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business
cost management strategic

Cost Management Strategies For Business Decisions 3rd Edition Michael W. Maher, Frank Selto Ronald W. Hilton - Solutions

18.38 Potomac General Hospital serves the metropolitan Washington, D.C., area. The hospital is a nonprofit organization supported by patient billings, county and state funds, and private donations. An organiza- tion chart and cost information for August follow.Requireda. Prepare a set of
18.37 American Traditions, Inc., manufactures antique reproduction furniture. The need for a widely based manufacturing and distribution system has led to a highly decentralized management structure. Each division manager is responsible for producing and distributing corporate products in one of
18.36 Phoenix Medical Equipment Company manufactures a variety of equipment used in hospitals. The com- pany operates in a very price-competitive industry, so it has little control over the price of its products. It must meet the market price. To do so, the firm must keep production costs in check
18.35 The following partial organization chart pertains to the Nantucket Hotel and Resort, a division of Seaside Resorts, Inc. Top management has specified that the hotel is a profit center. because the hotel's managmement does not have the authority to make significant investment decisions.Each of
18.34 Refer to the data in the preceding exercise for Tribeca Construction Associates. The company has two divisions, real estate and construction. The divisions' total assets, current liabilities, and before-tax oper- ating income for the most recent year follow: Division Real estate
18.33 Tribeca Construction Associates, a real estate developer and building contractor in Manhattan, has two sources of long-term capital: debt and equity. Tribeca's cost of issuing debt is the after-tax cost of the interest payments on the debt, considering the fact that the interest payments are
18.32 Alameda Division of California Metals Corporation just started operations. It purchased depreciable assets costing $2 million and having an expected life of four years, after which the assets can be sal- vaged for $400,000. In addition, the division has $2 million in assets that are not
18.31 Select one of the following companies (or any company of your choosing), and use the Internet to explore its most recent annual report. American Airlines (www.americanair.com) Deere and Company (www.deere.com) Firestone Tire & Rubber (www.firestone.com) IBM (www.ibm.com) Required Pizza Hut
18.30 The following data are available for the two divisions of North American Products, Inc. Division operating profit. Division investment The cost of capital for the company is 20 percent. Required East Division West Division $ 35.000 $195,000 100,000 750,000a. As a group, determine which
18.29 The Cleveland Division manager in the preceding exercise has the option to lease the asset on a year-to-year lease for $74,000 per year. All depreciation and other tax benefits would accrue to the lessor. Requireda. What is the division ROI if it leases the asset?b. c. What is the division's
18.28 Midwest Company's Cleveland Division manager is considering the acquisition of a new asset that will increase the division's profit. The division already earns $390,000 on assets of $1.3 million. The com- pany's cost of capital is 20 percent. The new investment has a cost of $225,000 and will
18.27 Rosito Company manufactures clothing in Buenos Aires, Argentina. The company's outerwear division is considering the acquisition of a new asset that will cost 360,000 pesos and have a cash flow of 140,000 pesos per year for each of the five years of its life. Depreciation is computed on a
18.26 As a group, prepare a report to the class regarding how a responsibility accounting system should handle each of the following scenarios:a. Department A manufactures a component, which Department B then uses. Department A recently experienced a machine breakdown that held up production of the
18.25 The following data pertain to the Cape Cod Inn for the month of August. The inn's organization chart shows that the food and beverage department has the following subunits: banquets and catering, restau- rants, and kitchen. Banquets and catering Restaurants.. Kitchen staff wages. Food Paper
18.24 Read "7-Eleven. Amid Pressures. Makes Big Bets." The Wall Street Journal, April 25, 2002. by Ann Zimmerman. Required How will 7-Eleven's investment likely impact the company's ROI? Explain.
18.23 For each of the following organizational subunits, indicate the type of responsibility center that is most appropriate.a. A movie theater in a company that operates a chain of theaters.b. A radio station owned by a large broadcasting network. C. The claims department in an insurance
18.22 Why does ROI or residual income typically rise across time in a division? What undesirable behavioral implica- tions could this phenomenon have?
18.21 Bleak Prospects, Inc., found that its market share was slip- ping. Bleak encouraged division managers to maximize ROI and make decisions consistent with that goal. Nonetheless, frequent customer complaints resulted in lost business. Moreover, Bleak depended on an established product line and
18.20 Distinguish between the following measures of invested capital and briefly explain when each should be used: (1) total assets, (2) total productive assets, and (3) total assets less current liabilities.
18.19 What is the chief disadvantage of ROI as an investment- center performance measure? How does the residual- income measure eliminate this disadvantage?
18.18 Management of division A is evaluated based on residual Ai income measures. The division can either rent or buy a certain asset. Might the performance evaluation tech-nique have an impact on the rent-or-buy decision? Why or why not?
