Home / essay help / business plan writing services / a _________ forecast predicts the future cash inflows and outflows in future periods.

a _________ forecast predicts the future cash inflows and outflows in future periods.

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©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Appendix 851

Appendix Capital Investment Decisions: An Overview

Solutions to Review Questions

A-1. The timing is important because cash received earlier has a greater economic value than cash received later. There is an opportunity cost and risk involved by having funds tied up in capital investment projects. Determining the amount is important in estimating the future cash flows. The timing and amount together are used to determine the economic value of the project.

A-2. The time value of money merely states that cash received earlier has a greater value than cash received later because the dollar received today can be earning interest between now and later.

A-3. Revenues represent the accounting measure of inflows to the firm. Revenues might be recognized when, before, or after cash is received. Revenues are recognized based on generally accepted accounting principles.

A-4. Expenses represent the accounting measure of outflows from the firm. Expenses are matched with revenues and, therefore, might be recognized when, before, or after cash is spent.

A-5. Depreciation is an accounting measure of the use of a capital asset and is not a cash flow. The tax shield on depreciation is the savings in taxes associated with the depreciation expense recorded for tax purposes and is a cash flow.

©The McGraw-Hill Companies, Inc., 2017 852 Fundamentals of Cost Accounting

Solutions to Critical Analysis and Discussion Questions

A-6. To determine which, if either, project should be approved, the net present value of each project should be determined. Once the timing and amount of cash flows has been determined, they should be discounted to the present by determining and applying appropriate discount rates. Any project with a positive net present value could be justified and the project with the greater net present value should be approved under normal circumstances.

A-7. The four types of cash flows are:

(1) investment cash flows, (2) periodic operating flows,

(3) depreciation tax shield, and

(4) disinvestment flows. We consider them separately because each type of flow results from different activities and gives rise to different tax consequences.

A-8. No. Depreciation is not a cash flow item. However, the tax shield which arises from depreciation deductions for tax purposes is a cash flow item and is included.

A-9. The total amount depreciated over the life of the machine (and, therefore, often the tax savings associated with that depreciation) is the same regardless of the depreciation method used. However, for capital investment decisions, the timing of the savings is important because it affects the net present value of the depreciation tax shield.

A-10. Although the working capital might be assumed to be returned to the firm at the end of the project, the firm does not have the use of those funds during that time. Therefore, the present value of the working capital returned is less than the present value of the working capital contributed.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Appendix 853

A-11. The net present value analysis for a new plant considered in this appendix considers the cash flows from the entire life of the plant and compares the present value of those cash flows to the initial investment in the plant. Accounting measures of income use a measure of plant cost (depreciation), which is an allocation of the plant cost to the individual years. This allocation often does not depend on the actual usage of the plant. Therefore, plants that are built with the intention of growing output to future demand will have insufficient cash inflows in the first year to cover the depreciation cost. Accounting income, therefore will be low (or negative)..

©The McGraw-Hill Companies, Inc., 2017 854 Fundamentals of Cost Accounting

Solutions to Exercises

A-12. (20 min.) Present Value of Cash Flows: Star City.

a. At 20% Time Year 0 1 2 3 4 5

Net cash flow ………. ($200,000 ) $20,000 $50,000 $80,000 $80,000 $100,000 PV factor (20%) …… 1.000 .833 .694 .579 .482 .402 Present values …….. ($200,000 ) $16,660 $34,700 $46,320 $38,560 $ 40,200 Net PV of project …. ($ 23,560 )

b. At 12% Time Year 0 1 2 3 4 5

Net cash flow ………. ($200,000 ) $20,000 $50,000 $80,000 $80,000 $100,000 PV factor (12%) …… 1.000 .893 .797 .712 .636 .567 Present values …….. ($200,000 ) $17,860 $39,850 $56,960 $50,880 $ 56,700 Net PV of project …. $ 22,250

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Appendix 855

A-13. (25 min.) Present Value of Cash Flows: Rush Corporation.

a.

Year

Depreciation Tax Shield

at 40% PV Factor

(8%) Present

Value 1 $120,000 $ 48,000 .926 $ 44,448 2 210,000 84,000 .857 71,988 3 90,000 36,000 .794 28,584 4 90,000 36,000 .735 26,460 5 90,000 36,000 .681 24,516 $600,000 $240,000 $195,996

The present value of the tax shield is $195,996.

b.

Year

Depreciation Tax Shield

at 40% PV Factor

(8%) Present

Value 1 $120,000 $ 48,000 .926 $ 44,448 2 120,000 48,000 .857 41,136 3 120,000 48,000 .794 38,112 4 120,000 48,000 .735 35,280 5 120,000 48,000 .681 32,688 $600,000 $240,000 $191,664

The present value of the tax shield is $191,664. Note the total depreciation taken is the same under straight-line and accelerated, but the timing under accelerated methods increase the present value of the tax shield over the straight-line method.

In part b, we can also use the annuity table (Exhibit A.9), because the annual cash flows are equal. The present value is $191,664 (= $48,000 x 3.993).

©The McGraw-Hill Companies, Inc., 2017 856 Fundamentals of Cost Accounting

A-14. (30 min.) Present Value Analysis in Nonprofit Organizations: Johnson Research Organization.

Year 0 1 2 3 4 5 6 7

Investment flows …………….. $(6,000,000 ) Periodic operating flows: Annual cash savings ……. $1,400,000 $1,400,000 $1,400,000 $1,400,000 $1,400,000 $1,400,000 $1,400,000 Additional cash outflow … (200,000) (200,000) (200,000) (200,000) (200,000) (200,000) (200,000) Disinvestment flows …….. 400,000 Net annual cash flow …… $(6,000,000 ) $1,200,000 $1,200,000 $1,200,000 $1,200,000 $1,200,000 $1,200,000 $1,600,000 PV factor 10% ……………. 1.000 .909 .826 .751 .683 .621 .564 .513 Present value …………….. $(6,000,000 ) $1,090,800 $ 991,200 $ 901,200 $ 819,600 $ 745,200 $ 676,800 $ 820,800 Net present value ……….. $45,600

Yes, the organization should buy the equipment. It is important to note, though, that the net present value is small relative to the investment and so the decision is sensitive to our estimates of the cash flows.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Appendix 857

Solutions to Problems

A-15. (35 min.) Compute Net Present Value; Compare to Accounting Income: Lucas Company.

a. Accounting income each year will be $500. The total over four years is $2,000.

For each year, accounting income is calculated as follows:

Cash flows …………………… (Cash revenues – cash expenses) $3,000 Depreciation ………………… ($10,000 ÷ 4 years) 2,500 Accounting income ……….. $ 500

b.

The present value of cash flows is (four years @ 10%):

($10,000) x 1.000 + ($3,000 x 3.170) = ($490).

c. The total accounting income is positive ($2,000) over the four years, but the net present value is negative (–$490). The difference arises, because accounting income does not consider the time value of money in depreciating the investment.

©The McGraw-Hill Companies, Inc., 2017 858 Fundamentals of Cost Accounting

A-16. (35 min.) Sensitivity Analysis in Capital Investment Decisions: Square Manufacturing.

The schedule of cash flows is ($000 omitted):

Year

Best Case Expected

Worst Case

0 ($9,000 ) ($9,000 ) ($9,000 ) 1 0 0 0 2 0 0 0 3 0 0 0 4 6,000 4,200 1,800 5 6,000 4,200 1,800 6 6,000 4,200 1,800 7 6,000 4,200 1,800

Net Present Value @ 14% $ 2,802 a ($ 738 )b ($5,460 )c

Note: In the following calculations, the present value factors are from Exhibit A.8. If you use Excel or a financial calculator, the net present values might differ slightly. a$2,802 = $(9,000) + ($6,000 x (0.592 + 0.519 + 0.456 + 0.400)) b$(738) = $(9,000) + ($4,200 x (0.592 + 0.519 + 0.456 + 0.400)) c$(5,460) = $(9,000) + ($1,800 x (0.592 + 0.519 + 0.456 + 0.400))

Under the expected scenario, the project has a negative net present value. Therefore, it would probably be rejected. However, under the best case, the project’s net present value is positive, which may make it suitable if there are additional reasons to believe this scenario is more likely or if the company is willing to take the risk on the project for other reasons.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Appendix 859

A-17. (40 min.) Compute Net Present Value: Dungan Corporation.

a. Equipment removal net of tax effects = $3,000 = $5,000 x (1 – 40%). b. Depreciation schedule:

Year

Depreciation

Tax Shield at 40%

Present Value Factor (16%)

Present Value

1 $ 40,000 $16,000 .862 $13,792 2 70,000 28,000 .743 20,804 3 30,000 12,000 .641 7,692 4 30,000 12,000 .552 6,624 5 30,000 12,000 .476 5,712

Totals $200,000 $80,000 $54,624

c. Forgone tax benefits: $4,000 = ($100,000 ÷ 10 years) x 40%

d. Gain from salvage of new equipment:

$36,000 = $60,000 x (1 – 40%) e. Tax benefit arising from loss on old equipment:

$24,000 = ($100,000 book value – $40,000 salvage value) x .40 tax rate

f. Differential cash flows (years 1 – 10): $19,800 = [($30,000 + $48,000) – ($25,000 + $20,000)] x (1 – 40%)

©The McGraw-Hill Companies, Inc., 2017 860 Fundamentals of Cost Accounting

A-17. (continued)

g. Year 0 1 2 3 4 5 6 7 8 9 10

Investment flows: Equipment cost …… $(200,000 ) Removal …………….. (3,000 ) Salvage of old

equipment ……….

40,000

Tax benefit—sale of old equipment

24,000

Periodic operating flows ……………….

$19,800

$19,800

$19,800

$19,800

$19,800

$19,800

$19,800

$19,800

$19,800

$19,800

Tax shield from depreciation: New equipment:

Year 1 …………….. 16,000 Year 2 …………….. 28,000 Years 3–5 ……….. 12,000 12,000 12,000 Old equipment

(forgone) ………..

(4,000 )

(4,000

)

(4,000

)

(4,000

)

(4,000

)

(4,000

)

(4,000

)

(4,000

)

(4,000

)

(4,000

)

Disinvestment: Proceeds of

disposal …………..

60,000

Tax on gain ………… (24,000 ) Total cash flows ……. $(139,000 ) $31,800 $43,800 $27,800 $27,800 $27,800 $15,800 $15,800 $15,800 $15,800 $51,800 PV factor at 16% …… .862 .743 .641 .552 .476 .410 .354 .305 .263 .227 Present values ……… $(139,000 ) $27,412 $32,543 $17,820 $15,346 $13,233 $ 6,478 $ 5,593 $4,819 $ 4,155 $11,759 Net present value ….. $ 158

SM-Ch01-5e.pdf

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 1 1

1 Cost Accounting: Information for Decision Making

Solutions to Review Questions

1-1. Among the goals of an organization, a central one is to create and increase value. Cost accounting systems are designed to provide information to decision makers in the organization with the information they need to accomplish this goal. Therefore, the designers of the cost accounting system need to understand how value is created in the organization in order to design systems for their particular organization.

1-2. Financial accounting is designed to provide information about the firm to external users. External users include investors, creditors, government authorities, regulators, customers, competitors, suppliers, labor unions, and so on. Cost accounting systems are designed to provide information to internal users (managers).

This difference is important, because it affects the design of the systems. Financial accounting systems are based on standards or rules. This allows the user to compare the results of different firms. Managerial accounting systems do not require rules. Each firm is free to develop managerial accounting systems that best serve the needs of the decision makers (managers).

1-3. B Providing cost information for financial reporting A Identifying the best store in a chain

C Determining which plant to use for production

1-4. The value chain is the set of activities that transforms raw resources into the goods and services end users purchase and consume. The supply chain includes the set of firms and individuals that sells goods and services to the firm. The distribution chain is the set of firms and individuals that buys and distributes goods and services from the firm.

©The McGraw-Hill Companies, Inc., 2017 2 Fundamentals of Cost Accounting

1-5. The customers of cost accounting are managers, from plant managers to the CEO.

1-6. Value-added activities are activities that customers perceive as adding utility to the goods or services they purchase. Nonvalue-added activities do not add value to the goods or services. By classifying costs this way, the cost accounting system can help the manager identify areas (processes) that can be improved, lowering costs and adding value to the organization.

1-7. Answers will vary, but should include some of the following:

Title

Major Responsibilities and Major Duties

Chief financial officer (CFO) ………  Manages entire finance and accounting function

Treasurer ………………………………..  Manages liquid assets  Conducts business with banks and other

financial institutions  Oversees public issues of stock and debt

Controller ………………………………..  Plans and designs information and incentive systems

Internal auditor ………………………..  Ensures compliance with laws, regulations, and

company policies and procedures  Provides consulting and auditing services within

the firm

Cost accountant ………………………  Records, measures, estimates, and analyzes costs

 Works with financial and operational manager to provide relevant information for decisions

1-8. No. Sarbanes-Oxley is a law and violations of it are legal issues. Codes of ethics are necessary to help accountants and managers identify situations that might develop into ethical conflicts, understand what they could do in these situations, and to learn what to do when they believe that an ethical violation has occurred.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 1 3

Solutions to Critical Analysis and Discussion Questions

1-9. We would not agree. The role of accountants is to help manage the organization. Part of that role is to report results. Another part is to design systems that assist other managers in making decisions to improve performance. This role requires that accountants understand how value is created in their organizations.

1-10. The calculation of cost depends on the decision being made. Therefore, the first question to ask is, “What decision (or decisions) are you trying to make?”

1-11. Costs that you could ask to be reimbursed might include the fuel, a share of the maintenance costs, “wear and tear,” or depreciation, and insurance. To avoid disagreements, it would be necessary to negotiate an agreement (even if only informally) between you and your friend considering all factors. For example, you might agree that she should pay for the gas and any other supplies (e.g., oil) needed on the trip.

If you are going along, you might change the agreement so that you split these costs. Alternatively, you might say that because you are going anyway, she can ride along for nothing.

1-12.

Although it is not the “job” of accounting to determine strategy, accounting provides important information to those who do determine strategy. If the cost accounting system provides inaccurate information, the firm may end up with an unintended strategy, because managers are making decisions based on faulty information.

