Within the relevant range, fixed costs do not change in total with changes in product volume. The average cost per unit declines as a production facility produces more units. S 10 min. Cost of coffee used at a Starbucks store Variable b. Hourly wages paid to sales clerks at Best Buy Variable c. Monthly flower costs for a florist Variable d.
Cost of fuel used for a national trucking company Variable e. Shipping costs for Amazon. Monthly rent for a nail salon Fixed g. Sales commissions at a car dealership Variable h. Monthly insurance costs for the home office of a company Fixed i. Monthly depreciation of equipment for a customer service office Fixed j. Cost of fabric used at a clothing manufacturer Variable k.
Cost of fruit sold at a grocery store Variable l. Monthly office lease costs for a CPA firm Fixed m. Property taxes for a restaurant Fixed o. Chapter 2 Building Blocks of Managerial Accounting 5 min. S Managerial Accounting 4e Solutions Manual 1. Chris overhears a subordinate at a mutual friend's party tell others about a confidential deal with a supplier to get raw materials for a price lower than market price.
Chris does not do anything about the subordinate's indiscrete conversation. Confidentiality - Keep information confidential except when disclosure is authorized or legally required. Without the bribe, the factory cannot be located in that location.
Integrity - Refrain from engaging in any conduct that would prejudice carrying out duties ethically. There is a failure in the company's backup systems after a system crash. Month end reports will be delayed. Mark, the manager of the division with the system failure, does not report this upcoming delay to anyone since he does not want to be the bearer of bad news. To reduce the company's tax bill, Jillian uses total cost to value inventory instead of using product cost as required by law.
Competence - Perform professional duties in accordance with relevant laws, regulations, and technical standards.
Since Michael works in the accounting department, he is aware that profits are going to fall short of analysts' projections. He tells his father to sell stock in the company before the earnings release date.
Confidentiality - Refrain from using confidential information for unethical or illegal advantage. EA a. Design b. Distribution d. Purchasing e. Marketing f. Customer Service Req. EA Req. EA Instructional note: This is a fairly challenging exercise that requires students to work backwards through financial statement elements. EA min. The interest rate paid on invested funds, when deciding how much inventory to keep on-hand.
Relevant — funds tied up in inventory cannot earn interest. The higher the interest rate, the more likely the company will want to decrease inventory levels and invest the extra funds. Cost of computers purchased 6 months ago, when deciding whether to upgrade to computers with faster processing speed. Irrelevant — the cost of the computers, which were purchased in the past, is a sunk cost.
Relevant — the company will incur different property taxes depending on where they locate. Relevant — the type of gas used by the delivery vans will affect the cost of operating the vans in the future. Cost of operating automated production machinery versus the cost of direct labor, when deciding whether to automate production. Relevant — the cost of employing labor versus automating production will likely differ. The fair market value of old manufacturing equipment when deciding whether or not to replace it with newer equipment.
Relevant — the fair market value is the amount of money the company could expect to receive from selling the old equipment if they decide to replace it with newer equipment.
Cost of purchasing packaging materials from an outside vendor, when deciding whether to continue manufacturing the packaging materials in-house. Relevant — the cost is relevant if it differs between outsourcing and making the materials in-house. Depreciation expense on old manufacturing equipment when deciding whether or not to replace it with newer equipment. Irrelevant — depreciation expense is simply the paper write-off expensing of a sunk cost.
Also, the remaining net book value of the equipment will need to be expensed regardless of whether the equipment is replaced. Most likely irrelevant — unless the additional items will require the restaurant to purchase additional kitchen equipment, the total fixed cost will probably not change. The cost of land purchased 3 years ago, when deciding whether to build on the land now or wait two more years before building. Irrelevant — the cost of the land is a sunk cost whether the company builds on the land now, or in the future.
The company will be operating more efficiently, so the average cost of making each unit decreases. EB Direct materials…………………………………….. EB a. Distribution b. Research and Development d.
Customer Service e. Purchases Chapter 2 Building Blocks of Managerial Accounting min. EB Instructional note: This is a fairly challenging exercise that requires students to work backwards through financial statement elements.
