 million in Finland and $30 million in
Refer to the data in Exercise 15–16. Suppose that Government Division will charge the client interested in implementing an activity-based costing system by the hour based on cost plus a fixed fee, where the cost is primarily the consultant’s hourly pay. Assume also that Government Division
Leapin’ Larry’s Pre-Owned Cars has two divisions, Operations and Financing. Operations is responsible for selling Larry’s inventory as quickly as possible and purchasing cars for future sale. Financing Division takes loan applications and packages loans into pools and sells them in the
Perth Corporation has two operating divisions, a casino and a hotel. The two divisions meet the requirements for segment disclosures. Before transactions between the two divisions are considered, revenues and costs are as follows:The casino and the hotel have a joint marketing arrangement by which
Athena Company has two divisions. Spartan Division, which has an investment base of $8,400,000, produces and sells 450,000 units of a product at a market price of $28 per unit. Its variable costs total $8 per unit. The division also charges each unit $14 of fixed costs based on a capacity of
Refer to the data in Problem 15-26. Division managers are evaluated using residual income using a 15 percent cost of capital.Requireda. What is the residual income for Spartan without the transfer to Trojan?b. What is Spartan’s residual income if it transfers 100,000 units to Trojan at $16
Amazon Beverages produces and bottles a line of soft drinks using exotic fruits from Latin America and Asia. The manufacturing process entails mixing and adding juices and coloring ingredients at the bottling plant, which is a part of Mixing Division. The finished product is packaged in a
Skane Shipping Ltd. (SSL) operates a fleet of container ships in international trade between Sweden and Singapore. All of the shipping income (that is, that related to SSL’s ships) is deemed to be earned in Sweden. SSL also owns a dock facility in Singapore that services SSL’s fleet. Income
Valencia Products is a decentralized organization that evaluates divisional management based on measures of divisional contribution margin. Consumer Audio (CA) Division and Auto Electronics (AE) Division both sell audio equipment. CA focuses on home and personal audio equipment;AE focuses on
Cochise Corporation’s Southern Division is operating at capacity. It has been asked by Northern Division to supply it a thermal switch, which Southern sells to its regular customers for $60 each.Northern, which is operating at 70 percent capacity, is willing to pay $40 each for the switch.
Western States Supply, Inc. (WSS), consists of three divisions—California, Northwest, and Southwest—that operate as if they were independent companies. Each division has its own sales force and production facilities. Each division manager is responsible for sales, cost of operations,
Gage Corporation has two operating divisions in a semiautonomous organizational structure. Adams Division, located in the United States, produces a specialized electrical component that is an input to Bute Division, located in the south of England. Adams uses idle capacity to produce the component,
Midwest Entertainment has four operating divisions: Bus Charters, Lodging, Concerts, and Ticket Services. Each division is a separate segment for financial reporting purposes. Revenues and costs related to outside transactions were as follows for the past year (dollars in thousands):Bus Charters
Mathes Corporation manufactures paper products. The company operates a landfill, which it uses to dispose of nonhazardous trash. The trash is hauled from the two nearby manufacturing facilities in trucks that can carry up to 5 tons of trash in a load. The landfill operation requires certain
Refer to the data in Problem 15-35. At the end of the year, the following data are available on actual operations at the landfill.Volume of trash . . . . . . . . . . . . . . . . . . . . . . . . . 1,250 tons (400 loads)Preparation costs (per load) . . . . . . . . . . . . . . . . . . . . . . . . . .
CHS is a large multidivision firm. One division, Health Services, is well known inside CHS for it efficient information technology (IT). A smaller division, Optics, has approached Health Services with a proposal that it provide IT support in the form of machine time for some of Optics’s billing
Refer to Problem 15-37. Suppose Health Services could sell time on the machine to other companies in the area on a per-hour basis. Further, it can sell all the time available for $30 per hour.Requireda. What is the optimal transfer price rule Health Services should use to charge Optics?b. Suppose
“We can’t drop our prices below $210 per hundred pounds,” exclaimed Greg Berman, manager of Forwarders, a division of Custom Freight Systems. “Our margins are already razor thin. Our costs just won’t allow us to go any lower. Corporate rewards our division based on our profitability and I
Assume that all of the information is the same as in Integrative Case 15-39, but instead of receiving only one outside bid, Logistics receives two. The new bid is from World Services for $195 per hundred pounds. World has offered to use Air Cargo for transporting packages. Air Cargo will charge
What are the advantages of divisional income as a business unit performance measure? What are the disadvantages?