1-13. Executive performance evaluation systems are designed for a specific company’s needs. The systems should be flexible to adapt to the circumstances that exist in that company. A common set of accounting principles would tend to reduce flexibility and usefulness of these systems. As long as all parties know the accounting basis used by the system, the exact rules can be designed in whatever manner the parties deem appropriate.

©The McGraw-Hill Companies, Inc., 2017 4 Fundamentals of Cost Accounting

1-14. Although not-for-profit organizations are not seeking to make a profit, they must remain financially viable to accomplish their missions. Cost accounting information can help managers of not-for-profit organizations by highlighting the costs of various activities, identifying sources of revenue, and measuring performance of managers. In terms of organizational survival, cost accounting information can be just as (or more) important for a not-for-profit as for a for-profit firm.

1-15. Airlines are characterized by the need to own a substantial amount of capacity costs. Managers at airlines require very sophisticated load management information that predicts the number of passengers flying on a particular route on a particular day. If they set a single price that would cover their costs given a certain number of passengers, they risk flying with empty seats. Once the plane takes off, they cannot sell the seat. Therefore, they need a flexible pricing system. Such a system requires detailed cost information about passengers and aircraft.

The costs are unlikely to be much different among passengers. The variable costs are relatively low (per passenger) and may include food and beverage, some baggage handling cost, some ticket processing costs, and, depending on the plane, a (very) small amount of fuel.

1-16. The cost accounting issues for Nabisco are the same as for Carmen’s Cookies in the sense that managers at Nabisco want the same kind of information as Carmen: what are the costs of cookies, who is performing the best, and so on. The cost accounting issues are different in the size and complexity of the operations at Nabisco compared to Carmen’s Cookies.

1-17. In decision-making, managers or supervisors may wish to take actions that they believe will increase the firm’s value that are difficult to justify given available information. Often, these situations arise when managers are using their intuition and their experience to identify new business opportunities and cannot point to data that support their views. For example, a marketing manager might view investment in a new advertising campaign as necessary for remaining competitive even though it appears to increase costs. Because the accountant does not have expertise in this area, she cannot verify the information the marketing manager is using.

In a few cases, however, a marketing manager may wish to pursue a project because of personal reasons (for example, because he was the champion of the product), and hopes to have an economic analysis to justify additional advertising support. In these situations, care must be taken to ascertain the economic merits of the plan, and, if the plan cannot be justified on economic grounds, the manager must make the case for the project on another basis.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 1 5

The final responsibility for the decision rests with the manager. Therefore, plans that cannot be justified on a cost analysis basis may still be adopted at the discretion of operating management. The controller should be clear that the project is justified on a basis other than (easily measured) costs.

In the control area, the accountant is charged with the responsibility of making certain that plans are executed in an optimal and efficient manner. In some cases this may be viewed as placing restrictions on management actions. Under these circumstances the marketing manager may view the accounting function as placing too great a constraint on him while the accountant may view the marketing manager as attempting to circumvent the rules.

1-18. This is a tricky question. The problem is that if each firm tries to minimize its own cost, some of the necessary processes might not be done satisfactorily. For example, if every firm decides not to hold inventory as a way to lower costs, customers might not be able to obtain products in a timely manner and look elsewhere. The goal is to increase value, not minimize costs.

1-19. The purpose of bonuses is to provide incentives to managers to “work harder” when the owner (or, for example, the CEO) cannot observe the manager’s efforts. As we will see, all performance incentive systems have the potential for abuse. However, eliminating them also eliminates the benefits of bonus plans. The firm needs to balance the costs of potential abuses with the benefits from better decision-making by managers.

1-20. The cost accountant provides information to decision makers in the firm. He or she needs to provide the best information possible, given the costs. As information technology improves, the cost of information falls and the quality of information the cost accountant can provide improves.

1-21. Studying cost accounting will most likely increase Carmen’s chances of success with her store. As illustrated in the chapter, she has a better idea of the costs of her business and the financial status of its different operations. Of course, it cannot guarantee success. A successful business depends on many things, including identifying the right products, efficient operations, and good marketing. Cost accounting helps managers make better decisions about these aspects, but cannot forecast trends or overcome bad managerial decision-making.

©The McGraw-Hill Companies, Inc., 2017 6 Fundamentals of Cost Accounting

1-22. There are two types of costs the airline or hotel incur with such upgrades. One type of cost results from the incremental resources that are a part of the upgraded service (perhaps a free meal on the airline or the costs of cleaning a larger room). These costs will be shown in the accounting records. In addition to these “direct” costs, there are “opportunity” costs. These costs arise when customers purchase a economy airline fare or smaller room in the hopes of an upgrade. If these customers would have purchased a first-class airfare or a more expensive room, this represents a lost opportunity. These opportunity costs will not be recorded in the accounting records.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 1 7

Solutions to Exercises

1-23. (10 Min.) Value Chain and Classification of Costs: Apple, Inc.

Cost Stage in the Value Chain Programmer costs for a new operating system. 4. Research & Development Costs to ship computers to customers. 6. Distribution Call center costs for support calls. 3. Customer Service Salaries for employees working on new product designs.

5. Design

Costs to purchase advertising in university stores. 1. Marketing Costs of memory chips to make computers. 2. Production

1-24. (5 Min.) Supply Chain and Supply Chain Costs: Coastal Cabinets. It is important that costs are minimized in the supply chain. Because it is cheaper for Coastal Cabinets to carry the inventory, the resolution should result in Coastal Cabinets carrying the inventory. You might suggest that the two firms share the inventory savings through price discounts or other contractual agreements.

1-25. (10 Min.) Accounting Systems: McDonald’s. Decision Maker System

a. Investor* ………………………… Financial (F) b. Marketing manager …………. Cost (C)

c. Competitor* ……………………. Financial (F)

d. Labor organization* …………. Financial (F) e. Advertising manager ……….. Cost (C)

*Note that all these decision makers might like information from the cost accounting system, but they would be unlikely to be given access to this information.

1-26. (10 Min.) Accounting Systems: Ford Motor Company. Answers will vary, but examples include the following.

Manager Example Decision

a. Plant manager ………………….. How to layout the plant. b. Purchasing manager …………. Which supplier to use.

c. Quality supervisor ……………… Where to focus quality improvement efforts.

d. Personnel manager …………… Where to recruit workers e. Maintenance supervisor ……. Whether to repair or replace a machine

©The McGraw-Hill Companies, Inc., 2017 8 Fundamentals of Cost Accounting

1-27. (10 min.) Cost Data for Managerial Purposes: Delta Airlines. a. Differential costs are costs that would change, which are the labor costs in this

situation. Other costs would presumably not be affected by the change in labor. Other issues include the quality and dependability of the new approach.

Differential costs next year are $0.60 (= $2.00 – $1.40) calculated as follows:

Labor Cost Old Method New Method Next year $2.00 $1.40 [= (1 – .30) x $2.00]

b. Management would use the information to help decide whether to use the new

method. Management would also want to know the effect of quality (lost bags, delays in delivering bags to the baggage claim, etc.).

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 1 9

1-28. (20 Min.) Cost Data for Managerial Purposes: Betty’s Fashions.

Considering the following costs as differential shows that closing the City Division will lower profits for the chain.

Betty’s Fashions, City Division Divisional Income Statement

Differential Revenues and Costs For the Year Ending January 31

Sales revenue …………………………………….. $ 8,600,000 Differentiala Costs Advertising ………………………………………. 350,000 Differentialb Cost of goods sold ……………………………. 4,300,000 Differentiala Divisional administrative salaries ………… 580,000 Differential Selling costs (sales commissions) ………. 1,160,000 Differentiala Rent ……………………………………………….. 1,470,000 Differential Share of corporate administration ……….. –0– Not differential Total costs ……………………………………… $ 7,860,000 Net differential gain before income tax ……. $ 740,000 Tax expense at 40% rate ……………………… 296,000 Differential

Net differential gain from store ……………….. $ 444,000

a These revenues and costs are differential if the sales (and the associated cost of sales) will be lost to the chain. If customers go to other stores in the chain when the City Division is closed, these revenues and costs will not be differential.

b If some of the advertising is “brand” advertising that benefits all stores, some of the advertising costs may not be differential.

©The McGraw-Hill Companies, Inc., 2017 10 Fundamentals of Cost Accounting

1-29. (20 Min.) Cost Data for Managerial Purposes: State University Business School.

Considering the following costs as differential shows that dropping the BBA degree will lower profits for the school.

State University Business School Degree Income Statement

Differential Revenues and Costs For the Academic Year Ending June 30

Revenue …………………………………………….. $ 6,000,000 Differentiala Costs Advertising – BBA program …………………. 225,000 Differentialb Faculty salaries ………………………………… 3,060,000 Differentiala Degree operating costs ……………………… 390,000 Differentiala Building maintenance ………………………… 555,000 Differentiala Classroom costs ……………………………….. 1,275,000 Differentiala Allocated school administration costs ….. –0– Not differential Total costs ……………………………………… $ 5,505,000 Net differential gain from BBA program ……. $ 495,000

a These revenues and costs are differential to the school, but might not be to the university if students will transfer to other programs and if the faculty and buildings will continue to be maintained by the university.

b If some of the advertising is “brand” advertising that benefits all programs, some of the advertising costs may not be differential.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 1 11

1-30. (20 Min.) Cost Data for Managerial Purposes: State University Business School.

a. The following differential analysis shows that the combined contribution of the BBA program will be positive.

State University Business School Degree Income Statement

Differential Revenues and Costs, BBA Programs For the Academic Year Ending June 30

Revenue …………………………………………… $ 6,000,000 x 2 $12,000,000 Costs Advertising – BBA program ……………….. 225,000 + (225,000 x 3) 900,000 Faculty salaries ………………………………. 3,060,000 x 2 6,120,000 Degree operating costs ……………………. 390,000 x 1.5 585,000 Building maintenance ………………………. unchanged 555,000 Classroom costs ……………………………… unchanged 1,275,000 Classroom rental ……………………………… given 300,000 Differential school administration costs .. given 30,000 Total costs ……………………………………. $9,765,000 Net gain from BBA programs ……………….. $ 2,235,000

b. The Dean should consider whether there are sufficient applicants with necessary qualifications. Similarly, the Dean should ensure that there is sufficient faculty to expand the program to this extent.

©The McGraw-Hill Companies, Inc., 2017 12 Fundamentals of Cost Accounting

1-31. (20 Min.) Cost Data for Managerial Purposes––Budgeting

1-32. Trends in Cost Accounting Answers will vary.

a. Activity-based costing might be used in the Design component to help designers identify designs that will lead to less costly production requirements.

b. Benchmarking might be used in Purchasing to ensure the firm is not paying too much for inputs.

c. Cost of quality might be used in Customer Service to monitor the costs associated with producing defective units.

d. Customer relationship management might be used in Marketing to identify profitable customers.

e. Lean accounting might be used in production to help identify and avoid waste.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 1 13

1-33. Trends in Cost Accounting

Title

Responsibility 5 CFO Signs off on financial statements. 3 Treasurer Determines where to invest cash balances. 4 Controller Maintains accounting records. 1 Internal auditor Ensures procurement rules are followed. 2 Cost accountant Evaluates costs of products.

1-34. (15 Min.) Ethics and Channel Stuffing: Continental Condiments. a. As a management accountant, Maria has a responsibility to perform her professional

duties with competence in accordance with relevant laws and regulations. Channel stuffing borders on illegal activity, especially if it is done to defraud investors by presenting results that are not achieved. As a professional, she must communicate both favorable and unfavorable information in an objective and fair manner. Thus, she cannot simply ignore the fact that the managers are engaging in this behavior.

b. Maria should first follow Continental’s established policy on the resolution of ethical conflict (assuming there is one!). If there isn’t an established policy Maria should confront the next higher level of management that she believes is not involved in the marketing scheme. This could be the Controller or the CFO. If the matter remains unresolved she should take the issue to the Audit Committee and the Board of Directors. Perhaps Maria should seek a confidential discussion with an objective advisor, such as her personal attorney. When all levels of internal review have been exhausted without satisfactory results, Maria should resign and submit an informative memorandum to the chairman of the Board of Directors.

©The McGraw-Hill Companies, Inc., 2017 14 Fundamentals of Cost Accounting

1-35. (15 Min.) Ethics and Cost Analysis: State University Business School. a. As a management accountant, Jon has a responsibility to perform his professional

duties with competence in accordance with relevant laws and regulations. Choosing a location in which the decision maker has a financial interest when a lower cost equivalent location is unethical and may be illegal. As a professional, he must communicate both favorable and unfavorable information in an objective and fair manner. Thus, he cannot simply ignore the fact that the dean is engaging in this behavior.

b. Jon should first follow the School’s (or University’s) established policy on the resolution of ethical conflict (assuming there is one!). If there isn’t an established policy Jon should confront the next higher level of management (the University CFO for example) that he believes is not involved in the decision. If the matter remains unresolved she should take the issue to the oversight board for the University (Regents or Trustees, for example).

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 1 15

Solutions to Problems

1-36. (15 Min.) Responsibility for Ethical Action: Giant Engineering. a. As a management accountant Dewi has a responsibility to perform her professional

duties with competence in accordance with relevant laws and regulations. Clearly, overbilling the federal government is a violation of the law. As such, Dewi might have both a legal and ethical responsibility to take some action. As a professional, she must communicate both favorable and unfavorable information in an objective and fair manner. Thus, she cannot simply ignore the fact that Giant is involved in illegal contracting activities.

b. The first possible course of action is to discuss the situation with the controller. This is an appropriate approach to the problem. Always take a problem to your immediate supervisor first. If the controller indicates that he or she is aware of the situation and that you should not worry about it, then take the matter up with your controller’s superior. Move up the layers of management until someone is concerned and will deal with the problem. She should also consult her personal attorney to learn her legal rights and responsibilities in this situation.

As for the second course of action, the proper authorities should be notified by someone in the company. The local newspaper, however, is not the proper authority. Dewi should discuss the matter with the Board of Directors only after exhausting possibilities of discussing the matter with internal management.