18.17 Explain how the manager of the automobile division of an insurance company could improve her division's ROI.
18.16 Explain why distinguishing between investment centers and their managers is important in performance evaluation.
18.15 Central management of Adler, Inc., evaluated divisional performance using residual income (RI) measures. The division managers were ranked according to the RI in each division. All division managers with residual income in the upper half of the ranking received a bonus. The bonus amount was
18.14 "Performance reports based on controllability are impos- sible. Nobody really controls anything in an organiza- tion!" Do you agree or disagree? Explain your answer.
18.13 Under what circumstances is it appropriate to change Outback Outfitters' Sydney plant from a profit center to an investment center?
18.12 Describe an alternative to using ROI, residual income, or EVA to measure investment-center performance.
18.11 Define the term economic value added (EVA). How does it differ from residual income?
18.10 Why do some companies use gross book value instead of net book value to measure a division's invested capital?
18.9 Create an example showing the calculation of residual income. What information is used in computing residual income that is not used in computing ROI?
18.8 Under what conditions does the use of ROI measures inhibit a division manager's goal-congruent decision making?
18.7 The production department manager has just received a responsibility report showing a substantial unfavorable variance for overtime premium. The manager objects to the inclusion of this variance because the acceptance of a large rush order by the sales department caused the over- time. To whom
18.6 What are the advantages of using an ROI-type measure rather than a division's profit as a performance evaluation technique?
18.5 Define and give examples of the following terms: cost cen ter, discretionary cost center, revenue center, profit center and investment center
18.4 Suppose you overheard this comment. "This whole prob- success?
18.3 Accounting is supposed to provide a neutral, relevant, and objective measure of performance. Why would problems arise when applying accounting measures in the context of performance evaluation? lem of measuring performance for segment managers using accounting numbers is so much hogwash. We
18.2 Could the type of budget items for which some responsi- bility centers are accountable differ? That is, might some responsibility centers be responsible only for costs, some only for revenues, and some for both? Give examples.
18.1 Why is goal congruence important to an organization's
17.68 "I just don't understand these financial statements at all!" exclaimed Elmo Knapp. Knapp explained that he had turned over management of Racketeer, Inc., a division of American Recreation Equipment. Inc... to his son. Otto, the previous month. Racketeer, Inc., manufactures tennis rackets. "I
17.67 Techno Arcade, Inc. manufactures video game machines. Market saturation and technological innova- tions have caused pricing pressures that have resulted in declining profits. To stem the slide in profits until new products can be introduced, top management has turned its attention to both
17.66 The Lexington plant of AccuTime. Inc. manufactures three styles of clock radio. The basic model (B) targets the teenage market. The standard model (S) is popular with college students. AccuTime's newest product, the deluxe model (D). is designed for home and office use. For the most recent
17.65 Savannah Machine Tool Company has an automated production process, and production activity is quantified in terms of machine hours. It uses a standard-costing system. The annual static budget for 20x6 called for 6,000 units to be produced, requiring 30,000 machine hours. The standard-overhead
17.64 South Bend Chemical Company manufactures two products. Florimene and Glyoxide, used in the plas- tics industry. The company prepares its budget on the basis of standard costs. The following data are for August: Florimene Glyoxide Actual results: Direct material. Direct labor Variable
17.63 Refer to your solution for Problem 17.61 regarding Calumet Carpet Company. Required Prepare a sales variance-chart similar to Exhibit 17-18 to summarize the sales variance analysis for Calumet Carpet Company.
17.62 Refer to your solution to the preceding problem for Calumet Carpet Company. Required Write a memo to the company president that summarizes and comments on the sales variance analysis.