The purchase price of the old computer when replacing it with a new computer with improved features Irrelevant b. The cost of renovations when deciding whether to build a new office building or to renovate the existing office building Relevant c. The original cost of the current stove when selecting a new, more efficient stove for a restaurant Irrelevant d. The fair market value trade-in value of the existing forklift when deciding whether to replace it with a new, more efficient model Relevant f.
Fuel economy when purchasing new trucks for the delivery fleet Relevant. The cost of production when determining whether to continue to manufacture the screen for a smartphone or to purchase it from an outside supplier Relevant h. The cost of land when determining where to build a new call center Relevant i.
The average cost of vehicle operation when purchasing a new delivery van Relevant j. Real estate property tax rates when selecting the location for a new order processing center Relevant 10 min.
However, some students may classify salt as direct materials. This can increase costs of later value-chain elements. If the recipe is not designed so the soda is easy to produce, or if the production process is not well laid-out, production costs will be higher than they need to be.
Qualitatively, you will want to consider whether the time spent commuting is worth the extra money you will be netting from living at home. PA Req.
The more units they produce, the lower the average fixed cost per unit. If the recipe is not designed so the soda is easy to produce, or if the production process is not well laid out, production costs will be higher than they need to be. PB Req. Part Three: Reqs. Briefly describe a service company, a merchandising company, and a manufacturing company. Give an example of each type of company, but do not use the same examples as given in the chapter. Service companies are in business to sell intangible services.
Merchandising companies are in business to sell tangible products they buy from manufacturers. Manufacturing companies use labor, plant, and equipment to convert raw materials into new finished products. How do service, merchandising, and manufacturing companies differ from each other? How are service, merchandising, and manufacturing companies similar to each other? List as many similarities and differences as you can identify. What is the value chain? What are the six types of business activities found in the value chain?
Which type s of business activities in the value chain generate costs that go directly to the income statement once incurred? What type s of business activities in the value chain generate costs that flow into inventory on the balance sheet?
All costs along the value chain for service companies, all except for purchases for merchandisers, and all except for production for manufacturers. Purchases flow into inventory for a merchandiser and production flows into inventories for a manufacturer. Compare direct costs to indirect costs. Give an example of a cost at a company that could be a direct cost at one level of the organization but would be considered an indirect cost at a different level of that organization.
Explain why this same cost could be both direct and indirect at different levels. A direct cost can be traced to a cost object whereas an indirect cost relates to the cost object but cannot be traced to it. The salary of a car sales manager is a direct cost to the sales department, but an indirect cost of the car itself. The salary of a sales manager is directly traceable to the sales department because that is the only place the manager works in the company.
The salary is an indirect cost of the car because it is impossible to determine how much of it belongs to a specific car. Why does it matter whether a cost is an inventoriable product cost or a period cost? Inventoriable product costs are all costs of a product that GAAP requires companies to treat as an asset inventory for external financial reporting.
These costs are not expensed until the product is sold. Period costs are costs that are expensed in the period in which they are incurred; often called Operating Expenses, or Selling, General, and Administrative Expenses. An inventoriable product cost is treated as an asset until the product is sold; it will benefit a future period. A period cost is expensed when it is incurred as it has no future value. Compare inventoriable product costs to period costs.
Using a product of your choice, give examples of inventoriable product costs and period costs. Explain why you categorized your costs as you did. Levi Strauss makes jeans. The inventoriable product costs would include denim, thread, zippers, labor, and factory overhead. All of these costs are related to the production of the jeans and are therefore inventoriable.
The costs of advertising the jeans in magazines, commissions paid to employees who sell the jeans to merchandisers, and the cost of shipping the jeans to buyers are all period costs because they are incurred once the jeans have been produced and have no future value to the company. Describe how the income statement of a merchandising company differs from the income statement of a manufacturing company. Also comment on how the income statement from a merchandising company is similar to the income statement of a manufacturing company.
The Cost of goods sold section of the income statement is different for a merchandiser and a manufacturer because a merchandiser buys finished goods whereas a manufacturer produces finished goods. The merchandiser uses the cost of purchases in the computation of Cost of goods sold, where the manufacturer uses the Cost of goods manufactured in the computation of Cost of goods sold.