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1-37. (20 Min.) Cost Data for Managerial Purposes: Imperial Devices.

This problem demonstrates the ambiguity of cost-based contracting and, indeed, the measurement of “cost.” This problem can stimulate a lively discussion in class.

Recommended prices may range from the $324 suggested by the state government to the $522 charged by Imperial Devices. The key is to negotiate the cost-based price prior to the signing of the contract. Considerations that affect the base costs are reflected in the following options:

Options: A. Only the differential production costs could be considered as the cost basis.

B. The total cost per device for normal production of 60,000 devices could be used as the cost basis.

C. The total cost per device for production of 66,000 devices, excluding marketing costs, could be used as the cost basis.

D. The total cost per device for production of 66,000 devices, including marketing costs, could be used as the cost basis.

Costs

Unit Cost Options (One Unit = One Device)

A B C D

Materials (variable) ……. $75.00 $75.00 $75.00 $75.00 $75.00 Labor (variable) ………… 150.00 150.00 150.00 150.00 150.00 Supplies (variable) …….. 45.00 45.00 45.00 45.00 45.00 Indirect costs (fixed) ….. 2,700,000 N/A 45.00 a 40.91 b 40.91 Marketing (variable) …… 30.00 N/A 30.00 N/A 30.00 Administrative (fixed) …. 5,400,000 N/A 90.00 c 81.82 d 81.82 Per device cost basis … $270.00 $435.00 $392.73 $422.73 Per device price (Cost + 20%) …………..

$324.00

$522.00

$471.28

$507.28

a $45.00 = $2,700,000 ÷ 60,000 units. b $40.91 = $2,700,000 ÷ 66,000 units. c $90.00 = $5,400,000 ÷ 60,000 units. d $81.82 = $5,400,000 ÷ 66,000 units.

We believe the most justifiable options exclude marketing costs and reflect the potential production level of 66,000 devices. These are Options A and C. (As stockholders in Imperial Devices, we would prefer Option C.) Also, depending on the resolution of the term “cost,” we may want to consider whether the 20 percent markup in the next contract is sufficient.

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1-38. (20 Min.) Cost Data for Managerial Purposes: Marco and Jenna. a. Answers will vary. The $0.13 that Marco proposes would be the incremental costs of

the trip. The $0.56 rate used by the IRS includes depreciation on the car, some of which is likely to occur regardless of the miles driven.

b. If Jenna was not going to take the trip, then some of the “wear and tear” costs, for example for tires, would be avoided. Therefore, it would make sense to include these costs in the sharing. (Measuring these costs is more difficult.) However, as noted above, some of the costs in the IRS rate will be incurred regardless of the miles driven.

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1-39. (20 Min.) Cost Data for Managerial Purposes: T-Comm. This problem demonstrates the ambiguity in measuring “costs.”

South Division’s controller included the “per unit” fixed costs, which were calculated for allocation purposes under normal production volume, when he or she calculated the per unit cost of the additional production. The controller charged North Division on that basis, ignoring the differential costs as a basis for interdivision sales. Possible options available are as follows:

A. Use the full per unit cost for normal production of 2,400 units.

B. Use only differential costs as the cost basis. C. Use differential costs plus a share of fixed costs, based on actual production

volume (with North’s order) of 3,000 units.

Costs Unit Cost Options:

A B C Direct materials (variable) .. $ 200 a $ 200 $ 200 $ 200 Direct Labor (variable) ……. 96 b 96 96 96 Other variable costs ……….. 64 c 64 64 64 Fixed costs …………………… 2,016,000 840 d N/A 672 e Per unit cost ………………….. $ 1,200 $ 360 $ 1,032 Cost plus 15% ………………. 1,380 414 1,186.80 Total price (600 units) …….. $828,000 $248,400 $712,080

a $200 = $480,000 ÷ 2,400 units. b $96 = $230,400 ÷ 2,400 units. c $64 = $153,600 ÷ 2,400 units. d $840 = $2,016,000 ÷ 2,400 units. e $672 = $2,016,000 ÷ 3,000 units.

If fixed costs are not differential and South has no alternative uses of the excess capacity (between 3,000 units available capacity and 2,400 units used), then Option B is the most defensible. Options A and C overstate the differential cost of production which could inappropriately affect North Division’s decisions about buying internally or externally, or about pricing its product, among other decisions. (If option B is used and managers forget that there are fixed costs of production, then it is also possible that North Division’s pricing decision could be affected inappropriately.)

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1-40. (20 Min.) Cost Data for Managerial Purposes: Campus Package Delivery. a.

b. The decision to expand and offer the express service results in differential profits of

$9,700, so it is profitable to expand. Note that only differential costs and revenues figured in the decision. The manager’s salary did not change, so it did not affect the decision.

c. Managers need to consider whether the new service will have an effect affect on their current business (perhaps reducing demand).

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1-41. (20 Min.) Cost Data for Managerial Purposes: KC Services. a.

b. The decision to drop the lawn service results in a differential loss of $16,800 [=

($48,000) – ($64,800)], so it is not profitable to drop that service. Note that only differential costs and revenues figured in the decision. The manager’s salary did not change, so it did not affect the decision.

c. The manager should consider whether there are other, more profitable uses that the resources could be used for instead of lawn services.

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1-42. (20 Min.) Cost Data for Managerial Purposes: B-You a. The following differential costs would be incurred:

b. Since acceptance of the contract would result in a decrease of operating profits by

$1,426 (=$90,000 paid according to the contract – $91,426 in differential costs), it would seem that the contract should be rejected. Of course, as a practical matter the amount is so small that differential profit probably would not be the deciding factor. Errors in estimation alone could change the decision easily.

c. Other factors would include (1) whether this will enable the company to get into a new, profitable line of business; (2) what other opportunities the company has for expanding; and (3) whether the contract will provide for more revenues in the future. In short, the company must consider the long run as well as the first year’s results.

1-43. (20 Min.) Cost Data for Managerial Purposes: Tom’s Tax Services. a. The following differential costs would be incurred:

b. Since the addition of the customer would result in an increase of operating profits by $4,920 (=$75,000 in revenues from the store – $70,080 differential costs), Tom could offer to lower the fees by this amount and not lose money on the client.

c. Other factors would include (1) whether this will lead to demands by other clients for lower fees; (2) what other opportunities the company has for its tax professionals; and (3) whether the business is likely to expand in the future. In short, Tom must consider the long run as well as the first year’s results.

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1-44. (20 Min.) Cost Data for Managerial Purposes––Budgeting a.

b. The three items that we would investigate would be (a) utilities; (b) chocolate; and,

(c) eggs. These three have the largest difference between what we actually incurred and the budget. Even though we incurred less cost for the chocolate than expected, we would still investigate this to understand why. For example, if we are using a lower quality chocolate or less chocolate in the cookies than budgeted, this might eventually affect sales adversely.

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1-45. (20 Min.) Cost Data for Managerial Purposes––Budgeting a.

b. The three items that we would investigate would be (a) eggs; (b) chocolate; and, (c) other labor. These three have the largest difference between what we actually incurred and the budget. Even though we incurred less cost for the eggs than expected, we would still investigate this to understand why. For example, if we are using fewer eggs in the cookies than budgeted, this might affect their quality and, as a result, future sales adversely.

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1-46. (20 Min.) Cost Data for Managerial Purposes––Finding Unknowns:Quince Products.

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Solutions to Integrative Cases

1-47. (20 Min.) Identifying Unethical Action – Appendix a. We recommend that Accountant B be retained to help Quince Products with their

expansion plans. Accountant B has experience with small companies and growth. Although Accountant A has experience in the local area, the experience is with not- for-profit firms and, therefore, might not be particularly applicable. We would not retain Accountant C because he or she is willing to share information from another company’s experience. Therefore, he or she might be willing to divulge our information to another competitor.

b. Accountant C is violating the IMA’s code of ethics, specifically the portion of the code dealing with confidentiality. Accountant C could use general knowledge of expansion plans gained as part of his or her work, but, unless legally obligated to, cannot offer to share another company’s experience.

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1-48. (20 Min.) Cost Data for Managerial Purposes––Finding Unknowns

Formatted: Font: 12 pt

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1-49. (20 Min.) Identifying Unethical Actions (Appendix) Yes. This action would violate both the Integrity and Credibility Principles.

1-50. (20 Min.) Responsibility for Unethical Action a. We can understand, but not justify, what Charles did. He was under considerable

pressure in both his professional and personal life and he probably felt that he had no choice. The problem is that his behavior was unethical and illegal.

b. People in this situation should contact a personal attorney (not the company attorney) for advice. The next step would normally be to contact the most trustworthy member of the board of directors. If the board failed to take action, Charles could have used the IMA confidential call-in number or contacted the Securities and Exchange Commission.

Charles told us that he should have developed a sufficient financial reserve so he could have quit when his boss told him to manipulate the numbers. Also, he should have contacted the former CFO during the first few months after he took the CFO job.

c. Answers will vary. Here is what actually happened. The Securities and Exchange Commission and the U.S. Department of Justice investigated this fraud. Both Charles and his boss were brought up on criminal and civil charges. Both did jail time. Charles has had difficulty getting a good job. He says that prospective employers shy away from hiring him because he has to answer “yes” to the question on employment forms: “Have you ever been convicted of a felony?”

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SM-Ch02-5e.pdf

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2 Cost Concepts and Behavior

Solutions to Review Questions

2-1. Cost is a more general term that refers to a sacrifice of resources and may be either an opportunity cost or an outlay cost. An expense is an outlay cost charged against sales revenue in a particular accounting period and usually pertains only to external financial reports.

2-2. Product costs are those costs that are attributed to units of production, while period costs are all other costs and are attributed to time periods.

2-3. Outlay costs are those costs that represent a past, current, or future cash outlay. Opportunity cost is the value of what is given up by choosing a particular alternative.

2-4. Common examples include the value forgone because of lost sales by producing low quality products or substandard customer service. For another example, consider a firm operating at capacity. In this case, a sale to one customer precludes a sale to another customer.

2-5. Yes. The costs associated with goods sold in a period are not expected to result in future benefits. They provided sales revenue for the period in which the goods were sold; therefore, they are expensed for financial accounting purposes.

2-6. The costs associated with goods sold are a product cost for a manufacturing firm. They are the costs associated with the product and recorded in an inventory account until the product is sold.

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2-7. Both accounts represent the cost of the goods acquired from an outside supplier, which include all costs necessary to ready the goods for sale (in merchandising) or production (in manufacturing).

The merchandiser expenses these costs as the product is sold, as no additional costs are incurred. The manufacturer transforms the purchased materials into finished goods and charges these costs, along with conversion costs to production (work in process inventory). These costs are expensed when the finished goods are sold.

2-8. Direct materials: Materials in their raw or unconverted form, which become an integral

part of the finished product are considered direct materials. In some cases, materials are so immaterial in amount that they are considered part of overhead.

Direct labor: Costs associated with labor engaged in manufacturing activities. Sometimes this is considered as the labor that is actually responsible for converting the materials into finished product. Assembly workers, cutters, finishers and similar “hands on” personnel are classified as direct labor.

Manufacturing overhead:

All other costs directly related to product manufacture. These costs include the indirect labor and materials, costs related to the facilities and equipment required to carry out manufacturing operations, supervisory costs, and all other support activities.

2-9. Gross margin is the difference between revenue (sales) and cost of goods sold. Contribution margin is the difference between revenue (sales) and variable cost.

2-10. Contribution margin is likely to be more important, because it reflects better how profits will change with decisions.

2-11. Step costs change with volume in steps, such as when supervisors are added. Semivariable or mixed costs have elements of both fixed and variable costs. Utilities and maintenance are often mixed costs.

2-12. Total variable costs change in direct proportion to a change in volume (within the relevant range of activity). Total fixed costs do not change as volume changes (within the relevant range of activity).

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2-13. A value income statement typically uses a contribution margin framework, because the contribution margin framework is more useful for managerial decision-making. In addition, it splits out value-added and non value-added costs. Therefore, it differs in two ways from the gross margin income statement: classifying costs by behavior and highlighting value-added and non value-added costs. It differs from the contribution margin income statement by highlighting the value-added and non value-added costs.

2-14. A value income statement is useful to managers, because it provides information that is useful for them in identifying and eliminating non value-added activities.

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Solutions to Critical Analysis and Discussion Questions

2-15. The statement is not true. Materials can be direct or indirect. Indirect materials include items such as lubricating oil, gloves, paper supplies, and so on. Similarly, indirect labor includes plant supervision, maintenance workers, and others not directly associated with the production of the product.

2-16. No. Statements such as this almost always refer to the full cost per unit, which includes fixed and variable costs. Therefore, multiplying the cost per seat-mile by the number of miles is unlikely to give a useful estimate of flying one passenger. We should multiply the variable cost per mile by 1,980 miles to estimate the costs of flying a passenger from Detroit to Los Angeles.

2-17. Marketing and administrative costs are treated as period costs and expensed for financial accounting purposes in both manufacturing and merchandising organizations. However, for decision making or assessing product profitability, marketing and administrative costs that can be reasonably associated with the product (product- specific advertising, for example) are just as important as the manufacturing costs.

2-18. There is no “correct” answer to this allocation problem. Common allocation procedures would include: (1) splitting the costs equally (25% each), (2) dividing the costs by the miles driven and charging based on the miles each person rides, (3) charging the incremental costs of the passengers (almost nothing), assuming you were going to drive to Texas anyway.

2-19. The costs will not change. Your allocation in 2-18 was not “incorrect,” because the purpose of the allocation is not to determine incremental costs.

2-20. Answers will vary. The major cost categories include servers (mostly fixed), personnel (mostly fixed), and licensing costs (mostly variable).

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2-21. Answers will vary. The major cost categories include servers (mostly fixed), personnel (mostly fixed), and legal costs (mostly fixed). There are only small variable costs for Uber or Lyft. For the drivers, the costs of the vehicle and technology are mostly fixed. Vehicle operating expenses (fuel and maintenance) are mostly variable.

2-22. Direct material costs include the cost of supplies and medicine. One possible direct labor cost would be nursing staff assigned to the unit. Indirect costs include the costs of hospital administration, depreciation on the building, security costs, and so on.