How is divisional income like income computed for the firm? How is it different?
What are the advantages of using an ROI-type measure rather than the absolute value of division profits as a performance evaluation technique for business units?
Give an example in which the use of ROI measures might lead the manager to make a decision that is not in the firm’s interests.
How does residual income differ from ROI?
How does EVA differ from residual income?
What impact does the use of gross book value or net book value in the investment base have on the computation of ROI?
What are the dangers of using only business unit measures to evaluate the performance of business unit managers?
A company prepares the master budget by taking each division manager’s estimate of revenues and costs for the coming period and entering the data into the budget without adjustment. At the end of the year, division managers are given a bonus if their actual division profit exceeds the budgeted
If every division manager maximizes divisional income, we will maximize firm income.Therefore, divisional income is the best performance measure. Comment.
What problems might there be if the same methods used to compute firm income are used to compute divisional income? Does your answer depend on the type of business a fi rm is in?
The chapter identified some problems with ROI-type measures and suggested that residual income reduces some of them. Why do you think that ROI is a more common performance measure in practice than residual income?
Failure to invest in projects is not a problem when you use ROI. If there is a good project, corporate headquarters will just tell the division manager to invest. What are the difficulties with this view?
How would you respond to the following comment? “Residual income and economic value added are identical.”
I think that EVA is the best performance measure. I am going to recommend that we evaluate all managers, of plants, divisions, subsidiaries, up to the chief executive officer (CEO), using it. Do you think this statement is appropriate? Explain.
Management of Division A is evaluated based on residual income measures. The division can either rent or buy a certain asset. Might the performance evaluation technique have an impact on the rent-or-buy decision? Why or why not? Will your answer change if EVA is used?
Every one of our company’s divisions has a return on investment in excess of our cost of capital. Our company must be a blockbuster. Comment on this statement.
Residual income solves some of the problems with ROI, but because it is an absolute number, it is difficult to compare divisions. We should use residual income divided by assets and then we would have the best of both measures. Do you agree with this statement?
Eastern Merchants shows the following information for its two divisions for year 1:RequiredCompute divisional operating income for the two divisions. Ignore taxes. How well have these divisionsperformed?
Refer to Exercise 14-19. The results for year 2 have just been posted:RequiredCompute divisional operating income for the two divisions. How well have these divisionsperformed?
TL Division of Giant Bank has assets of $14.4 billion. During the past year, the division had profits of $1.8 billion. Giant Bank has a cost of capital of 8 percent. Ignore taxes.Requireda. Compute the divisional ROI.b. Compute the divisional RI.
A division is considering the acquisition of a new asset that will cost $720,000 and have a cash flow of $252,000 per year for each of the four years of its life. Depreciation is computed on a straight-line basis with no salvage value. Ignore taxes.Requireda. What is the ROI for each year of the
The following data are available for two divisions of Solomons Company:The cost of capital for the company is 10 percent. Ignore taxes.Requireda. If Solomons measures performance using ROI, which division had the better performance?b. If Solomons measures performance using economic value added,
Ocean Division currently earns $780,000 and has divisional assets of $3.9 million. The division manager is considering the acquisition of a new asset that will add to profit. The investment has a cost of $675,000 and will have a yearly cash flow of $168,000. The asset will be depreciated using the
Refer to the data in Exercise 14-24. The division manager learns that he has the option to lease the asset on a year-to-year lease for $148,000 per year. All depreciation and other tax benefits would accrue to the lessor. What is the divisional ROI if the asset is leased?
Refer to the information in Exercises 14-24 and 14-25.a. What is the division’s residual income before considering the project?b. What is the division’s residual income if the asset is purchased?c. What is the division’s residual income if the asset is leased?
