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cost management strategic
Cost Management Strategies For Business Decisions 1st International Edition Marc Wouters, Michael W. Maher, Frank H. Selto, Ronald W. Hilton - Solutions
Under what conditions are the results from using the direct method of allocation the same as those from the step method? Why?
(Appendix 12) What argument(s) could be given in support of the reciprocal method as the preferred method for allocating the costs of service departments?
Explain how cost allocation in an organization could be both a technical and a political exercise.
One critic of cost allocation noted, 'You can avoid the problem of arbitrary cost allocations by simply not allocating any higher-level resource service costs to lower-level uses of resources.' Prepare a memo outlining the costs and benefits of this approach.
If support service cost allocations are arbitrary and potentially misleading, should we assume that managers are foolish for using information about which services to provide based on allocated service costs?
Consider the following conversation between a self-proclaimed cost allocation expert and Jack, the manager of a pub. Expert: Joe, you said you put in these crisps because some people ask for them, but do you realize what this rack of crisps is costing you? Jack: It's not going to cost! It's going
Respond to this comment: 'Outsourcing is based on a market economy and, therefore, is the most efficient way to obtain a service.'
Three students share a house. Having better things to do than clean the house, they hire someone to come in and clean once each week. How should they share the costs of the housekeeper? One simple solution is to share the cost equally. Suppose that one student's bedroom is twice as large as each of
What criterion should be used to determine the order of allocation from support service departments when using the step method? Explain why.
What are the similarities and differences of allocating service costs for the direct method and the step method (and the reciprocal method, if studied)?
What are four broad categories of common costs and a typical basis for the allocation of costs in each category?
What are some management uses of information based on allocated costs?
How should a manager decide whether to allocate costs?
What are some benefits of cost allocation?
What are some costs of the cost allocation process itself?
What factors would you consider when deciding whether to outsource a particular support service?
Describe how an individual could manipulate reported earnings by misstating degrees of completion of closing WIP. Would it be easy to continue this manipulation for subsequent periods? Explain.
Explain how the concept of 'normal spoilage' could impede quality improvements in processes. If you do not distinguish between normal and abnormal spoilage, how would you identify 'unacceptable' spoilage?
When computing the cost per equivalent unit, the weighted-average method considersa. Current costs only.b. Current costs plus costs in opening WIP inventory.c. Current costs plus costs in closing WIP inventory.d. Current costs less costs in opening WIP inventory. [CPA adapted]
An error was made in computing the percentage of completion of the closing WIP inventory for the current year. The error resulted in assigning a lower percentage of completion to each component of the inventory than actually was the case. Assume that there was no opening inventory. What is the
(Appendix 11B) Under which of the following conditions will the first-in, first-out (FIFO) method of process costing produce the same cost of goods manufactured as the weighted-average method?a. When goods produced are homogeneous.
(Appendix 11B) A new member of the controller's staff in your company, a large producer of paper products, has just completed a report that urges the company to adopt the last-in, first-out (LIFO) method of process costing. The controller is concerned about the recommendation because the cost
Management of a large beer maker is trying to decide whether to install a job or a process costing system. The manufacturing vice president has stated that job costing gives the company the best control because it makes possible the assignment of costs to specific batches of beer. The controller,
Respond to this comment: 'Because joint cost allocations are arbitrary, there is no rational argument for allocating joint costs except for complying with financial or tax reporting requirements."
Top management has decided that your division, which operates a joint production process, no longer provides a competitive return and should be shut down and all assets liquidated. Prepare an outline of the costs and benefits (to all affected parties) of the decision to shut down and liquidate your
Assume that your company operates a joint production process that generates three main products and one by-product. If you allocate joint costs only for financial reporting, would you ever care whether you use the NRV or the physical measures method? Explain.
(continuation of 11.15) A year later, Bonzo Oil experienced a 25 per cent decline in the sales of its products and no longer accepts its full shipments of the refinery outputs. Accordingly, Bonzo seeks to renegotiate the agreement based on the joint-costing system prepared previously. Form small
Bonzo Oil Co. and Crusty Petroleum Inc. are entering a joint venture to construct and operate an oil refinery in a foreign country. This refinery will process crude oil in a joint process that results in multiple products, such as gasoline, jet fuel, asphalt and petrochemicals that require further
Company A and Company B are negotiating the construction and operation of a plant that will produce joint products X and Y and by-product W, which has a positive net realizable value. Company A will use all of product X and operate the plant. Company B claims that it needs only 80 per cent of
(Appendix 11C) How is operation costing similar to, and different from, both job costing and process costing?
