Test Bank Fundamentals of Cost Accounting 6th Edition By William Lanen
Fundamentals of Cost Accounting, 6e (Lanen)
Chapter 1 Cost Accounting: Information for Decision Making
1) The value chain comprises activities from research and development through the production process but does not include activities related to the distribution of products or services.
Answer: FALSE
Explanation: The value chain comprises activities from research and development (R&D) through the production process and including distribution and customer service.
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2) Administrative functions are not included as part of the value chain because they are implicitly included in every business function.
Answer: TRUE
Explanation: This statement is true. Administrative expenses are not included as part of the value chain because they are included instead in every business function of the value chain.
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
3) Under the value chain concept, value-added activities are those that firms perform and that customers perceive as adding utility to the goods they purchase.
Answer: TRUE
Explanation: The statement is true. Under the value chain concept, the value-added activities are those that the customer perceives as adding utility to the goods or services they purchase.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
4) The value chain is comprised of the activities that take place only during the production process.
Answer: FALSE
Explanation: This statement is false. The value chain comprises activities from research and development through the production process to customer service.
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
5) If a poor facility layout exists and work-in-process inventory must be moved during the production process, the company is likely to be performing value-added activities.
Answer: FALSE
Explanation: The statement is false. If a poor facility layout exists and work-in-process inventory must be moved during the production process, the company is likely to be performing nonvalue-added activities.
Difficulty: 1 Easy
Topic: Our Framework for Assessing Cost Accounting Systems
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
6) Cost information itself is a product with its own customers.
Answer: TRUE
Explanation: The statement is true. Cost information itself is a product with its own customers, who are managers that need to control and improve operations.
Difficulty: 1 Easy
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) Financial accounting information is sufficient for making operational decisions.
Answer: FALSE
Explanation: The statement is false. Financial accounting information is not sufficient for making operational decisions.
Difficulty: 1 Easy
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) Cost accounting information is commonly used in developing financial accounting information.
Answer: TRUE
Explanation: The statement is true. Cost accounting information is commonly used in developing financial accounting information.
Difficulty: 1 Easy
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
9) Financial accounting information is designed for decision-makers who are directly involved in the daily management of the firm.
Answer: FALSE
Explanation: This statement is false. Financial accounting is designed for external parties; cost accounting is designed for managers.
Difficulty: 1 Easy
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
10) It is more important for financial accounting information to be comparable between firms than to be useful for managerial decision-making.
Answer: TRUE
Explanation: Important criteria for financial accounting include comparability and decision relevance (for investors); decision relevance (for managers) and timeliness are the important criteria for cost accounting.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
11) Cost accounting information developed for managers to use in making decisions must comply with generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS).
Answer: FALSE
Explanation: This statement is false. In contrast to cost data for financial reporting to shareholders, cost data for managerial use (that is, within the organization) need not comply with GAAP or IFRS.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12) A cost driver is a factor that causes costs.
Answer: TRUE
Explanation: This statement is true. A cost driver is a factor that causes costs
Difficulty: 1 Easy
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
13) A cost can be considered a differential cost for one particular course of action but not for another course of action.
Answer: TRUE
Explanation: This statement is true. A differential cost is a cost that changes in response to a particular course of action. A cost may change in response to one course of action but not in response to a different course of action.
Difficulty: 1 Easy
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
14) A responsibility center can be a department, division, or segment, but not a subsidiary of the parent company.
Answer: FALSE
Explanation: A responsibility center is a specific unit of an organization assigned to a manager who is held accountable for its operations and resources. As such, a department, division, segment, or subsidiary could be considered a responsibility center.
Difficulty: 2 Medium
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
15) It is important that the manager assigned to lead a responsibility center be held accountable for its operations.
Answer: TRUE
Explanation: The statement is true. Responsibility does not work without accountability.
Difficulty: 1 Easy
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
16) Budgeting is primarily used to determine year-end bonuses based on managerial and organizational performance.
Answer: FALSE
Explanation: This statement is false. A budget is a financial plan of the revenues and resources needed to carry out activities and meet financial goals. Budgeting helps managers decide whether their goals can be achieved and, if not, what modifications are necessary.