Noonan Division has total assets (net of accumulated depreciation) of $2,200,000 at the beginning of year 1. One of the assets is a machine that has a net book value of $200,000. Expected divisional income in year 1 is $330,000 including $28,000 in income generated by the machine (after
Refer to the facts in Exercise 14-27, but assume that Noonan has been leasing the machine for $40,000 annually. Assume also that the machine generates income of $28,000 annually after the lease payment. Noonan can cancel the lease on the machine without penalty at any time.Requireda. Noonan
The Caribbean Division of Mega-Entertainment Corporation just started operations. It purchased depreciable assets costing $30 million and having a four-year expected life, after which the assets can be salvaged for $6 million. In addition, the division has $30 million in assets that are not
Refer to the data in Exercise 14-29. Assume that the division uses beginning-of-year asset values in the denominator for computing ROI.Requireda. Compute ROI, using net book value.b. Compute ROI, using gross book value.c. If you worked Exercise 14-29, compare those results with those in this
Refer to the information in Exercise 14-29. In computing ROI, this division uses end-of-year asset values. Assume that all cash flows increase 10 percent at the end of each year. This has the following effect on the assets' replacement cost and annual cash flows:Depreciation is as follows:Note that
Upper Division of Lower Company acquired an asset with a cost of $600,000 and a four-year life. The cash flows from the asset, considering the effects of inflation, were scheduled as follows:Year Cash Flow1 . . . . . . . . . . . . . . . . . . . . . . . . . . . $225,0002 . . . . . . . .
Oscar Clemente is the manager of Forbes Division of Pitt, Inc., a manufacturer of biotech products. Forbes Division, which has $4 million in assets, manufactures a special testing device. At the beginning of the current year, Forbes invested $5 million in automated equipment for test machine
Oscar Clemente (Problem 14–33) is still assessing the problem of whether to acquire LSI’s assembly machine. He learns that the new machine could be acquired next year, but if he waits until then, it will cost 15 percent more. The salvage value would still be $500,000. Other costs or revenue
Refer to the facts in Problem 14–33. Assume that Pitt’s performance measurement and bonus plans are based on residual income instead of ROI. Pitt uses a cost of capital of 12 percent in computing residual income.Requireda. What is Forbes Division’s residual income if Oscar does not acquire
Refer to the facts in Problem 14–35. Assume that Pitt’s performance measurement and bonus plans are based on residual income instead of ROI. Pitt uses a cost of capital of 12 percent in computing residual income.Requireda. When would Oscar want to purchase the new machine if he waits until
Division managers at Asher Company are granted a wide range of decision authority. With the exception of managing cash, which is done at corporate headquarters, divisions are responsible for sales, pricing, production, costs of operations, and management of accounts receivable, inventories,
Pharmaceutical firms, oil and gas companies, and other ventures inevitably incur costs on unsuccessful investments in new projects (e.g., new drugs or new wells). For oil and gas firms, a debate continues over whether those costs should be written off as period expense or capitalized as part of the
Several years ago, Seville Company acquired Salvador Components. Prior to the acquisition, Salvador manufactured and sold automotive components products to third-party customers. Since becoming a division of Seville, Salvador has manufactured components only for products made by
House Station, Inc., is a nationwide hardware and furnishings chain. The manager of the House Station Store in Portland is evaluated using ROI. House Station headquarters requires an ROI of 10 percent of assets. For the coming year, the manager estimates revenues will be $2,340,000, cost of goods
Suwon Pharmaceuticals invests heavily in research and development (R&D), although it must currently treat its R&D expenditures as expenses for financial accounting purposes. To encourage investment in R&D, Suwon evaluates its division managers using EVA. The company adjusts accounting income for
Biddle Company uses EVA to evaluate the performance of division managers. For the WallaceDivision, after-tax divisional income was $400,000 in year 3.The company adjusts the after-tax income for advertising expenses. First, it adds the annual advertising expenses back to after-tax divisional
I thought evaluating performance would be easier than this. I have three vice presidents, operating the same business in three different countries. I need to be able to compare them in order to prepare compensation recommendations to the board. The problem is that there are so many variables that
The following exchange occurred just after the finance staff at Diversified Electronics rejected a capital investment proposal.David Parker (Product Development) : I just don't understand why you rejected my proposal. We can expect to make $230,000 on it before tax.Shannon West (Finance) : David,
What are the advantages of the contribution margin format based on variable costing compared to the traditional format based on full absorption costing?
The flexible budget for costs is computed by multiplying average total cost at the master budget activity level by the activity at some other level. Is this true or false? Why or why not?
A flexible budget is:a. Appropriate for control of factory overhead but not for control of direct materials and direct labor.b. Appropriate for control of direct materials and direct labor but not for control of factory overhead.c. Not appropriate when costs and expenses are affected by
What is the basic difference between a master budget and a flexible budget?a. A flexible budget considers only variable costs; a master budget considers all costs.b. A master budget is based on a predicted level of activity; a flexible budget is based on the actual level of activity.c. A master
Standards and budgets are the same thing. True or false?