2-23. Answers will vary. Common suggestions are number of students in each program, usage (cafeteria: meals; library: study rooms reserved; or career placement: interviews, for example), assuming usage is measured, or revenue (tuition dollars).

2-24. No, R&D costs are relevant for many decisions. For example, should a program of research be continued? Was a previous R&D project profitable? Should we change our process of approving R&D projects? R&D costs are expensed (currently) for financial reporting, but for managerial decision-making the accounting treatment is not relevant.

2-25. This question can create a good discussion of the different roles of financial and managerial accounting. An important issue is identifying the activities that are non value-added. These are almost certainly better known to the managers of the firm than to outsiders. These costs are also difficult to measure, meaning there are many different “reasonable” numbers that might be reported. Because managers have an interest in reporting favorable numbers (however favorable is defined), there is a potential for managerial bias in the reports.

A second reason is that most firms would be concerned about revealing potentially valuable competitive information.

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Solutions to Exercises

2-26. (15 min.) Basic Concepts. a. False. The statement refers to an expense. For example, R&D costs are incurred

in expectation of future benefits. b. False. Variable costs can be direct (direct materials) or indirect (lubricating oil for

machines that produce multiple products.) c. True. Each unit of a product has the same amount of direct material (same cost

per unit), but producing more units requires more material (and more cost).

2-27. (15 min.) Basic Concepts.

Cost Item Fixed (F)

Variable (V) Period (P) Product (M)

a. Depreciation on buildings for administrative staff offices .. F P b. Cafeteria costs for the factory …………………………………… F M c. Overtime pay for assembly workers …………………………… V M d. Transportation-in costs on materials purchased ………….. V M e. Salaries of top executives in the company ………………….. F P f. Sales commissions for sales personnel ……………………… V P g. Assembly line workers’ wages ………………………………….. V M h. Controller’s office rental …………………………………………… F P i. Administrative support for sales supervisors ……………….. F P j. Energy to run machines producing units of output in the

factory…………….. …………………………………………………….

V

M

2-28. (10 min.) Basic Concepts. a. Assembly line worker’s salary. …………………………………………………………… B b. Direct materials used in production process. ……………………………………….. P c. Property taxes on the factory. ……………………………………………………………. C d. Lubricating oil for plant machines. ……………………………………………………… C e. Transportation-in costs on materials purchased. ………………………………….. P

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2-29. (15 min.) Basic Concepts.

Concept Definition 9 Period cost …………….. Cost that can more easily be attributed to

time intervals. 2 Indirect cost ……………. Cost that cannot be directly related to a

cost object. 10 Fixed cost ………………. Cost that does not vary with the volume of

activity. 8 Opportunity cost ……… Lost benefit from the best forgone

alternative. 7 Outlay cost …………….. Past, present, or near-future cash flow. 6 Direct cost ……………… Cost that can be directly related to a cost

object. 5 Expense ………………… Cost charged against revenue in a

particular accounting period. 1 Cost ………………………. Sacrifice of resources. 3 Variable cost ………….. Cost that varies with the volume of activity. 4 Full absorption cost …. Cost used to compute inventory value

according to GAAP. 11 Product cost …………… Cost that is part of inventory.

2-30. (15 min.) Basic Concepts.

Cost Item Fixed (F)

Variable (V) Period (P) Product (M)

a. Power to operate factory equipment ………………………….. V M b. Chief financial officer’s salary ……………………………………. F P c. Commissions paid to sales personnel ………………………… V P d. Office supplies for the human resources manager ……….. F P e. Depreciation on pollution control equipment in the plant .. F M

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2-31. (15 min.) Basic Concepts. a. Variable production cost per unit: ($360 + $60 + $15 + $30) ……………… $465 b. Variable cost per unit: ($465 + $45) ……………………………………………….. $510 c. Full cost per unit: [$510 + ($225,000 ÷ 1,500 units)] …………………………. $660 d. Full absorption cost per unit: [$465 + ($135,000 ÷ 1,500)] …………………. $555 e. Prime cost per unit. (materials + labor + outsource) …………………………. $435 f. Conversion cost per unit: (labor + overhead + outsource) …………………. $540 g. Contribution margin per unit: ($900 – $510)…………………………………… $390 h. Gross margin per unit: ($900 – full absorption cost of $555)……………… $345 i. Suppose the number of units decreases to 1,250 units per month,

which is within the relevant range. Which parts of (a) through (h) will change? For each amount that will change, give the new amount for a volume of 1,250 units. c. Full cost = $510 + ($225,000 ÷ 1,250) = $690 d. Full absorption cost = $465 + ($135,000 ÷ 1,250) = $573 f. Conversion costs = $360 + $30 + ($135,000 ÷ 1,250) + $60 = $558 h. Gross margin = $900 – $573 = $327

c, d, f and h

will change

, as follows

2-32. (15 min.) Basic Concepts: Intercontinental, Inc. a. Prime cost per unit: (materials + labor) ………………………………………….. $40 b. Contribution margin per unit: ($100 – $72) …………………………………… $28 c. Gross margin per unit: ($100 – full absorption cost of $74)………………. $26 d. Conversion cost per unit: (labor + overhead) ………………………………….. $50 e. Variable cost per unit: ($60 + $12) ………………………………………………… $72 f. Full absorption cost per unit: [$60 + ($4,200,000 ÷ 300,000)] ……………. $74 g. Variable production cost per unit: ($16 + $24 + $20) ……………………….. $60 h. Full cost per unit. [$72 + ($5,400,000 ÷ 300,000 units)] ……………………. $90 i. Suppose the number of units increase to 400,000 units per month,

which is within the relevant range. Which parts of (a) through (h) will change? For each amount that will change, give the new amount for a volume of 400,000 units. c. Gross margin = $100.00 – $70.50 = $29.50 d. Conversion costs = $16 + $20 + ($4,200,000 ÷ 400,000) = $46.50 f. Full absorption cost = $60 + ($4,200,000 ÷ 400,000) = $70.50 h. Full cost = $72 + ($5,400,000 ÷ 400,000) = $85.50

c, d, f and h

will change,

as follows

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2-33. (15 min.) Cost Allocation—Ethical Issues This problem is based on the experience of the authors’ research at several companies.

a. Answers will vary as there are several defensible bases on which to allocate the product development costs. As an example, many government-purchasing contracts are based on the cost of the product or service. In this case, using expected sales (units or revenue) leads to a potential circularity. Price depends on cost, which depends on sales, which depends on price.

b. The company has an incentive to allocate as much cost as possible to government sales. This cost will be reimbursed (and the government may be less price- sensitive). Of course, the government recognizes this and has detailed allocation guidelines in place and an agency (the Defense Contract Audit Agency) that monitors contracts and the allocation of costs.

2-34. (15 min.) Cost Allocation—Ethical Issues This problem is based on the experience of the authors’ research at several companies. a. Answers will vary as there are several defensible bases on which to allocate the

common costs. One possibility is relative sales revenue. (We ignore here whether we should allocate these costs, something we discuss in chapter 4.)

b. You should explain to Star that you cannot agree with the allocation basis, especially given the reason for selecting the basis. If this fails to persuade Star, you should disclose to Star’s boss your disagreement with the analysis and the relation between Star and the vendor.

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2-35. (30 min.) Prepare Statements for a Manufacturing Company: Tappan Parts.

Tappan Parts

Cost of Goods Sold Statement For the Year Ended December 31

Beginning work in process inventory … $1,354,000 Manufacturing costs: Direct materials: Beginning inventory ………………… $962,000 Purchases ……………………………… 1,118,000 (a)* Materials available ……………….. $2,080,000 Less ending inventory ……………… 884,000 Direct materials used ……………. $1,196,000 Other manufacturing costs ……….. 310,000 ** Total manufacturing costs …….. 1,506,000 (c) Total costs of work in process …… $2,860,000 Less ending work in process …. 1,430,000 Cost of goods manufactured ………………………………..

$ 1,430,000 (b)

Beginning finished goods inventory ….. 312,000 Finished goods available for sale …….. $ 1,742,000 Ending finished goods inventory ……… 364,000 Cost of goods sold ………………………… $1,378,000

* Letters (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c. ** Difference between total manufacturing costs of $1,506,000 and direct materials used

of $1,196,000.

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2-36. (10 min.) Prepare Statements for a Service Company: Chuck’s Brokerage Service.

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2-37. Prepare Statements for a Service Company: Where2 Services.

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2-38. (10 min.) Prepare Statements for a Service Company: Remington Advisors

Sales revenue …………………………… $1,700,000 (Given) Cost of services sold (b) ……………… 890,000 (Sales revenue – gross margin) Gross margin …………………………….. $810,000 (Given) Marketing and administrative costs (a) ……………………………………

505,000

(Gross margin – operating profit)

Operating profit …………………………. $305,000 (Given)

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2-39. (20 min.) Prepare Statements for a Service Company: Lead! Inc. You can solve this in the order shown below.

Lead!, Inc.

Income Statement For the Month Ended April 30

Sales revenue …………………………………… $600,000 a

Cost of services sold ………………………….. 384,000 c

Gross margin ……………………………………. $216,000 d

Marketing and administrative costs ………. 96,000 e

Operating profit ($600,000 x 20%) ……….. $120,000 b

a. Given b. $120,000 = 20% x $600,000.

c. To find the cost of services sold plus marketing and administrative costs, start with the operating profit (b). Then cost of services plus marketing and administrative costs is $480,000 (= $600,000 – $120,000). But, marketing and administrative costs equal 25% of cost of services sold, so,

Cost of services sold + marketing and administrative costs = $480,000 and Marketing and adminstrative costs = .25 x Cost of services sold.

Combining these equations yields,

1.25 x Cost of services sold = $480,000 or cost of services sold = $384,000 (= $480,000 ÷ 1.25).

d. $216,000 = $600,000 – $384,000.

e. $96,000 = 25% x $384,000.

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2-40. (30 min.) Prepare Statements for a Manufacturing Company: Crabtree Machining Company.

Crabtree Machining Company Cost of Goods Sold Statement

For the Year Ended December 31 Beginning work-in-process inventory …. $ 139,200 Manufacturing costs: Direct materials: Beginning inventory ………………….. $115,200 Purchases ……………………………….. 717,600 Materials available …………………. $832,800 Less ending inventory ……………….. 141,600 Direct materials used ……………… $ 691,200 (a)* Other manufacturing costs …………. 1,901,760 ** Total manufacturing costs ………. 2,592,960 (c) Total costs of work in process …….. $ 2,732,160 Less ending work in process …… 134,400 Cost of goods manufactured … $ 2,597,760 (b) Beginning finished goods inventory ……. 117,120 Finished goods available for sale ………. $ 2,714,880 Ending finished goods inventory ……….. 108,000 Cost of goods sold ………………………….. $2,606,880

* The best approach to solving this problem is to lay out the format of the Cost of Goods Sold Statement first, then fill in the amounts known. Next find the subtotals that are possible (e.g., Finished goods available for sale). Finally, solve for letters (a), (b), and (c) where (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c.

** Difference between total manufacturing costs and direct materials used.

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2-41. (15 min.) Basic Concepts: Monroe Fabricators a. From the basic inventory equation,

Beginning Inventory + Transferred in = Transferred out + Ending Inventory, so Ending Materials Inventory, December 31, = Beginning balance + Transferred in – Transferred out = $7,800 + $48,300 – $43,800 ……………………………………….

= $12,300

b. Total manufacturing costs = Cost of goods manufactured – Beginning work-in-process + Ending work-in-process = $163,350 – $8,100 + $11,400 ……………………………………. (also can be found solving for Transferred in to Finished Goods)

= $166,650

c. Total manufacturing costs = Direct materials + Direct labor + Manufacturing overhead, so, Direct labor = Total manufacturing costs – Direct materials used – Manufacturing overhead, = $166,650 – $43,800 – $41,400 ………………………………….

= $81,450

d. Sales revenue = Gross margin + Cost of Goods Sold = $147,750 + $168,150 ………………………………………………..

= $315,900

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2-42. (15 min.) Basic Concepts: Talmidge Co. a. From the basic inventory equation,

Beginning work-in-process inventory + Total manufacturing cost = Cost of goods manufactured + Ending work-in-process inventory, so Ending work-in-process inventory, March 31, = Beginning balance + Total manufacturing cost – Cost of goods manufactured = $10,000 + $254,000 – $260,000 …………………………………

= $4,000

b. Purchases of direct materials = Ending direct materials inventory + Direct materials used – Beginning materials inventory = $27,000 + $62,000 – $32,000 ……………………………………. (also can be found solving for Transferred in to Finished Goods)

= $57,000

c. Cost of goods sold = Sales revenue – Gross Margin = $480,000 – $170,000 ………………………………………………..

= $310,000

d. Manufacturing overhead = Total manufacturing cost – Direct materials used – Direct labor = $254,000 – $62,000 – $120,000 …………………………………

= $72,000

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 46

2-43. (15 min.) Prepare Statements for a Merchandising Company: Angie’s Apparel.

Angie’s Apparel

Income Statement For the Month Ended July 31

Sales revenue ……………………………………………………………………………. $570,000 Cost of goods sold (see statement below) ……………………………………… 388,500 Gross margin …………………………………………………………………………….. $181,500 Marketing and administrative costs ($42,000 + $27,000 + $9,000 + $16,500) ………………………………………..

94,500

Operating profit ………………………………………………………………………….. $87,000

Angie’s Apparel Cost of Goods Sold Statement For the Month Ended July 31

Merchandise inventory, July 1 ………………………………….. $ 9,000 Merchandise purchases ………………………………………….. $360,000 Transportation-in ……………………………………………………. 27,000 Total cost of goods purchased …………………………………. 387,000 Cost of goods available for sale ……………………………….. $396,000 Merchandise inventory, July 31 ………………………………… 7,500 Cost of goods sold …………………………………………………. $388,500

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2-44. (15 min.) Prepare Statements for a Merchandising Company: University Electronics.