Difficulty: 1 Easy
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
17) Managers are usually responsible for the revenues needed to achieve the targets set during the budgeting process, but not the resources consumed to achieve those targets.
Answer: FALSE
Explanation: This statement is false. Usually, managers are responsible for both the revenues and resources needed to carry out activities and meet financial goals.
Difficulty: 2 Medium
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
18) In general, if activities that do not add value to the company can be eliminated, then costs associated with them will also be eliminated.
Answer: TRUE
Explanation: This statement is true. In general, if activities that do not add value to the company can be eliminated, then costs associated with them will also be eliminated.
Difficulty: 1 Easy
Topic: Our Framework for Assessing Cost Accounting Systems
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
19) Accounting systems are important because they are a primary source of information for managers.
Answer: TRUE
Explanation: This statement is true. Accounting systems are important because they are a primary source of information for managers.
Difficulty: 1 Easy
Topic: Our Framework for Assessing Cost Accounting Systems
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20) Benchmarking is a continuous process of measuring a company's products, services, or activities against competitors' performance.
Answer: TRUE
Explanation: This is the definition of benchmarking.
Difficulty: 1 Easy
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
21) Activity-based costing (ABC) is a management tool that focuses on the continuous improvement of all dimensions of a business.
Answer: FALSE
Explanation: This statement is false. ABC is a costing method that assigns costs to activities and then assigns them to products based on the products' consumption of activities.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
22) Lean manufacturing techniques are used only in the production process.
Answer: FALSE
Explanation: This statement is false. Lean manufacturing techniques can be applied to design, materials, and cost accounting decisions throughout the life of a product.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
23) Typical ERP systems integrate information systems that link production, purchasing, human resources, and finance into a single comprehensive information system.
Answer: TRUE
Explanation: This statement is true. ERP systems are integrated information systems that link the various systems of the enterprise into a single comprehensive information system.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
24) Managers face ethical situations on a daily basis, while accountants face them infrequently.
Answer: FALSE
Explanation: This statement is false. Professional accountants, managers, and business owners face ethical situations on an everyday basis.
Difficulty: 1 Easy
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
25) Compliance with Sarbanes-Oxley does not mean that the manager has met all of his or her ethical responsibilities.
Answer: TRUE
Explanation: This statement is true. Compliance with Sarbanes-Oxley does not mean that the manager has met all of his or her ethical responsibilities.
Difficulty: 3 Hard
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
26) Ethical behavior depends more on a firm's code of conduct than the individual's personal beliefs.
Answer: FALSE
Explanation: This statement is false. Codes of conduct look good on paper, but ultimately much of ethical behavior comes from an individual's personal beliefs.
Difficulty: 2 Medium
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
27) Cost accounting information can be used by managers to defraud customers, creditors, and owners.
Answer: TRUE
Explanation: The statement is true. The design of the cost accounting system has the potential to be misused to defraud customers, employees, or shareholders.
Difficulty: 1 Easy
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28) The boundary between what is cost accounting and what belongs in another discipline is often blurred.
Answer: TRUE
Explanation: This statement is true. Real world problems are generally multidisciplinary.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
29) The set of activities that transforms raw resources into the goods and services end users purchase and consume is called the:
A) value chain.
B) supply chain.
C) demand chain.
D) cost-benefit analysis.
Answer: A
Explanation: The value chain is the set of activities that transforms raw resources into the goods and services end users purchase and consume.
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
30) Which of the following activities would not be considered a value-added activity?
A) Production
B) Marketing
C) Accounting
D) Distribution
Answer: C
Explanation: Accounting for something does not add value; it is an administrative function.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
31) Which of the following statements is false?
A) In essence, the value chain and the supply chain are similar; each creates something for which the customer is willing to pay.
B) Financial accounting information is important because it is sufficient to provide all the information for operational decisions commonly made by managers.
C) The supply or distribution chain is a linked set of organizations that exchange goods and services in combination to provide a final product or service to the customer.