The rest of the income statement is the same for both merchandisers and manufacturers. It includes Sales revenue, Gross profit, Operating expenses, and Operating income. How are the cost of goods manufactured, the cost of goods sold, the income statement, and the balance sheet related for a manufacturing company? What specific items flow from one statement or schedule to the next?
Describe the flow of costs between the cost of goods manufactured, the cost of goods sold, the income statement, and the balance sheet for a manufacturing company. The Cost of goods manufactured includes all the costs of production, direct material, direct labor, and manufacturing overhead. This amount is used in the preparation of the income statement in the computation of Cost of goods sold where it is added to beginning Finished goods inventory to determine Cost of goods available for sale.
The remaining Finished goods that have not been sold is shown on the balance sheet as Inventory. What makes a cost relevant or irrelevant when making a decision? Suppose a company is evaluating whether to use its warehouse for storage of its own inventory or whether to rent it out to a local theater group for housing props. Describe what information might be relevant when making that decision. When making a decision, a cost is considered relevant or irrelevant depending on whether it changes between the alternatives in the decision.
Some relevant costs to consider in the evaluation of whether to use the warehouse for storage or whether to rent it would be the cost of storage elsewhere, how much rent could be charged for the warehouse, insurance costs, and so forth. Give an example of a situation in which there is a cost that is a differential cost but not a variable cost. A differential cost is the difference in cost between two alternative courses of action whereas a variable cost is a cost that changes in total in direct proportion to changes in volume.
If a company was deciding between renting office space downtown more expensive or in the suburbs less expensive , the cost of rent would be an example of a differential cost that is not a variable cost. Rent is a fixed cost. Student answers may vary. Describe the product that is being produced and the company that produces it. A 2. Describe the six value chain business activities that this product would pass through from its inception to its ultimate delivery to the customer.
List at least three costs that would be incurred in each of the six business activities in the value chain. Classify each cost you identified in the value chain as either being an inventoriable product cost or a period cost. Explain your justification. All the costs, with the exception of production costs, are period costs. Only the production costs are inventoriable. A cost object can be anything for which managers want a separate measurement of cost.
List three different potential cost objects other than the product itself for the company you have selected. Advertising Internal control Environmental sustainability 6. List a direct cost and an indirect cost for each of the three different cost objects in 5. Explain why each cost would be direct or indirect. Internal Control o Direct — cost of separating duties within a department o Indirect — Audit Committee costs for the company Environmental Sustainability o Direct — Zero waste within a department o Indirect — Companywide energy efficiency Student answers will vary.
If Joe were to increase income by adding sales commission costs and advertising costs to product costs, the following ethical principles would be violated: a.
Competence: Perform professional duties in accordance with relevant laws, regulations, and technical standards. By adding in period costs to product costs, Joe would be violating technical standards.
Competence: Provide decision support information that is accurate and clear. Adding in period costs would not be accurate or clear. Credibility - Disclose all relevant information that could reasonably be expected to influence an intended user's understanding of the reports. Integrity - Abstain from engaging in or supporting any activity that might discredit the profession.
Monitor expenses closely. Employee satisfaction Consider employee Human Management would record surveys and feedback suggestions and enact Resources needs and suggestions made reports. Time budgets as well as expense budgets are needed. If the goods have been received, postponing recording of the purchases understates liabilities. This is unethical and inconsistent with the IMA standards even if the supplier agrees to delay billing.
The software has not been sold. Therefore, it would be inconsistent with the IMA standards to record it as sales. This is clearly wrong and unethical, and it is inconsistent with the IMA standards. The decision should not be driven by the desire to meet a profit goal. It should be based on the likelihood that the company will collect. We cannot determine this without more information.
However, because the company emphasizes earnings growth, which can lead to sales to customers with weaker credit records, reducing the allowance seems questionable.