17.61 Calumet Carpet Company makes three grades of indoor-outdoor carpets. Sales volume for the annual budget is determined by estimating the total market volume for indoor-outdoor carpet and then applying the company's prior year market share, adjusted for planned changes due to company programs
17.60 Catskill Airlines plans its budget and subsequently evaluates sales performance based on passenger miles. A passenger mile is one paying passenger flying one mile. For this month, the company estimated that its contribution margin would amount to 20 cents per passenger mile and that 40
17.59 The following information has been prepared by Alexis Wells, a member of the cost-management staff of Conundrum Corporation, a manufacturer of puzzles. CONUNDRUM CORPORATION Income Statement For the Year Ended December 31, 20x0 (dollar amounts in thousands) Product CF-11 Product MT-8 Total
17.58 Scrooge & Zilch is a law firm with partners and staff members. Each billable hour of partner time has a $275 budgeted price and $130 budgeted variable cost. Each billable hour of staff time has a budgeted price of $65 and budgeted variable cost of $35. This month, the partnership budget
17.57 Redwood Company developed its overhead application rate from the annual budget, which is based on an expected total output of 720,000 units requiring 3,600,000 machine hours. The company is able to schedule production uniformly throughout the year. A total of 66,000 units requiring 315,000
17.56 Corona, Inc., manufactures a special fabric used in space suits. Corona's actual activity for the past month follows: Material purchased Material used. Direct labor Total manufacturing overhead.. Production The company's standard costs are detailed as follows: Direct material, 20 meters at $
17.55 Scholastic Software. Inc.. distributes educational software packages used in the public schools nationwide. Mark Fletcher, president of Scholastic Software, was looking forward to seeing the per- formance reports for November because he knew the company's sales for the month had exceeded
17.54 Bo Vonderweidt is the production manager of the Cincinnati Plant, a division of the large corporation, Plantimum, Inc. He has complained several times to the corporate office that the cost reports used to evaluate his plant are misleading. Vonderweidt states, "I know how to get good quality
17.53 The following information is provided to assist you in evaluating the performance of the production operations of Ulysses Company: Standard costs per unit: Direct material Direct labor Variable overhead Master production budget: Direct material Direct labor Manufacturing overhead Actual
17.52 Countrytime Studios is a recording studio in Nashville. The studio budgets and applies overhead costs on the basis of production time. Its controller anticipates 10,000 hours of production time to be available during the year. The following overhead amounts have been budgeted for the year.
17.51 Four Corners Insurance Company insures clients in Colorado, New Mexico, Arizona, and Utah. The company uses a flexible overhead budget for its application-processing department. The firm offers five types of policies. The company processed the following number of insurance applications dur-
17.50 Lake Huron Metal Stamping, Inc., shows the following overhead information for the current period: Standard variable-overhead rate per direct-labor hour Standard direct-labor hours allowed for actual production... Actual direct-labor hours used Actual overhead incurred. Budgeted fixed
17.49 Alberta Apparel Company, located in Calgary, uses a standard-costing system. The firm estimates that it will operate its manufacturing facilities at 800.000 machine hours for the year. The estimate for total budgeted overhead is $2,000,000. The standard variable-overhead rate is estimated to
17.48 Churchill and Blair, Ltd., manufactures a special type of brass fitting in its plant in London, England. The company prepares its budgets on the basis of standard costs. A monthly responsibility report shows the differences between budgeted and actual costs. Variances are analyzed and
17.47 Heartstrings Greeting Cards, Inc., reported a $50 unfavorable spending variance for variable overhead and a $500 unfavorable budget variance for fixed overhead. The flexible budget had $32,100 variable overhead based on 10,700 direct labor hours; only 10.600 hours were worked. Total actual
17.46 Piedmont Condiments, Inc., makes bulk artificial seasonings for use in processed foods. A seasoning was budgeted to sell in 21-liter drums at a price of $48 per drum. The company expected to sell 150,000 drums. Budgeted variable costs are $10 per drum. During the year. Piedmont Condiments
17.45 One aspect of sales-variance analysis involves helping management gain insight into the company's market share. Select one of the following companies (or any company you choose) and use the Internet to gather information about that company's share of a particular market. You also might need
17.44 Cerritos Company manufactures valves in its plant outside Rio de Janeiro, Brazil. For the most recent year, the company budgeted sales of 20,000 units of its sole product, assuming that the company would have 20 percent of 100,000 units sold in a particular market. The actual results were
17.43 Woods Corporation sells two models of golf gloves. The budgeted per-unit price is $10.95 for Standard and $24.95 for Ultra. The budget called for sales of 400,000 Standards and 180,000 Ultras during the current year. Actual results showed sales of 300,000 Standards, with a price of $11.29 per
17.42 Sand 'n Surf Beach Wear, Inc., manufactures and sells beach T-shirts. The business is very competitive. The budget for last year called for sales of 200,000 units at $9 each. However, as the summer season approached, management realized that the company could not sell 200,000 units at the $9
17.41 During the current period. Plattsburg Pipe Company paid $38,000 for 30,000 units of material, all of which was immediately put into process. During the period, 14,800 units of output were produced, and 14.500 units were sold. Three hundred units remain in finished-goods inventory. Each unit
17.40 Refer to the data for Lackawanna Ladder Company in the preceding exercise. If the company were oper- ating in a just-in-time environment and charging its standard costs directly to Cost of Goods Sold (at standard cost), show the flow of costs through the T-accounts required to adjust Cost of
17.39 Lackawanna Ladder Company acquired 50,000 units of direct material for $70,000 last year. The stan- dard price paid for the material was $1.30 per unit. During last year, 45,000 units of material were used in the production process. Materials are entered into production at the beginning of
17.38 Choose a city or state in the United States (or a Canadian city or province), and use the Internet to explore the annual budget for the governmental unit you selected. For example, you could check out the annual budget for Los Angeles at www.losangeles.com. Requireda. Select three items in
17.37 Refer to Koala Camp Gear's activity-based flexible budget in Exhibit 17-12. Suppose that the com- pany's activity in February is described as follows: Requireda. Machine hours Production runs Engineering design specs Direct material (sq. meters).. Determine the flexible budgeted cost for each
17.36 Fayetteville Financial originates mortgage loans for residential housing. The company charges a service fee for processing loan applications that is set twice a year based on the cost of processing a loan appli- cation. For the first half of this year, Fayetteville Financial estimated that it
17.35 You recently received the following note from the production supervisor of the company where you serve as controller. "I don't understand these crazy variable-overhead efficiency variances. My employ- ees are very careful in their use of electricity and manufacturing supplies, and we use very
17.34 Refer to the data in Exercise 17.32 for Neptune Glassware Company, Required Draw graphs similar to those in Exhibit 17-7 (variable overhead) and Exhibit 17-9 (fixed overhead) to depict the overhead variances.