(Appendix 11B) If costs change from one period to another, why do costs that are transferred out of one department under FIFO costing include units with two different costs?
How are spoilage costs similar to under-applied overhead?
A manufacturing company has records of its current activity in WIP inventory and its closing WIP inventory; however, the record of its opening inventory has been lost. What data are needed to compute the opening inventory? Express your answer in equation form.
Why are equivalent units computed for process costing?
Why are joint costs irrelevant in the sell-or-process-further decision? What costs are important?
What is the condition under which an item should be treated as a by-product rather than as a joint product?
When might a physical measures method for allocation be preferred?
Why might some express a preference for the net realizable value method of joint-cost allocation over the physical measures method?
What are the steps to follow to make decisions about producing products from joint processes?
What are the similarities and differences between joint costs and indirect costs?
How do joint products, intermediate products and final products differ?
What is the nature of a joint production process?
(Appendix 10) In general, how would you expect a manufacturing company's statement of financial position at any particular date to be different under absorption and variable costing?
(Appendix 10) Explain how making more products than can be sold in a period can increase the organization's operating income. Is this a sustainable tactic to increase operating income? Would this happen in a service company, or is it an issue only in manufacturing companies? Explain.
Motion picture contracts often offer some participants residual profits, which are shares of profits computed after all costs of production have been covered. Sometimes blockbuster movies never pay residual profits because they do not fully recover their costs, which could include upfront payments
A government contractor had a contract with NASA to build a space shuttle. Under this contract, all costs of development and construction are to be reimbursed and the contractor is to be guaranteed a specific profit. At the same time, the contractor had a fixed-fee contract with the US Air Force to
How might job-order costing for a homebuilder be similar to and differ from that used by a consulting firm?
Your manager tries to persuade you that all of the overhead variance should be charged to Cost of sales. This is appealing to you since you have hundreds of jobs and many overhead accounts to reconcile, and this is the least fun part of your job. Why should you consider this argument with caution?
A co-worker states, 'I don't know why we spent so much money on that new job-costing system. I can do everything we need on a simple spreadsheet. If the CFO had listened to me, we could have saved a lot of money.' Would it have been desirable to follow your co-worker's advice? Why or why not?
Interview the manager of a campus print shop or a print shop in the local area about how the company bids on prospective jobs. Does it use cost information from former jobs similar to prospective ones, for example? Does it have a specialist in cost estimation to project costs of prospective jobs?
Interview the manager of a construction company (for example, a company that does house construction, remodelling, landscaping, or street or highway construction) about how it bids on prospective jobs. Does it use cost information from former jobs similar to prospective ones, for example? Does it
An employee of Doughties Foods overstated inventories to make periodic profits higher. Using the basic cost-flow model, explain how overstating inventories could increase profits. If the employee did this a second and a third time, use the basic cost-flow model to show what the effect would be. How
Would a dentist, an architect, a landscaper and a lawyer use job-order costing or process costing? Explain.
(Appendix 10) Do throughput, variable and absorption costing result in significantly different income measures in a JIT setting? Why?
(Appendix 10) When inventory increases, is absorption costing or variable costing income higher? Why?
(Appendix 10) Timing is the key in distinguishing between absorption, variable and throughput costing. Explain this statement.
Explain the benefits of using a predetermined overhead rate instead of an actual overhead rate.
Why is the use of direct labour as a cost driver for manufacturing overhead declining?
Describe several ways in which job-order costing can be misused.
Does it matter how the overhead variance is disposed? Explain.
How can overhead be over- or under-applied?
Explain how to measure the costs of a product using normal costing.
What is different about work in progress, finished goods and cost of sales?
Describe the basic cost-flow model as an algebraic equation.
What are the distinguishing features of the following three product-costing methods: (a) job- order costing, (b) process costing, and (c) operation costing? Give an example of a product that would be accounted for by each method.