This strategy is likely inconsistent with the IMA standards. If the maintenance is postponed, there is no transaction to record. Strategies a, b, and c are clearly unethical and inconsistent with the IMA standards of integrity, credibility, and perhaps competence. Strategy d is likely unethical, but we cannot be certain without more information. The controller should resist attempts to implement a, b, and c, and she should gather more information about d. PB Req.
Savings from streamlining the manufacturing process…………………. Savings from inventory reduction…………………………………………… Profits from increased sales Total benefits if the project is successful…………………………………..
Employee training…………………………………………………… Total costs………………………………….. Costs ………………………………………… Excess of benefits over costs… Second, the representatives of the different functional business areas have different knowledge and information to contribute. PB Costs: Financial assistance to dealers Software and consulting fees……………………………………. This is a downward revision from what was originally estimated in PB.
Total costs from PB ……………… The quantitative analysis suggests the company should not undertake the project. Providing dealers with current availability, price information, and timely order processing will help Sun Gas manage and reduce its inventories. How are these three areas interrelated? How does managerial accounting support each of the responsibility areas of managers?
Planning involves setting goals, directing means overseeing the day-to-day operations that support those goals, and controlling means evaluating the results of those operations. Budgets, variance analysis, cost-volume-profit analysis are some of the ways managerial accounting supports the responsibility areas of management. How does SOX affect financial accounting?
How does SOX impact managerial accounting? Is there any overlap between financial and managerial accounting in terms of the SOX impact? If so, what are the areas of overlap? The Sarbanes-Oxley Act of is a congressional act that enhances internal control and financial reporting requirements and establishes new regulatory requirements for publicly traded companies and their independent auditors. I addition, they assume responsibility for establishing an adequate and internal control structure and procedures for financial reporting.
Why is managerial accounting more suitable for internal reporting than financial accounting? Managerial accounting is more suitable for internal reporting than financial accounting because management needs timely information that will assist them in planning, analyzing, and making decisions. They cannot wait for the historical information that is provided by financial accounting. A company currently has all of its managerial accountants reporting to the controller.
What might be inefficient about this organizational structure? How might the company restructure? What benefits would be offered by the restructuring? Having all managerial accountants report to the controller is the traditional way of structuring companies in the past when management accountants were viewed as recorders of historical transactions. Now the company should consider how management accountants make a better fit in cross-functional teams, which consist of employees representing various functions of the company.
This would allow the management accountants to use their consultant and advisor roles more effectively for the company. What skills are required of a management accountant? In what college courses are these skills taught or developed?
What skills would be further developed in the workplace? These skills are taught and developed in a variety of college courses: accounting, management, communication, computer science, finance, and any courses that require students to work in teams and practice their communication skills. All skills would be further developed in the workplace especially as each company has its own needs and requirements based on its industry and culture.
The Institute of Management Accountants is the professional association for management accountants. What skills are assessed on the CMA exam? Most employers do not require the CMA certification, but it tends to command a higher salary and higher-level positions for those who hold the certification.
The difference lies in the accounting focus of each. The CPA exam focuses on financial, auditing, and tax topics whereas the CMA exam focuses on managerial accounting topics as well as economics and business finance. Describe the meaning of each of the four standards. How does each of these standards impact planning, directing, and controlling? The four ethical standards are competence, confidentiality, integrity, and credibility. Maintain an appropriate level of professional expertise by continually developing knowledge and skills.
Perform professional duties in accordance with relevant laws, regulations, and technical standards. Provide decision support information and recommendations that are accurate, clear, concise, and timely. Recognize and communicate professional limitations or other constraints that would preclude responsible judgment or successful performance of an activity.
Inform all relevant parties regarding appropriate use of confidential information. Mitigate actual conflicts of interest. Regularly communicate with business associates to avoid apparent conflicts of interest. Advise all parties of any potential conflicts. How has technology changed the work of management accountants? What other business trends are influencing managerial accounting today?
Due to technology, management accountants have been freed from the routine mechanical work and spend their time planning, analyzing, and interpreting accounting data to provide decision making support. Some business trends, such as the shifting economy, have required managers to become knowledgeable in services as well as products. Global competition also has required managers to become skilled in e-commerce.