University Electronics

Income Statement For the Year Ended February 28

Sales revenue ……………………………………………………………………………. $4,000,000 Cost of goods sold (see statement below) ……………………………………… 2,830,000 Gross margin …………………………………………………………………………….. $1,170,000 Marketing and administrative costs ($220,000 + $135,000 + $290,000 + $650,000) ……………………………….

1,295,000

Operating profit (loss) ………………………………………………………………….. $(125,000)

University Electronics Cost of Goods Sold Statement

For the Year Ended February 28 Merchandise inventory, March 1 ………………………………. $ 185,000 Merchandise purchases ………………………………………….. $2,750,000 Transportation-in ……………………………………………………. 105,000 Total cost of goods purchased …………………………………. 2,855,000 Cost of goods available for sale ……………………………….. $3,040,000 Merchandise inventory, February 28 …………………………. 210,000 Cost of goods sold …………………………………………………. $2,830,000

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 48

2-45. (10 min.) Cost Behavior for Forecasting: Dayton, Inc. The variable costs will be 20 percent higher because there will be an increase of 36,000 – 30,000 = 6,000 units (20% = 6,000 ÷ 30,000).

Variable costs: Direct materials used ($510,000 x 1.2) …………………………… $ 612,000 Direct labor ($1,120,000 x 1.2)………………………………………. 1,344,000 Indirect materials and supplies ($120,000 x 1.2) ………………. 144,000 Power to run plant equipment ($140,000 x 1.2) ……………….. 168,000 Total variable costs ……………………………………………………… $2,268,000 Fixed costs: Supervisory salaries …………………………………………………….. $ 470,000 Plant utilities (other than power to run plant equipment) ……. 120,000 Depreciation on plant and equipment …………………………….. 67,500 Property taxes on building ……………………………………………. 98,500 Total fixed costs ………………………………………………………….. 756,000 Total costs for 36,000 units ……………………………………………… $3,024,000

Unit costs (= $3,024,000 ÷ 36,000) …………………………………… $84

Note that the variable cost per unit is $63 at both 30,000 units and at 36,000 units.

Total variable cost at 30,000 units is $1,890,000 (= $510,000 + $1,120,000 + $120,000 + $140,000).

Unit variable cost = $63 per unit = ($1,890,000  30,000 units) or ($2,268,000  36,000 units).

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2-46. (30 min.) Components of Full Costs: Madrid Corporation

a. Variable manufacturing cost: $270 + $165 + $60= $495 b. Variable cost: $270 + $165 + $60 + $18 = $513 c. Full absorption cost: $270 + $165 + $60 + ($162,000 ÷ 1,800 units) = $585 d. Full cost: $270 + $165 + $60 + $18 + ($162,000 ÷ 1,800 units) + ($108,000 ÷ 1,800

units) = $663

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 50

2-47. (15 min.) Components of Full Costs: Madrid Corporation. a. Product cost = Direct materials + Direct labor + Manufacturing overhead. Product cost per unit: $270 + $165 + $60 + ($162,000 ÷ 1,800 units) = $585 b. Period costs = Marketing and administrative costs. Period costs for the period: $108,000 + ($18 x 1,800 units) = $140,400

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2-48. (30 min.) Components of Full Cost: Larcker Manufacturing.

a. Variable cost: $21.00 + $24.00 + $12.00 + $5.00 = $62.00 b. Variable manufacturing cost: $21.00 + $24.00 + $12.00 = $57.00

c. Full-absorption cost: $21.00 + $24.00 + $12.00 + ($135,000 ÷ 30,000 units) = $61.50

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 52

2-48. (continued)

d. Full cost: $21.00 + $24.00 + $12.00 + ($135,000 ÷ 30,000 units) + $5.00 + ($117,000 ÷ 30,000 units) = $70.40

e. Profit margin = Sales price – full cost = $79.00 – $70.40 = $8.60

f. Gross margin = Sales price – full absorption cost = $79.00 – $61.50 = $17.50

g. Contribution margin = Sales price – variable cost = $79.00 – $62.00 = $17.00

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2-49. (20 Min.) Gross Margin and Contribution Margin Income Statements: Larcker Manufacturing.

Gross Margin Income Statement Contribution Margin Income Statement

Sales revenue(a) …………. ………………………………….

$2,370,000 Sales revenue ………………… $2,370,000

Variable manufacturing costs (b) ……………………..

1,710,000

Variable manufacturing costs ……………………………..

1,710,000

Fixed manufacturing overhead costs ……………. …………………………………. ………………………………….

135,000

Variable marketing and administrative costs …………

150,000

Gross margin ………………. $525,000 Contribution margin …………. $510,000 Variable marketing and administrative costs (c) ….

150,000

Fixed manufacturing overhead costs ………………..

135,000

Fixed marketing and administrative costs ………

117,000

Fixed marketing and administrative costs …………

117,000

Operating profit …………… $258,000 Operating profit ………………. $258,000

(a) $79 x 30,000 units = $2,370,000 (b) $57 x 30,000 units = $1,710,000; $57 = ($21 direct material + $24 direct labor + $12

variable manufacturing overhead). (c) $5 x 30,000 units = $150,000

2-50. (20 Min.) Gross Margin and Contribution Margin Income Statements: Niles Castings.

Gross Margin Income Statement

Contribution Margin Income Statement

Sales revenue ……………. $264,000 Sales revenue ………………… $264,000 Variable manufacturing costsa …………………………

119,000

Variable manufacturing costs ………………………………

119,000

Fixed manufacturing costs …………………

44,000

Variable marketing and administrative costs ………….

13,600

Gross margin ………………. $ 101,000 Contribution margin …………. $131,400 Variable marketing and administrative costs ………

13,600

Fixed manufacturing costs… 44,000

Fixed marketing and administrative costs ………

32,000

Fixed marketing and administrative costs ………….

32,000

Operating profit …………… $ 55,400 Operating profit ……………….. $ 55,400

a Variable manufacturing costs = $68,000 + $34,000 + $17,000 = $119,000

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 54

2-51. (20 Min.) Gross Margin and Contribution Margin Income Statements: Alpine Coffee Roasters.

Gross Margin Income Statement Contribution Margin Income Statement

Sales revenuea ………………… $230,400 Sales revenue …………………… $230,400 Variable manufacturing costsb ……………………………..

126,000

Variable manufacturing costs ………………………………..

126,000

Fixed manufacturing overhead costsc ……………….

45,000

Variable marketing and administrative costs ……………

10,800

Gross margin …………………… $59,400 Contribution margin …………… $93,600 Variable marketing and administrative costsd …………

10,800

Fixed manufacturing overhead costs ………………….

45,000

Fixed marketing and administrative costse …………

18,000

Fixed marketing and administrative costs ……………

18,000

Operating profit ……………….. $30,600 Operating profit …………………. $30,600

a Revenue = $6.40 x 36,000 = $230,400 b Variable manufacturing costs = ($3.00 + $0.40 + $0.10) x 36,000 = $126,000 c Fixed manufacturing overhead costs = $1.25 x 36,000 = $45,000 d Variable marketing and administrative costs = $0.30 x 36,000 = $10,800 e Fixed marketing and administrative costs = $0.50 x 36,000 = $18,000

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2-52. (30 min.) Value Income Statement: Ralph’s Restaurant. a.

Ralph’s Restaurant Value Income Statement

For the year 2 ending December 31 Nonvalue-

added activities

Value- added

activities

Total Sales revenue …………………………………. $1,000,000 $1,000,000 Cost of merchandise ………………………… Cost of food serveda …………………….. $ 52,500 297,500 350,000 Gross margin ………………………………….. $ (52,500) $ 702,500 $ 650,000 Operating expenses …………………………. Employee salaries and wagesb ………. 37,500 212,500 250,000 Managers’ salariesc ………………………. 20,000 80,000 100,000 Building costsd …………………………….. 30,000 120,000 150,000 Operating income (loss) ……………………. $(140,000) $ 290,000 $ 150,000

a 15% nonvalue-added activities (= 5% not used + 10% incorrectly prepared) b 15% nonvalue-added activities c 20% nonvalue-added activities d 20% unused and nonvalue-added activities

b. The information in the value income statement enables Ralph to identify nonvalue- added activities. He could eliminate such activities without reducing value to customers. Ralph can take steps to ensure that food is used prior to the expiration date, either by changing scheduling or purchasing procedures. He can also spend time training staff to take orders more carefully. Preparing a Year 3 statement helps Ralph see whether the company is improving in reducing nonvalue-added activities.

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 56

2-53. (30 min.) Value Income Statement: DeLuxe Limo Service. a.

b. The information in the value income statement enables the managers at DeLuxe to identify nonvalue-added activities. They could eliminate such activities without reducing value to customers. They can take steps to improve how directions are given to drivers and reduce customer complaints, for example. By preparing the same information in April, they can see how DeLuxe is improving (or becoming worse) in reducing nonvalue-added activities.

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Solutions to Problems

2-54. (30 min.) Cost Concepts: Chelsea, Inc. a. Prime costs = direct materials + direct labor Direct materials = beginning inventory + purchases – ending inventory = $9,000 + $120,000 – $7,500 = $121,500

Direct labor is given as $96,000 Prime costs = $121,500 + $96,000 = $217,500

b.

Conversion costs = Direct labor + Manufacturing overhead Conversion costs = $96,000 + $126,000 = $222,000

c. Total manufacturing costs = Direct materials + Direct labor + Manufacturing

overhead = $121,500 (from a above) + $96,000 + $126,000 = $343,500

d. Cost of goods

manufactured =

Beginning Work In Process + Total manufacturing costs – Ending Work In Process

= $4,500 + $343,500 (from c above) – $3,000 = $345,000

e. Cost of

Goods Sold

=

Cost of Goods

Manufactured

+

Beginning Finished Goods

Inventory

Ending Finished Goods

Inventory = $345,000 + $27,000 – $36,000 (from d above) = $336,000

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 58

2-55. (30 Minutes) Cost Concepts: Lawrence Components.

a. $58,000. Prime costs = Direct materials used + Direct labor costs Direct materials used = Prime costs – Direct labor costs = $98,000 – $40,000 = $58,000

b. $12,000. Direct materials used = Beginning inventory + purchases – ending inventory Direct materials,

beginning inventory = Direct materials used – purchases + ending inventory

$58,000 – $56,000 + $10,000 = $12,000

c. $120,000. Total manufacturing

costs = Prime costs + Conversion costs – Direct labor cost

Conversion cost = Total manufacturing costs – Prime costs + Direct labor cost

= $178,000 – $98,000 + $40,000 = $120,000

d. $4,000. Work-in-process, ending = Work-in-process, beginning + Total manufacturing costs

– Cost of goods manufactured $6,000 + $178,000 – $180,000 = $4,000

e. $80,000. Conversion cost = Direct labor costs + Manufacturing overhead Manufacturing overhead = Conversion costs – Direct labor costs = $120,000 – $40,000 = $80,000

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2-55. (continued)

f. $10,000.

Cost of goods sold = Finished goods, beginning + Cost of goods manufactured – Finished goods, ending

Finished goods, beginning

= Cost of goods sold – Cost of goods manufactured + Finished goods, ending

$142,000 – $180,000 + $48,000 = $10,000

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 60

2-56. (30 minutes) Cost Concepts: Columbia Products. a. Amounts per unit:

(1) $217. Variable manufacturing

cost = Manufacturing overhead + Direct labor + Direct materials

= $70 + $35 + $112 = $217 (2) $362. Full unit cost = All unit fixed costs + All unit variable costs Unit fixed manufacturing = ($50,400 ÷ 900 units) = $56 Unit fixed marketing and administrative cost = ($67,500 ÷ 900

units) = $75 = $56 + $75 + $35 + $112 + $70 + $14 = $362 (3) $231. Variable cost = All variable unit costs = $14 + $70 + $35 + $112 = $231

(4) $273.

Full absorption cost = Fixed and variable manufacturing overhead + Direct labor + direct materials

= $56 + $70 + $35 + $112 = $273 (5) $147. Prime cost = Direct labor + Direct materials = $35 + $112 = $147

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2-56. (continued) (6) $161. Conversion cost = Direct labor + Manufacturing overhead = $35 + ($70 + $56) = $161 (7) $86. Profit margin = Sales price – Full cost = $448 – $362 = $86 (8) $217. Contribution margin = Sales price – Variable costs = $448 – $231 = $217

(9) $175. Gross margin = Sales price – Full absorption cost = $448 – $273 = $175 b. As the number of units increases (reflected in the denominator), fixed manufacturing

cost per unit (and the total cost per unit) decreases. The numerator (i.e., total fixed costs) remains the same. However, that does not mean Columbia should produce more units. That decision should be based on the total profits (revenues minus costs), not on unit profits.

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 62

2-57. (30 min.) Prepare Statements for a Manufacturing Company: Yolo Windows.

Yolo Windows

Statement of Cost of Goods Sold For the Year Ended December 31

($000) Work in process, Jan. 1 …………………………………… $ 48 Manufacturing costs: Direct materials: Beginning inventory, Jan. 1 ……………………….. $ 36 Add material purchases ……………………………. 3,280 Direct materials available ………………………….. 3,316 Less ending inventory, Dec. 31 ………………….. 32 Direct materials used ……………………………….. $ 3,284 Direct labor ………………………………………………… 4,240 Manufacturing overhead: Indirect factory labor ………………………………… 1,120 Indirect materials and supplies …………………… 280 Factory supervision ………………………………….. 840 Factory utilities ………………………………………… 360 Factory and machine depreciation ……………… 4,640 Property taxes on factory ………………………….. 112 Total manufacturing overhead ………………… 7,352 Total manufacturing costs …………………… 14,876 Total cost of work in process during the year ……… 14,924 Less work in process, Dec. 31 ………………………. 56 Costs of goods manufactured during the year 14,868 Beginning finished goods, Jan. 1 ……………………… 656 Finished goods inventory available for sale ……….. 15,524 Less ending finished goods inventory, Dec. 31 …… 588 Cost of goods sold …………………………………………. $14,936

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2-57. (continued)

Yolo Windows Income Statement

For the Year Ended December 31 ($000)

Sales revenue ……………………………………………. $18,160 Less: Cost of goods sold …………………………….. 14,936 Gross margin …………………………………………….. $3,224 Administrative costs ……………………………………. $1,440 Marketing costs ………………………………………….. 600 Total marketing and administrative costs ……….. 2,040 Operating profit ………………………………………….. $1,184

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 64

2-58. (30 min.) Prepare Statements for a Manufacturing Company: Mesa Designs.