What is a product-costing system and what does it do?
How would the use of a just-in-time inventory system affect a company's budget plans?
Borealis Corporation has established a bonus plan for its employees. An employee receives a bonus if his or her subunit meets the cost levels specified in the annual budget plan. If the subunit's costs exceed the budget, its employees earn no bonus. What problems might arise with this bonus plan?
Briefly describe three issues that create special challenges for multinational firms in preparing their budgets.
Surveying the accounts payable records, a clerk in the controller's office noted that expenses appeared to rise significantly within a month of the close of the budget period. The organization did not have a seasonal product or service to explain this behaviour. Can you suggest an explanation?
List the steps you would go through in developing a budget to meet your college expenses.
If a company prepares budgeted income statements and balance sheets, why is a cash budget necessary?
A budget is also a legal limitation on expenditures of governmental agencies. If governmental employees are asked about their agencies' needs for the coming fiscal period, what types of biases are they likely to incorporate in their estimates? Why?
Give three examples of how the City of Nice could use a budget for planning purposes.
The chief executive officer of Home Workout Equipment Corporation remarked to a colleague, 'I don't understand why other companies waste so much time in the budgeting process. I set our company goals, and everyone strives to meet them. What's wrong with that approach?' Comment on the executive's
for a service station. The service station provides automotive maintenance services in addition to selling fuel and related products.
Draw a flowchart similar to the one in Exhibit
(Appendix 9) Explain the differences in the basic philosophies underlying the JIT and EOQ approaches to inventory management.
Explain the concept of zero-base budgeting.
How can an organization help to reduce the problems caused by budgetary slack?
Define the term budgetary slack and briefly describe a problem it can cause.
9.9 Discuss the importance of predictions and assumptions in the budgeting process. What is the purpose of a financial planning model? Briefly describe how such a model is constructed.
Describe the role of a budget director.
What is the purpose of a budget manual?
What is the danger of relying entirely on middle-management estimates of sales, costs, and other data used in budget planning?
Give an example of the effect of general economic trends on sales forecasting in the airline industry.
Use an example to explain how a budget could be used to allocate resources in a university.
What is meant by the term operational budgets? List three operational budgets that a hospital would prepare.
What are the relationships among organization goals, strategic plans and a master budget for the coming period?
You are a member of a strategic planning team that is considering a decision, the success of which depends on your major competitor's actions. Your colleague suggests that the best legal way to learn about a competitor's future actions is to hire away one of the competitor's key employees. What do
Consider both sides of this argument. Side 1: Portraying all the possible combinations of different future external events can become hopelessly complex. Imagine the size of a decision tree that has 15 future events with three different levels each. Because reality can be even more complex than
Of course depreciation is a source of cash flow. There it is right on your NPV analysis. Explain.
Explain how ABC and NPV analyses can be used together to evaluate an investment.
Expected NPV analysis does not model the risk of investments directly. Discuss how sensitivity and scenario analyses model investment risk. Some experts argue that these analyses are better for modelling risk than adding a higher risk premium to the discount rate for riskier projects. Explain why
Shade Tree Roasters is planning an expansion to central Europe, but the chapter does not discuss contingency plans beyond terminating the investment if a major competitor enters the market. Individually or with a small group, develop a plan C that Shade Tree Roasters might implement if market
The chapter describes how Shade Tree Roasters have included social causes in their strategic plans. Do you think this is a good business practice? Explain.
Sometimes investments with a positive NPV have a negative impact on earnings. For example, investing in certain types of research and development could result in a large expense at the time of investment with the benefits coming years later. Suppose an executive rejects all investments that
A medium-size retailer of upscale retail goods is considering outsourcing its data-processing, human resources, billing, and legal activities. Prepare a list of the benefits and costs of these considerations.
CEO: 'It's all well and good for you to say that I should disregard sunk costs when I consider whether to sell this unprofitable operation. After we report lower-than-expected profits, you won't have to answer the angry questions from shareholders and analysts because our share price has dropped or
Respond to this observation in the context of investment decisions: Estimating future cash flows is a nightmare compared to measuring the cost of capital.
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