17.33 Refer to the data in the preceding exercise for Neptune Glassware Company. Required Use diagrams similar to those in Exhibits 17-6 and 17-8 to compute the variable-overhead spending and efficiency variances and the fixed-overhead budget and volume variances.
17.32 Neptune Glassware Company had the following actual results for April: Actual variable overhead Actual fixed overhead. Actual direct labor...... Actual output.. $320,000 $97,000 50,000 hours 20,000 units The company has the following standards and flexible-budget data. Standard
17.31 Read "On Factory Floors. Top Workers Hide Secrets to Success." The Wall Street Journal, July 1, 2002. pp. A1, A10, by Timothy Aeppel. Required As a group, discuss the phenomenon described in the article. Why does it occur? What can be done to mitigate against this behavior? Is this behavior
17.30 Adirondack Community Hospital's controller estimates that the hospital uses 30 kilowatt-hours of elec tricity per patient-day, and that the electric rate will be $.10 per kilowatt-hour. The hospital also pays a fixed monthly charge of $950 to the electric utility to rent emergency backup
17.29 (Appendix C) How could a CPA firm use a sales-mix variance to analyze its revenue?
17.28 (Appendix C) A company sells three products that must be purchased in a single package. Does comput- ing a sales-mix variance provide any benefit under these circumstances?
17.27 (Appendix C) The marketing manager of a company noted. "We had a favorable revenue budget variance of $391,000, yet company profit went up by only $98,000. Some part of the organization has dropped the ball; let's find out where the problem is and straighten it out." Comment on this remark.
17.26 What is the conceptual problem of applying fixed- manufacturing overhead as a product cost?
17.25 Does the fixed-overhead volume variance represent a difference in the cash outflows for the company when compared to budgeted cash outflows?
17.24 Describe a common but misleading interpretation of the fixed-overhead volume variance. Why is this interpreta- tion misleading?
17.23 Bodin Company's only variable-overhead cost is elec- tricity. Does an unfavorable variable-overhead spending variance imply that the company paid more than the anticipated rate per kilowatt hour?
17.22 flexible budgeting for each of the following organiza- tions: an insurance company, an express delivery service. a restaurant, and a state tax-collection agency. Budgets for government units are usually prepared one year in advance of the budget period. Expenditures are limited to the
17.21 Give one example of a plausible activity base to use in
17.20 How has computer-integrated-manufacturing (CIM) technology affected overhead application?
17.19 How does the concept of flexible budgeting reinforce the notion that employees should be held responsible only for what they can control or heavily influence?
17.18 Why are flexible overhead budgets based on an activity measure such as machine hours or direct-labor hours?
17.17 "I don't understand why you accountants want to prepare a budget for a period that is already over. We know the actual results by then-all that flexible budgeting does is increase the controller's staff and add to our overhead." Comment on this remark.
17.16 (Appendix C) If the sales-volume variance is zero, is there any reason to compute a sales mix variance?
17.15 (Appendix C) What information does the computation of a market-size variance provide?
17.14 (Appendix C) Why is there no efficiency variance for revenue?
17.13 (Appendix C) Into what two variances is a revenue sales- volume variance decomposed? What is the purpose of computing these two variances?
17.12 (Appendix B) Briefly describe the procedure known as backflush costing.
17.10 Show, using T-accounts, how manufacturing overhead is added to Work-in-Process Inventory when standard cost- ing is used.
17.9 Distinguish between the control purpose and the product- costing purpose of standard costing and flexible budgeting.
17.6 What is the fixed-overhead budget variance? 17.7 Why are fixed-overhead costs sometimes called capacity- producing costs?
17.5 Distinguish between the interpretations of the direct-labor and variable-overhead efficiency variances.
17.3 What is the interpretation of the variable-overhead spend- ing variance?

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