Actual direct materials costs differ from the master budget amount. What are the three primary reasons for the difference?
Fixed cost variances are computed differently from the variances for variable costs. Why?
What is the advantage of preparing the flexible budget? The period is over and the actual results are known. Is this just extra work for the staff?
What is the link between flexible budgeting and management control?
Actual revenues are greater than budgeted for December, so our revenue variance is favorable. Give an example of when this would be “good” news and when it could be “bad” news.
Give two reasons why dividing production cost variances into price and efficiency variances is useful for management control.
A rush order for a major customer has led to considerable overtime and an unfavorable variance for production costs. Is this variance the responsibility of the marketing manager, the production manager, both, neither, or someone else?
My firm has a wage contract with the union. Therefore, we do not need to compute a labor price variance; it will always be zero. Comment.
The production volume variance indicates whether a company has spent more or less than called for in the budget. True or false?
The production volume variance should be charged to the production manager. Do you agree? Why or why not?
The master budget at Windsor, Inc., last period called for sales of 90,000 units at $36 each. The costs were estimated to be $15 variable per unit and $900,000 fixed. During the period, actual production and actual sales were 92,000 units. The selling price was $36.45 per unit. Variable costs were
Refer to the data in Exercise 16-16. Prepare a sales activity variance analysis like the one in Exhibit16.4.
Refer to the data in Exercises 16-16 and 16-17. Prepare a profit variance analysis like the one in Exhibit16.5.
Flexible BudgetRequiredGiven the data shown in the graph, what are the following:a. Budgeted fixed cost per period?b. Budgeted variable cost per unit?c. Value of F (that is, the flexible budget for an activity level of 8,000 units)?d. Flexible budget cost amount if the actual activity had been
Fill in the missing amounts for (a) and (b) in the followinggraph.
Label (a) and (b) in the graph and give the number of units sold foreach.
Data-2-Go manufactures and sells flash drives. The company produces only when it receives orders and, therefore, has no inventories. The following information is available for the current month:RequiredPrepare a flexible budget forData-2-Go.
Refer to the data in Exercise 16-22. Prepare a sales activity variance analysis for Data-2-Go like the one in Exhibit16.4.
Use the information from Exercise 16-22 to prepare a profit variance analysis for Data-2-Go like the one in Exhibit16.5.
Wallace Manufacturing produces engine parts for auto manufacturers. Recently, one of the major auto firms rejected a load of manifolds as being defective. Wallace’s purchasing department had ordered from a new supplier with a much lower price. Unfortunately, the quality was much lower as well.
Davidson Communications produces mobile phones. In Building 404, the phones are assembled and then sent to Building 405 where they are inspected, packaged, and shipped to the customer. On Thursday, the production supervisor in Building 405 asked the Building 404 manager to stop production. One of
The standard direct labor cost per unit for a company was $7 (= $28 per hour Ã— 0.25 hours per unit). During the period, actual direct labor costs amounted to $45,000, 1,600 labor-hours were worked, and 5,600 units were produced.RequiredCompute the direct labor price and efficiency variances for
The following data reflect the current month’s activity for Sills, Inc.:Actual total direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $546,000Actual hours worked . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,000Standard labor-hours
The records of Simon Company show the following for February:Standard labor-hours allowed per unit of output . . . . . . . . . . . . . 1.5Standard variable overhead rate perstandard direct labor-hour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30Good units produced . . . . . . . .
Information on Thurmster Corporation’s direct materials costs follows:Actual quantities of direct materials used . . . . . . . . . . . 7,500Actual costs of direct materials used. . . . . . . . . . . . . $98,550Standard price per unit of direct materials. . . . . . . . . . $12.60Flexible budget
Information on Canyon Chemical’s direct materials costs follows:Quantities of chemical Y purchased and used . . . . . 28,800 gallonsActual cost of chemical Y used . . . . . . . . . . . . . . . $640,000Standard price per gallon of chemical Y . . . . . . . . . . $22.50Standard quantity of chemical
Information on Carney Company's fixed overhead costs follows:Overhead applied . . . . . . . . . . . . $360,000Actual overhead . . . . . . . . . . . . . 385,500Budgeted overhead. . . . . . . . . . . 369,000RequiredWhat are the fixed overhead price and production volume variances? (Refer to Exhibit
Refer to the data in Exercise 16-32. Management would like to see results reported graphically.RequiredPrepare a graph like that shown in Exhibit16.14.

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