Mesa Designs

Statement of Cost of Goods Sold For the Year Ended December 31

($000) Work in process, Jan. 1 …………………………………… $ 152 Manufacturing costs: Direct materials: Beginning inventory, Jan. 1 ……………………….. $ 96 Add materials purchases ………………………….. 10,300 Direct materials available ………………………….. $10,396 Less ending inventory, Dec. 31 ………………….. 110 Direct materials used ……………………………….. $10,286 Direct labor ………………………………………………… 13,000 Manufacturing overhead: Depreciation (factory) ……………………………….. $5,560 Depreciation (machines) …………………………… 9,240 Indirect labor (factory) ………………………………. 3,340 Indirect materials (factory) …………………………. 960 Property taxes on factory ………………………….. 370 Utilities (factory) ………………………………………. 1,060 Total manufacturing overhead ………………… 20,530 Total manufacturing costs …………………… 43,816 Total cost of work in process during the year ……… $43,968 Less work in process, Dec. 31 ………………………. 136 Costs of goods manufactured during the year $43,832 Beginning finished goods, Jan. 1 ……………………… 1,974 Finished goods inventory available for sale ……….. $45,806 Less ending finished goods inventory, Dec. 31 …… 2,026 Cost of goods sold …………………………………………. $43,780

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2-58. (continued)

Mesa Designs Income Statement

For the Year Ended December 31 ($000)

Sales revenue ……………………………………………. $60,220 Less: Cost of goods sold …………………………….. 43,780 Gross margin …………………………………………….. $ 16,440 Administrative costs ……………………………………. $4,200 Selling costs………………………………………………. 2,140 Total marketing and administrative costs ……….. 6,340 Operating profit ………………………………………….. $10,100

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 66

2-59. (30 min.) Prepare Statements for a Manufacturing Company: Billings Tool & Die.

. Billings Tool & Die

Statement of Cost of Goods Sold For the Year Ended December 31

($ 000) Beginning work in process, Jan. 1………………………… $ 192 Manufacturing costs: Direct materials: Beginning inventory, Jan. 1 …………………………… $ 72 Add: Purchases …………………………………………… 21,900 Direct materials available ………………………….. 21,972 Less ending inventory, Dec. 31 ……………………… 84 Direct materials used ………………………………… $21,888 Direct labor ……………………………………………………. 5,040 Manufacturing overhead: Indirect factory labor ……………………………………. 5,472 Factory supervision ……………………………………… 2,940 Indirect materials and supplies ………………………. 4,110 Building utilities (90% of total) ……………………….. 6,750 Building & machine depreciation (75% of $5,400) 4,050 Property taxes—factory (80% of total) ……………. 4,032 Total manufacturing overhead ……………………. 27,354 Total manufacturing costs ………………………. 54,282 Total cost of work in process during the year …………. 54,474 Less work in process, Dec. 31 ………………………….. 174 Costs of goods manufactured during the year ….. 54,300 Beginning finished goods, Jan. 1 …………………………. 324 Finished goods available for sale …………………………. 54,624 Less ending finished goods, Dec. 31 ……………………. 390 Cost of goods sold …………………………………………….. $ 54,234

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2-59. (continued)

Billings Tool & Die Income Statement

For the Year Ended December 31 ($ 000)

Sales revenue …………………………………………………….. $77,820 Less: Cost of goods sold (per statement) ………………… 54,234 Gross profit ………………………………………………………… $ 23,586 Marketing and administrative costs: Depreciation (25% of total) ………………………………… $ 1,350 Utilities (10% of total) ………………………………………… 750 Property taxes (20% of total) ……………………………… 1,008 Administrative costs ………………………………………….. 9,600 Marketing costs ……………………………………………….. 5,226 Total marketing and administrative costs …………….. 17,934 Operating profit …………………………………………………… $ 5,652

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 68

2-60. (10 Min.) Cost Allocation with Cost Flow Diagram: Coastal Computer. a. (1) Main Street Lakeland Mall Total Number of computers sold …… 2,000 1,600 3,600 Percentage ………………………. 55.56% 44.44% 100% Allocated Accounting

Department cost ($180,000) …

$100,000

$80,000

$180,000 (2) Main Street Lakeland Mall Total Revenue …………………………… $1,000,000 $2,000,000 $3,000,000 Percentage ……………………….. 33.33% 66.67% 100% Allocated Accounting

Department cost ($180,000) …

$60,000

$120,000

$180,000

b.

a 33.33% = $1,000,000 ÷ ($1,000,000 + $2,000,000) b 66.67% = $2,000,000 ÷ ($1,000,000 + $2,000,000)

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2-61. (20 Min.) Cost Allocation with Cost Flow Diagram: Wayne Casting, Inc. a. (1) Chillicothe

Metals Ames Supply

Total

Material purchased (tons) ……. 130 120 250 Percentage ………………………. 52% 48% 100% Allocated waste handling

cost ($300,000) …………………..

$156,000

$144,000

$300,000 (2) Chillicothe

Metals Ames Supply

Total

Amount of waste (tons) ……….. 12.8 2.2 15 Percentage ……………………….. 85.33% 14.67% 100% Allocated waste handling

cost ($300,000) …………………..

$256,000

$44,000

$300,000 (3) Chillicothe

Metals Ames Supply

Total

Cost of materials purchased … $624,000 $876,000 $1,500,000 Percentage ………………………. 41.6% 58.4% 100% Allocated waste handling

cost ($300,000) …………………..

$124,800

$175,200

$300,000

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 70

2-61. (continued) b.

a 52% = 130 tons ÷ (130 tons + 120 tons) b 48% = 120 tons ÷ (130 tons + 120 tons)

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2-62. (20 Min.) Cost Allocation with Cost Flow Diagram: Pacific Business School. a. Undergraduate Graduate Total Number of students ……………….. 900 600 1,500 Percentage ………………………. 60% 40% 100% Credit Hours …………………………. 13,500 16,500 30,000 Percentage ………………………. 45% 55% 100% Allocation of student-related costsa……………………………….

$1,350,000

$900,000

$2,250,000

Allocation of credit-hour costsb … 803,250 981,750 1,785,000 Total Allocations ………………… $2,153,250 $1,881,750 $4,035,000

a $1,350,000 = 60% x $2,250,000; $900,000 = 40% x $2,250,000. b $803,250 = 45% x $1,785,000; $981,750 = 55% x $1,785,000.

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 72

2-62. (continued) b.

a 45% = 13,500 credit hours ÷ (13,500 credit hours + 16,500 credit hours) b 55% = 16,500 students ÷ (13,500 credit hours + 16,500 credit hours) c 60% = 900 students ÷ (900 students + 600 students) d 40% = 600 students ÷ (900 students + 600 students)

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2-63. (40 Min.) Find the Unknown Information.

a. Finished goods beginning inventory

+ Cost of goods manufactured

– Cost of goods sold

= Finished goods ending inventory

Finished goods beginning inventory + $88,800 – $87,040 = $14,080

Finished goods beginning inventory = $ 12,320 (= $14,080 – $88,800 + $87,040)

b. Direct

materials used

+ Direct labor + Manufacturing

overhead = Total

manufacturing costs

Direct materials

used + $ 12,160 + $23,040 = $77,600

Direct materials

used = $42,400 (= $77,600 – $12,160 – $23,040)

c. Gross margin % = Gross margin ÷ Sales revenue = (Sales revenue – COGS) ÷ Sales revenue Rearranging, Sales revenue = Cost of Goods Sold ÷ (1.0 – Gross Margin %) $87,040 ÷ (1.0 – .375) $87,040 ÷ 0.625 Sales revenue = $139,264

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 74

2-64. (40 Min.) Find the Unknown Information.

a. Cost of goods sold =

Finished goods beginning inventory +

Cost of goods manufactured –

Finished goods ending inventory

= $22,320 + $611,650 – $38,770 Cost of

goods sold = $595,200 b. Total

manufacturing costs

= Direct

materials used

+ Direct labor + Manufacturing

overhead

$612,320 =

Direct materials

used + $270,400 + $225,000

Direct materials used = $116,920 (= $612,320 – $270,400 – $225,000)

c. Direct

materials used

= Beginning inventory + Materials

purchased – Ending

inventory

$116,920 = $2,520 + Materials purchased – $2,088

Materials purchased = $116,488 (= 116,920 – $2,520 + $2,088)

d. Gross margin % = Gross margin ÷ Sales revenue 38% = (Sales revenue – Cost of goods sold) ÷ Sales revenue

38% x Sales revenue = Sales revenue – Cost of goods sold Cost of goods sold = Sales revenue – (38% x Sales revenue) Cost of goods sold = Sales revenue x (1 – 38%) Sales revenue = Cost of goods sold ÷ (100% – 38%) = $595,200 (from a) ÷ 62% $960,000

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2-65. (40 min.) Cost Allocation and Regulated Prices: The City of Imperial Falls. a. The rate is 20 percent above the average cost of collection:

Total cost of collection = $400,000 + $1,280,000 + $320,000 = $2,000,000

Total waste collected (tons) = 4,000 + 12,000 = 16,000 tons = 32,000,000 pounds

Average cost per pound = $2,000,000 ÷ 32,000,000 pounds = $.0625 per pound

Price per pound = $.0625 x 1.20 = $.075 per pound

b.

First, allocate costs to the two cost objects: households and businesses: Allocation of administrative costs and truck costs:

Total costs = $400,000 + $1,280,000 = $1,680,000

Number of customers = 12,000 + 3,000 = 15,000 customers

Allocated cost per customer = $1,680,000 ÷ 15,000 customers

= $112 per customer

Allocation of other collection costs:

Total costs = $320,000 Total waste collected (tons) = 4,000 + 12,000

= 16,000 tons Allocated cost per ton of waste = $320,000 ÷ 16,000 tons

= $20 per ton

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 76

2-65. (continued) Allocation to customer types:

Households Business Allocation of customer cost: Allocated cost per customer ………….. $112 $112 Number of customers …………………… 12,000 3,000 Allocated cost ……………………………… $1,344,000 $336,000 Allocation of other costs: Allocated cost per ton …………………… $20 $20 Number of tons ……………………………. 4,000 12,000 Allocated cost ……………………………… $80,000 $240,000 Total allocated cost ………………………. $1,424,000 $576,000 Total number of tons …………………….. 4,000 12,000 Number of pounds ……………………….. 8,000,000 24,000,000 Average allocated cost per pound ….. $.1780 $.0240 Price (= 1.20 x average cost) …………. $.2136 $.0288

c. Answers will vary. This problem illustrates that cost allocation can have an important effect on decisions when the allocated costs are used as if they are actual costs. In the current example, the proposed allocation approach allows the company to compete with other haulers for business customers because they maintain a monopoly on the household business.

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2-66. (30 min.) Reconstruct Financial Statements: San Ysidro Company.

aMaterials used is given, but this number is not. To obtain it, Beg. Bal. + Purchases = Mat. Used + End. Bal. Beg. Bal. = Mat. Used + End. Bal. – Purchases $309,880 = $1,069,880 + $248,000 – $1,008,000 bTotal labor = Indirect labor + Direct labor = $1,209,600 = 0.08 Direct labor + Direct

labor Direct labor = $1,209,600 ÷ 1.08 = $1,120,000 Indirect labor = 0.08 x $1,120,000 = $89,600

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 78

2-66 (continued)

a Total depreciation = Depreciation on plant + Depreciation on administrative building portion Depreciation on plant is 80% of the total depreciation, so total depreciation is, = $181,440 ÷ 0.80 = $226,800 Depreciation on administrative portion = $226,800 x (1.0 – 0.8) = $45,360.

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2-67. (20 Min.) Finding Unknowns: Mary’s Mugs. a. $2,812.50.

Direct materials cost per unit = Direct materials cost ÷ Units produced = $6,000 ÷ 20,000 units = $0.30 per unit.

Direct materials used per mug = 0.4 pounds.

Direct materials cost per pound = $0.30 ÷ 0.4 pounds = $0.75 per pound. Direct materials inventory = 3,750 pounds  $0.75 per pound = $2,812.50.

b. 2,750 units.

Finished goods inventory (in units) = Finished goods inventory ÷ Manufacturing cost per unit.

Manufacturing cost per unit

= (Direct material + Direct labor + Indirect manufacturing cost) ÷ Units produced = ($6,000 + $27,000 + $5,400 + $6,000) ÷ 20,000 = $44,400 ÷ 20,000

= $2.22 per unit.

Finished goods inventory (in units) December 31, Year 1 = $6,105 ÷ $2.22 = 2,750 units

c. $4.25.

Selling price per unit = Sales revenue ÷ Units sold = Sales revenue ÷ (Units produced – units in ending finished goods

inventory)

= $73,312 ÷ (20,000 – 2,750) = $73,312 ÷ 17,250 = $4.25. d. $13,642.

Operating income for the year:

Sales revenue …………………………………………………. $ 73,312 Cost of goods sold (17,250 x $2.22) …………………… 38,295 Gross margin …………………………………………………… $ 35,017 Less marketing and administrative costs Variable marketing and administrative costs ……. $3,375 Fixed marketing and administrative costs ……….. 18,000 21,375 Operating profit ……………………………………………….. $ 13,642

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 80

2-68. (40 Min.) Finding Unknowns: BS&T Partners. Note: This problem is challenging, because there is no indication of how to begin or the order in which to solve for the unknowns.