What significant regulatory trends are impacting accounting in general today? How do these regulatory trends affect the field of managerial accounting? All these trends affect different aspects in the field of managerial accounting, requiring managers to keep educated and updating their skills.
The effect of sustainability on the planet environment is probably the most visible component of the triple bottom line. For a company with which you are familiar, list two examples of its sustainability efforts related to the planet. Student responses will vary. One controversial area regarding sustainability is whether organizations should use their sustainability progress and activities in their advertising.
Do you think a company should publicize their sustainability efforts? Why or why not? When you think of an accountant, whom do you picture? Do you personally know anyone family member, friend, relative whose chosen career is accounting?
Before reading Chapter 1, what did you picture accountants doing, day-in and day-out, at their jobs? From where did this mental picture come e. What skills are highly valued by employers? They help design the information systems that capture and record transactions and make sure that the information system generates accurate data.
They use professional judgment to record non-routine transactions and make adjustments to the financial records as needed. Since management accountants have been freed, due to technology, from the routine mechanical work, they spend more time planning, analyzing, and interpreting accounting data and providing decision support. Chapter 1 includes several quotes from accountants at Abbott Laboratories, Caterpillar, and U.
Accountants are now responsible for understanding how all the functions in a company work together. They have become members of different teams in order to participate in the daily operations of the company. Many, if not most, accounting majors start their careers in public accounting. Do you think most of them stay in public accounting? Discuss what you consider to be a typical career track for accounting majors. Student answers will vary concerning the typical career track for accounting majors because there are many.
It would start with the decision to enter public, corporate, governmental, or independent accounting. If you are not an accounting major, how do the salaries of accountants compare with your chosen field? How do the opportunities compare i.
Student answers will vary depending on their chosen field. Do you think such behavior is common at other companies, or do you think this was a fairly isolated event? Why do you think some people can so easily justify at least to themselves their unethical behavior?
In general, do you think people stop to think about how their actions will affect other people e. What was your reaction to the psychology experiment shown in the DVD? Why then do some people do it? You are a business student and will someday work for company or own a business. How will watching this movie impact the way you intend to conduct yourself as an employee or owner? How did employees of Enron and employees of the utilities company in Oregon end up losing billions in retirement funds?
Decision Case A Sustainability This is an open-ended project, without definite solutions. However, the following observations may be helpful. This project works best with groups of students. The person interviewed could be identified through a connection of one of the students, a connection made by the instructor, or a connection through the school. Requiring students to answer the first four questions before the interview will help ensure that they are prepared for the interview. It is important that students be prepared so they can make a favorable impression on the interviewee for the school and future employment!
If the company is of any reasonable size, they should be able to gather information from the library or the Internet. Regardless of whether the company has a sustainability policy or not, what sustainability efforts does the company make with respect to the environment?
For example, does the company recycle its waste? What specific types of waste are recycled? Does the company purchase recycled-content products? Is the amount or percentage of waste that is recycled tracked in a reporting system? How does the company measure its impact on the environment if it does?
For example, does it measure its carbon footprint in total? Does it measure the carbon footprint of individual projects? Does the company do any external reporting on sustainability?
If so, how long has the company been reporting on its sustainability efforts? If the company does not do any sustainability reporting at the current time, does it anticipate starting to report on its sustainability efforts in the near future? A Ethics The ethical standard that Jane may have violated is confidentiality.
She had a responsibility to keep her work details confidential. Tom, on the other hand, has committed illegal acts insider trading at a minimum. If Jane discovers what Tom has been doing, she may have a responsibility to report his actions.
If they get married before she would discover his wrongdoings, then that muddies the waters further. Note from author: This case was based loosely on a real-life legal case. Types of financial accounting information that may be generated or recorded includes: a. Ticket sales revenue b.
Operating costs including salaries, utilities, cost of props, etc. Information needed by Mamma Mia! Financial accounting system i. Ticket revenues to date ii. Operating costs to date b. Managerial accounting system i.
Projected rental costs of new theater for upcoming year ii. Projected rental costs of current theater for upcoming year iii. Projected operating costs of new theater iv. Projected operating costs of current theater v.
Projected ticket revenues in new theater vi.
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