We begin by computing the following unit costs: Manufacturing cost per unit = Direct materials + Direct labor + Manufacturing overhead = $5.00 + $6.25 + $15.75 = $27.00 Full cost per unit = Manufacturing cost per unit + Selling, general & administrative = $27.00 + $12.00 = $39.00 a. Direct material inventory (pounds) = Direct material inventory (cost) ÷ Cost per pound

= $3,500 ÷ $10.00 = 350 pounds. b. Finished goods inventory, cost = (Finished goods inventory, units) ÷ (Manufacturing

cost per unit)

= $10,800 ÷ $27 = 400 units

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2-68 (continued) c. Full costs = Cost of goods sold + Selling, general, and administrative costs Then,

Operating profit = Sales revenue – Cost of goods sold – Selling, general, and

administrative costs = Sales revenue – Full costs

$55,200 = $414,000 – Full costs Full costs = $414,000 — $55,200 = $358,800

Full costs = Units sold x Full cost per unit $358,800 = Units sold x $39.00

Units sold = $358,800 ÷ $39.00

= 9,200 units sold d. Sales revenue = Selling price per unit x Units sold

$414,000 = Selling price per unit x 9,200 units sold

Selling price per unit = $414,000 ÷ 9,200 = $45.00

e. Finished goods ending (units) = Finished goods beginning (units) + Units produced

– Units sold 400 = 0 + Units produced — 9,200

Units produced = 9,200 + 400 = 9,600

f. Direct labor cost incurred = Direct-labor hours worked x Wage rate per hour Direct labor cost incurred = Units produced x Direct labor cost per unit

= 9,600 x $6.25 = $60,000

$60,000 = Direct-labor hours worked x $20.00 Direct-labor hours worked = $60,000 ÷ $20.00

= 3,000 direct-labor hours

©The McGraw-Hill Companies, Inc., 2017 Fundamentals of Cost Accounting 82

Solutions to Integrative Case

2-69. (30 min.) Analyze the Impact of a Decision on Income Statements: Tunes2Go.

a. This year’s income statement: Baseline

(Status Quo) Rent

Equipment

Difference Sales revenue …………………………..

$4,800,000 $4,800,000 0

Operating costs: Variable ……………………………….

(600,000) (600,000) 0

Fixed (cash expenditures) ………. (2,250,000) (2,250,000) 0 Equipment depreciation ………….. (450,000) (450,000) 0 Other depreciation …………………. (375,000) (375,000) 0 Loss from equipment write-off …. 0 (2,550,000) a $2,550,000 lower Operating profit (before taxes) ……. $1,125,000 $ (1,425,000) $2,550,000 lower

a Equipment write-off = $3 million cost – $450,000 accumulated depreciation for one year (equipment was purchased on January 1 of the year).

b. Next year’s income statement: Baseline

(Status Quo) Rent

Equipment

Difference Sales revenue ………………………… $4,800,000 $5,136,000 a $336,000 higher Operating costs: Equipment rental …………………. 0 (690,000) 690,000 higher Variable ……………………………… (600,000) (600,000) 0 Fixed cash expenditures ……….. (2,250,000) (2,115,000) b 135,000 lower Equipment depreciation ………… (450,000) 0 450,000 lower Other depreciation ……………….. (375,000) (375,000) 0 Operating profit ………………………. $1,125,000 $1,356,000 $231,000 higher

a $5,136,000 = 1.07  $4,800,000 b $2,115,000 = (1.00 – 0.06)  $2,250,000

c. Despite the effect on next year’s income statement, the company should not rent the new machine because net cash inflow as a result of installing the new machine ($336,000 + $135,000) does not cover cash outflow for equipment rental ($690,000).

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  • Cost Concepts and Behavior
  • Solutions to Review Questions
  • Solutions to Critical Analysis and Discussion Questions
  • Solutions to Exercises
  • a. Variable cost: $21.00 + $24.00 + $12.00 + $5.00 = $62.00
  • b. Variable manufacturing cost: $21.00 + $24.00 + $12.00 = $57.00
  • c. Full-absorption cost: $21.00 + $24.00 + $12.00 + ($135,000 ÷ 30,000 units) = $61.50
  • d. Full cost: $21.00 + $24.00 + $12.00 + ($135,000 ÷ 30,000 units) + $5.00 + ($117,000 ÷ 30,000 units) = $70.40
  • e. Profit margin = Sales price – full cost = $79.00 – $70.40 = $8.60
  • f. Gross margin = Sales price – full absorption cost = $79.00 – $61.50 = $17.50
  • g. Contribution margin = Sales price – variable cost = $79.00 – $62.00 = $17.00
  • Solutions to Problems
  • a.
  • Conversion costs = $96,000 + $126,000 = $222,000
  • c.
  • a. $58,000.
  • Depreciation on plant is 80% of the total depreciation, so total depreciation is,
  • Full costs = Units sold x Full cost per unit
  • $414,000 = Selling price per unit x 9,200 units sold
  • = $45.00
  • Direct labor cost incurred = Units produced x Direct labor cost per unit
  • $60,000 = Direct-labor hours worked x $20.00
  • Solutions to Integrative Case

SM-Ch03-5e.pdf

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 3 83

3 Fundamentals of Cost-Volume-Profit Analysis

Solutions to Review Questions

3-1. Profit = TR – TC

= PX – VX – F = (P – V)X – F

where Profit = operating profit,

TR = total revenue, TC = total costs,

P = average unit selling price, V = average unit variable cost, X = quantity of units, F = total fixed costs for the period.

3-2. Total costs = Total variable costs plus total fixed costs.

3-3. Total contribution margin: Total selling price – Variable manufacturing costs expensed – Variable nonmanufacturing costs expensed = Total contribution margin.

Gross margin: Total selling price – Variable manufacturing costs expensed – Fixed manufacturing costs expensed = Gross margin.

3-4. Profit-volume analysis plots only the contribution margin line against volume, while cost- volume-profit analysis plots total revenue and total costs against volume. Profit-volume analysis is a simpler, but less complete, method of presentation.

3-5. Costs that are “fixed in the short run” are usually not fixed in the long run. In fact few, if any, costs are fixed over a very long time horizon, because managers can make decisions that change a firm’s cost structure.

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3-6. Operating leverage is the proportion of fixed costs in an organization’s cost structure. It is important for managers because it determines how an increase in volume affects the change in profits.

3-7. The margin of safety is the excess of sales over the break-even volume. Managers can use the margin of safety to understand how far sales can fall before the firm is operating at a loss.

3-8. Goal Seek is the function in Microsoft Excel that can be used for CVP analysis.

3-9.

Target volume (units) = Fixed costs + [Target profit/(1-t)]

Unit contribution margin

3-10. Income taxes do not affect the break-even equation because with zero income (breakeven), there are no income taxes to pay.

3-11. It is common to assume a fixed sales mix when solving for break-even volumes with multiple products because the contribution margin depends on the relative quantities of the individual products sold. If the sales mix is not fixed, the break-even volume is indeterminate.

3-12. Two common assumptions in CVP analysis are that unit prices and unit variable costs are constant. It is also common to assume that fixed costs are constant over relatively large volume ranges. Although these assumptions are common, they are not a necessary part of CVP analysis. CVP analysis can accept many forms of price and cost relations with volume. However, when more general relations are used, the common break-even formulas will no longer hold.

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Solutions to Critical Analysis and Discussion Questions

3-13. There may be a difference between costs used in cost-volume-profit analysis and costs expensed in financial statements. A common example is fixed manufacturing costs. Cost- volume-profit analysis assumes fixed manufacturing costs are period costs, while they are treated as product costs for financial reporting. If part of current production is inventoried, some fixed manufacturing costs would not be expensed for financial reporting. On the other hand, if current sales include all of current production plus some from inventory, all fixed costs from this period plus some from previous periods would be expensed for financial reporting.

3-14. The accountant makes use of a linear representation to simplify the analysis of costs and revenues. These simplifying assumptions are generally reasonable within a relevant range of activity. Within this range, it is generally believed that the additional costs required to employ nonlinear analysis cannot be justified in terms of the benefits obtained. Thus, within this range, the linear model is considered the “best” in a cost-benefit sense.

3-15. As volume rises, it is likely that product markets will be saturated, leading to a need to cut prices to maintain or increase volume. This price-cutting would result in a nonlinear revenue function with a slope that becomes less steep (though still positive) as volume increases. Moreover, as activity increases and approaches capacity constraints, costs tend to rise more than proportionately. Overtime premiums and shift pay differentials increase the unit labor costs. Similar costs may be incurred in terms of excess maintenance costs for running machines beyond their optimal performance levels, higher materials costs for any input commodity that is in short supply, and similar factors. These factors tend to cause costs to rise more than proportionately with an increase in activity.

3-16. Although the assumptions of CVP analysis appear relatively simplistic, CVP analysis is a useful tool for understanding the relations among costs, volumes, and the resulting profit. Clearly, the more important the decision, the more time that should be spent developing good assumptions. However, CVP analysis is useful for developing intuition about the cost structure of the firm.

3-17. Although there are no “profits” in a not-for-profit organization, these organizations are still very concerned about the difference between inflows (from fees, grants, sales, or other sources) and costs. Often the term “surplus” will be used in place of profit and the methods of CVP analysis can be applied in the same way that it is in a for-profit firm.

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3-18. Most business schools have relatively high fixed costs when volume is measured by the number of students. Examples of these costs would be plant (buildings and grounds), faculty and staff, and support (for example, computer resources). Variable costs are relatively low. Therefore, most business schools would be characterized by high operating leverage.

3-19. High (or low) operating leverage is not a good (or bad) thing. It is the result of managerial decisions about the resources to be used (and the structure of the costs that result). Therefore, if it is better to use resources, which are more flexible, it might be preferable to rent (lease). As a result, the operating leverage would be lower than a similar business where a manager decided that is was better not to bear the risks of rising rents.

3-20. The “product” or “service” for an airline consists of a flight between two city-pairs (for example, Los Angeles to San Francisco). As you can imagine, the number of “products” for any airline is very large. (In fact, it is even larger, if time-of-day is considered to be another product.) Airlines often fly a mix of aircraft as well, further complicating the analysis. Therefore, when you read statements such as this, be aware that the numbers are given assuming a current mix of flights and aircraft. It does not mean that if an individual flight has 63% of seats filled, the flight will break even.

3-21. Because the price Luxe pays for the leased parking space is fixed (it does not depend on how many times it is used), the cost per use falls as the number of times it is used increases. This is the same phenomenon we saw in Chapter 2 when considering fixed manufacturing overhead and fixed administrative costs.

3-22. The per-unit lease cost is not appropriate to decide where to park the cars, because the lease costs will not be affected by that decision.

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Solutions to Exercises

3-23. (15 min.) Profit Equation Components.

3-24. (15 min.) Profit Equation Components. a. Total fixed costs (loss at zero volume)

b. Break-even point

c. Slope = contribution margin per unit

d. Profit line

e. Profit area

f. Net loss area

g. Zero profit line

©The McGraw-Hill Companies, Inc., 2017 88 Fundamentals of Cost Accounting

3-25. (20 min.) Basic Decision Analysis Using CVP: Anu’s Amusement Center. a. $2,400,000  75,000 tickets = $32 per ticket

b. $1,350,000  75,000 tickets = $18 per ticket

c. ($32.00 – $18.00) = $14 per ticket

d. Profit = ($32 – $18)X – $656,250

Let Profit = 0

0 = ($32.00 – $18.00)X – $656,250

X = $656,250

$14 X = 46,875 tickets

e. Let Profit = $131,250

$131,250 = ($32 – $18)X – $656,250

X = $656,250 + $131,250

$14 X = 56,250 tickets

3-26. (20 min.) Basic CVP Analysis: Dukey’s Shoe Station. a. Break-even point is sales dollars = Fixed costs ÷ Contribution margin ratio

= $450,000 ÷ 0.40 = $1,125,000

b. Break-even point is sales dollars = Fixed costs ÷ Contribution margin ratio

= $450,000 ÷ 0.25 = $1,800,000

c. Sales dollars required = (Fixed costs + Desired profit) ÷ Contribution margin ratio

= ($450,000 + $100,000) ÷ 0.40 = $1,375,000

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 3 89

3-27. (25 min.) CVP Analysis—Ethical Issues: Mark Ting. This problem is based on the experience of the authors at several companies.

The problem in this example, which is common, is that the guidelines the company has established (for example, a high break-even point) lead to projects that would be valuable in some way, but cannot meet the standard established by the company.

Mark believes, perhaps honestly, that the new product is valuable for the company. However, the approach he has taken to support the product is unethical.

Mark should persuade the management of the company that the break-even requirement is inappropriate.

3-28. (55 min.) Basic Decision Analysis Using CVP: Derby Phones. a.

Profit = (P – V)X – F

$0 = ($270 – $120)X – $300,000 $150X = $300,000

X = $300,000

$150 X = 2,000 units

b. Profit = (P – V)X – F

$180,000 = ($270 – $120)X – $300,000 $150X = $480,000

X = $480,000

$150 X = 3,200 units

©The McGraw-Hill Companies, Inc., 2017 90 Fundamentals of Cost Accounting

3-29. (55 min.) Basic Decision Analysis Using CVP: Derby Phones.

a. Profit = ($270 – $120)  5,000 – $300,000 = $450,000

b. 10% price decrease. Now P = $243

Profit = ($243 – $120) x 5,000 – $300,000

= $315,000 Profit decreases by $135,000

20% price increase. Now P = $324

Profit = ($324 – $120) x 5,000 – $300,000

= $720,000 Profit increases by $270,000 c. 10% variable cost decrease. Now V = $108

Profit = ($270 – $108) x 5,000 – $300,000

= $510,000 Profit increases by $60,000

20% variable cost increase. Now V = $144

Profit = ($270 – $144) x 5,000 – $300,000

= $330,000 Profit decreases by $120,000 d. Profit = ($270 – $132) x 5,000 – $240,000

= $450,000 Profit remains the same.

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3-30. (25 min.) Basic Decision Analysis Using CVP: Warner Clothing. a.

Profit = (P – V)X – F

$0 = ($15 – $3)X – $42,000 $12X = $42,000

X = $42,000

$12 X = 3,500 units

b. Profit = (P – V)X – F

$30,000 = ($15 – $3)X – $42,000 $12X = $72,000

X = $72,000

$12 X = 6,000 units

©The McGraw-Hill Companies, Inc., 2017 92 Fundamentals of Cost Accounting

3-31. (30 min.) Basic Decision Analysis Using CVP: Warner Clothing.

a. Profit = ($15 – $3)  5,000 – $42,000 = $18,000 b. 10% price decrease. Now P = $13.50

Profit = ($13.50 – $3.00) x 5,000 – $42,000

= $10,500 Profit decreases by $7,500

20% price increase. Now P = $18

Profit = ($18 – $3) x 5,000 – $42,000

= $33,000 Profit increases by $15,000 c. 10% variable cost decrease. Now V = $2.70

Profit = ($15.00 – $2.70) x 5,000 – $42,000

= $19,500 Profit increases by $1,500

20% variable cost increase. Now V = $3.60

Profit = ($15.00 – $3.60) x 5,000 – $42,000

= $15,000 Profit decreases by $3,000 d. Profit = ($15.00 – $3.30) x 5,000 – $37,800

= $20,700 Profit increases by $2,700

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3-32. (30 min.) Basic CVP Analysis: Pacific Parts. $23 per unit. Using the profit equation: Profit = (P – V) x X – FC $1,000,000 = ($30 – V) x 270,000 – $890,000 V = $6,210,000 ÷ 270,000 V = $23 per unit. Using an income statement format (based on 270,000 units): Amount Unit

Sales ………………………………………. $8,100,000 (a) $30 Variable cost …………………………….. 6,210,000 23 (c) Contribution margin …………………… $1,890,000 (b) $7 Fixed costs ……………………………….. 890,000 Operating profit before taxes ……….. $1,000,000

(a) $30 x 270,000 units = $8,100,000 (Sales) (b) $1,000,000 + $890,000 = $1,890,000 (Contribution margin) (c) $8,100,000 – $1,890,000 = $6,210,000 / 270,000 units = $23 (Unit variable cost)

3-33. (30 min.) Analysis of Cost Structure: The Greenback Store vs. One-Mart. a. Greenback Store One-Mart Amount Percentage Amount Percentage Sales ………………………… $800,000 100% $800,000 100% Variable cost ………………. 600,000 75 200,000 25 Contribution margin …….. $200,000 25% $600,000 75% Fixed costs …………………. 40,000 5 440,000 55 Operating profit …………… $160,000 20% $160,000 20%

b. Greenback Store’s profits increase by $30,000 [= .25 x ($800,000 x .15)] and One Mart’s profits increase by $90,000 [= .75 x ($800,000 x .15)].

©The McGraw-Hill Companies, Inc., 2017 94 Fundamentals of Cost Accounting

3-34. (30 min.) Analysis of Cost Structure: Spring Company vs. Winters Company.

a. Spring Company Winters Company Amount Percentage Amount Percentage Sales …………………………. $500,000 100% $500,000 100% Variable cost ……………….. 400,000 80 150,000 30 Contribution margin …….. $100,000 20% $350,000 70% Fixed costs ………………….. 60,000 12 310,000 62 Operating profit ……………. $ 40,000 8% $40,000 8%

b. Spring Company’s profits increase by $8,000 [= .20 x ($500,000 x .08)] and Winter Company’s profits increase by $28,000 [= .70 x ($500,000 x .08)].

3-35. (15 min.) CVP and Margin of Safety: Bristol Car Service. a.

Profit = (P – V)X – F

$0 = ($50 – $12)X – $2,736 $38X = $2,736

X = $2,736

$38 X = 72 trips

b. Margin of safety = 90 – 72

= 18 trips (20%)

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3-36. (15 min.) CVP and Margin of Safety: Casey’s Cases. a.

Profit = (P – V)X – F

$0 = ($30 – $26)X – $2,480 $4X = $2,480

X = $2,480

$4 X = 620 cases

b. Margin of safety = 700 – 620

= 80 cases (11.4%)

©The McGraw-Hill Companies, Inc., 2017 96 Fundamentals of Cost Accounting

3-37. (20 min.) Using Microsoft Excel to Perform CVP Analysis: Derby Phones. a. 2,000 units.

The following two screenshots show the setup and solution.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 3 97

3-37 (continued). b. 2,040 units.

The following two screenshots show the setup and solution.

©The McGraw-Hill Companies, Inc., 2017 98 Fundamentals of Cost Accounting

3-38. (20 min.) Using Microsoft Excel to Perform CVP Analysis: Warner Clothing. a. 3,500 units.

The following two screenshots show the setup and solution.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 3 99

3-38(continued). b. 4,250 units.

The following two screenshots show the setup and solution.

©The McGraw-Hill Companies, Inc., 2017 100 Fundamentals of Cost Accounting

3-39. (20 min.) CVP With Income Taxes: Hunter & Sons. a.

Profit = (P – V)X – F

$0 = ($550 – $330)X – $143,000

X = $143,000

$220 X = 650 units

b. In order to achieve a profit of $39,600 after tax, Hunter & Sons must earn:

$66,000 = [$39,600 ÷ (1.00 – 0.40)] before taxes.

The number of units to earn $66,000 in operating profits is: X = ($143,000 + $66,000) ÷ ($550 – $330) = 950 units

3-40. (20 min.) CVP With Income Taxes: Hammerhead Charters. a.

Profit = (P – V)X – F

$0 = ($50 – $20)X – $6,000

X = $6,000

$30 X = 200 trips

b. In order to achieve a profit of $9,000 after tax, Hammerhead Charters must earn:

$12,000 = [$9,000 ÷ (1.00 – 0.25)] before taxes.

The number of units to earn $75,000 in operating profits is: X = ($6,000 + $12,000) ÷ ($50 – $20) = 600 trips

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 3 101

3-41. (20 min.) Multiproduct CVP Analysis: Rio Coffee Shoppe.’ First, compute the weighted-average contribution margin per unit:

= $0.96 = 60% x ($1.50 – $0.70) + 40% x ($2.50 – $1.30)

The total number of cups of regular coffee and lattes (X) to break even is:

Profit = (P – V)X – F $0 = $0.96 X – $6,720 X = 7,000 cups

=

4,200 (= 60% x 7,000) cups of regular coffee and

2,800 (= 40% x 7,000) lattes

©The McGraw-Hill Companies, Inc., 2017 102 Fundamentals of Cost Accounting

3-42. (20 min.) Multiproduct CVP Analysis: Mission Foods.

a. Profit = ($3.00 – $1.50) x 200,000 + ($4.50 – $2.25) x 300,000 – $117,000

= $858,000

b. First, compute the weighted-average contribution margin per unit:

= $1.95 = 40% x ($3.00 – $1.50) + 60% x ($4.50 – $2.25)

The total number of chicken and fish tacos (X) to break even is:

Profit = (P – V)X – F $0 = $1.95 X – $117,000 X = 60,000 tacos

= 24,000 (= 40% x 60,000) chicken tacos and 36,000 (= 60% x 60,000) fish tacos

c. First, compute the weighted-average contribution margin per unit:

= $1.65 = 80% x ($3.00 – $1.50) + 20% x ($4.50 – $2.25)

The total number of chicken and fish tacos (X) to break even is:

Profit = (P – V)X – F $0 = $1.65 X – $117,000 X = 70,910 tacos (rounding up)

= 56,728 (= 80% x 70,910) chicken tacos and 14,182 (= 20% x 70,910) fish tacos

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 3 103

Solutions to Problems

3-43. (35 min.) CVP Analysis and Price Changes: Argentina Partners. a. Current profit = 60,000 units x ($30 – $15) – $700,000 = $200,000

Variable costs. New variable cost per unit: Labor + Materials + Overhead

115%  50%  $15 + 110%  25%  $15 + 120%  25%  $15 = $17.25

Price: New price = 110%  $30 = $33.00 Fixed costs: New fixed costs = 105%  $700,000 = $735,000 Sales: Profit target = $200,000 Profit = (P – V)X – F $200,000 = ($33.00 – $17.25)X – $735,000 X = $935,000 ÷ ($33.00 – $17.25) = 59,365 units (rounded)

or sales of 59,365  $33 = $1,959,045

b. Profit target = $200,000  106% = $212,000  Profit = (P – V)X – F $212,000 = ($33.00 – $17.25)X – $735,000 X = $947,000 ÷ ($33.00 – $17.25) = 60,127 units (rounded) or sales of 60,127  $33.00 = $1,984,191

c. Profit = PX – VX – F $212,000 = P(60,000) – ($17.25  60,000) – $735,000 P = $1,982,000 ÷ 60,000

P = $33.03 (rounded) or a 10.1% increase

©The McGraw-Hill Companies, Inc., 2017 104 Fundamentals of Cost Accounting

3-44. (35 min.) CVP Analysis and Price Changes: Scholes Systems. a. Current profit = 80,000 units x ($60 – $30) – $1,400,000 = $1,000,000

Variable costs. New variable cost per unit: Labor + Materials + Overhead

115%  50%  $30 + 110%  25%  $30 + 120%  25%  $30 = $34.50

Price: New price = 110%  $60 = $66.00 Fixed costs: New fixed costs = 105%  $1,400,000 = $1,470,000 Sales: Profit target = $1,000,000 Profit = (P – V)X – F $1,000,000 = ($66.00 – $34.50)X – $1,470,000 X = $2,470,000 ÷ ($66.00 – $34.50) = 78,413 units (rounded)

or sales of 78,413  $66 = $5,175,258

b. Profit target = $1,000,000  106% = $1,060,000  Profit = (P – V)X – F $1,060,000 = ($66.00 – $34.50)X – $1,470,000 X = $2,530,000 ÷ ($66.00 – $34.50) = 80,318 units (rounded up) or sales of 80,318  $66.00 = $5,300,988

c. Profit = PX – VX – F $1,060,000 = P(80,000) – ($34.50  80,000) – $1,470,000 Rearranging,

$1,060,000 + ($34.50  80,000) + $1,470,000 = P(80,000)

P = $5,290,000 ÷ 80,000 P = $66.13 (rounded) or a 10.2% increase

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 3 105

3-45. (20 min.) CVP Analysis―Missing Data: Breed Products. a. $8.20

Because the volume is given, it is not necessary to know the fixed and variable costs separately.

Profit = Revenues – Costs Profit = 150,000 x Price – Costs

$600,000 = 150,000 P – $630,000 $1,230,000 = 150,000 P

P = $8.20

b. $1,125,000

Profit = Revenues – Costs

0.20 Revenues = (P – V)X – F 0.20 Revenues = Revenues – 0.6 Revenues – $225,000 0.20 Revenues = $225,000

Revenues = $1,125,000

c. 125,000 units (= $1,125,000 ÷ $9)

©The McGraw-Hill Companies, Inc., 2017 106 Fundamentals of Cost Accounting

3-46. (20 min.) CVP Analysis―Missing Data: Remington Inc. P = $20

There are several ways to approach this problem. Note that although we do not know the fixed costs, they are irrelevant to the solution as we will see.

(1) Set this up as two equations with two unknowns (Price and the breakeven point). Let P = Current price, BE the breakeven point at the current price, and FC fixed cost. Then

BE = FC ÷ (P – $5) at the current price.

If the price is cut by 50 percent, we know that the breakeven point is tripled, so

(3 x BE) = FC ÷ [(0.5 x P) – $5].

Substituting the first equation in the second, we have:

[(3 x FC)/(P – $5)] = FC ÷ [(0.5 x P) – $5].

Solving for P yields P = $20.

(2) For the same fixed cost, if the new breakeven point is three times the old breakeven point, the contribution margin at the current price must be three times the contribution margin at 50 percent of the current price:

(P – $5) = 3 x [(0.5 x P) – $5]

Solving for P yields P = $20.

3-47. (20 min.) CVP Analysis With Subsidies: Suburban Bus Lines. a.

Surplus = (P – V)X – F + Subsidy

$0 = ($1.00 – $1.50)X – $200,000 + $250,000 $0.50X = $50,000

X = $50,000

$0.50 X = 100,000 riders

b. With 75,000 riders, Suburban will operate at a surplus because the subsidy more than offsets the negative contribution margin plus fixed costs. It is “below” break-even, but because Suburban loses money on each rider ($1.00 revenue less the $1.50 variable costs), it operates with a surplus below break-even and at a deficit above break-even.

©The McGraw-Hill Companies, Inc., 2017 Solutions Manual, Chapter 3 107

3-48. (35 min.) CVP Analysis―Sensitivity Analysis: Alameda Tile.

a. Profit = (P – V) X – F

Profit = ($800 – $480) X – $160,000 0 = ($800 – $480) X – $160,000 X = $160,000 ÷ $320 = 500 students b. Profit = ($800 – $480) X – $160,000 $80,000 = ($800 – $480) X – $160,000 X = $240,000 ÷ $320 = 750 students c. (1) Profit = ($800 – $480) x 800 students – $160,000

= $96,000

c. (2) 10% price decrease. Now P = $720

Profit = ($720 – $480) x 800 students – $160,000

= $32,000 Profit decreases by $64,000

20% price increase. Now P = $960

Profit = ($960 – $480) x 800 students – $160,000

= $224,000 Profit increases by $128,000

c. (3) 10% variable cost decrease. Now V = $432

Profit = ($800 – $432) x 800 students – $160,000

= $134,400 Profit increases by $38,400

20% variable cost increase. Now V = $576

Profit = ($800 – $576) x 800 students – $160,000

= $19,200 Profit decreases by $76,800

©The McGraw-Hill Companies, Inc., 2017 108 Fundamentals of Cost Accounting

3-48 (continued).

c. (4) 10% fixed cost decrease, 10% variable cost increase.

Now F = $144,000 and V = $528

Profit = ($800 – $528) x 800 students – $144,000

= $73,600 Profit decreases by $22,400

3-49. (35 min.) Extensions of the CVP Model―Semifixed (Step) Costs: Sam’s Sushi.

a. There are three possible break-even points (one with each additional lane):

1 lane: X = $33,000 ÷ ($10 – $4) = 5,500 meals 2 lanes: X = $39,000 ÷ ($10 – $4) = 6,500 meals 3 lanes: X = $52,500 ÷ ($10 – $4) = 8,750 meals

The break-even point with one lane is not feasible because it exceeds the maximum number of meals for one lane.

Therefore, there are two break-even points: 6,500 meals and 8,750 meals.

b. To answer this question, we just need to check at the three maximum levels for each lane alternative:

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