D) Eliminating nonvalue-added activities always reduces costs without affecting the value of the product to customers.
Answer: B
Explanation: Financial accounting information is not sufficient for operational decisions made by managers.
Difficulty: 2 Medium
Topic: Value Creation in Organizations; Accounting Systems; Our Framework for Assessing Cost Accounting Systems
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.; 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.; 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
32) Managers do not make decisions about future events based on:
A) Perfect information.
B) Estimated information.
C) Actual information.
D) Financial information.
Answer: A
Explanation: Perfect information is never available; there is always some uncertainty.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
33) Which of the following is a nonvalue-added activity?
A) Product design
B) Customer service
C) Research and development
D) Rework of defective items
Answer: D
Explanation: Performing a task correctly adds value; correcting mistakes does not add value.
Difficulty: 2 Medium
Topic: Our Framework for Assessing Cost Accounting Systems
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34) (CMA adapted) A costing method that first assigns costs to activities and then assigns them to products based on the products' consumption of those activities is:
A) full-absorption costing.
B) activity-based costing.
C) variable costing.
D) benchmarking.
Answer: B
Explanation: Activity-based costing is a costing method that first assigns costs to activities and then assigns them to products based on the products' consumption of those activities.
Difficulty: 1 Easy
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
35) (CMA adapted) Cost drivers are:
A) activities that cause costs to increase as the activity increases.
B) accounting techniques and practices used to control costs.
C) accounting reimbursements used to evaluate whether performance is proceeding according to plan.
D) a mechanical basis, such as machine hours, computer time, or factory square footage, used to assign costs to activities.
Answer: A
Explanation: Cost drivers are factors that cause costs.
Difficulty: 1 Easy
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36) During 2020, the Beach Restaurant had sales revenues and food costs of $800,000 and $600,000, respectively. During 2021, Beach plans to introduce a new menu item that is expected to increase sales revenues by $100,000 and food costs by $40,000. Assuming no changes are expected for the other food items, operating profits for 2021 are expected to increase by:
A) $260,000.
B) $100,000.
C) $60,000.
D) $40,000.
Answer: C
Explanation: Increase in operating profits would be $100,000 − $40,000 = $60,000.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37) (CMA adapted) The process of creating a financial plan of the revenues and resources needed to carry out activities and meet financial goals is referred to as:
A) budgeting.
B) benchmarking.
C) cost-benefit analysis.
D) value-added analysis.
Answer: A
Explanation: Budgeting is the process of creating a financial plan of the revenues and resources needed to carry out activities and meet financial goals.
Difficulty: 1 Easy
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38) The field of accounting that reports according to generally accepted accounting principles (GAAP) is called:
A) cost accounting.
B) financial accounting.
C) managerial accounting.
D) responsibility accounting.
Answer: B
Explanation: Financial accounting is governed by generally accepted accounting principles (GAAP). Cost, managerial, and responsibility accounting do not depend on GAAP.
Difficulty: 1 Easy
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39) The field of accounting that focuses on the criterion of relevant information rather than comparability of firms is:
A) cost accounting.
B) financial accounting.
C) responsibility accounting.
D) international accounting.
Answer: A
Explanation: The important criterion of cost accounting is that information be relevant for managers making operational decisions; individuals making decisions using financial accounting data are interested in comparing firms.
Difficulty: 1 Easy
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
40) The just-in-time (JIT) method of production focuses on:
A) increasing sales revenue.
B) reducing inventories.
C) increasing customer service.
D) reducing operating expenses.
Answer: B
Explanation: JIT focuses on reducing inventories; the other items are all results or outcomes.
Difficulty: 1 Easy
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41) (CIA adapted) The primary reason for adopting total quality management (TQM) is to achieve:
A) reduced delivery time.
B) reduced delivery charges.
C) greater customer satisfaction.
D) greater employee participation.
Answer: C
Explanation: TQM focuses on the customer.
Difficulty: 1 Easy
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42) According to the Institute of Management Accountants (IMA), the final step in resolving an ethical dilemma is to:
A) consult your own attorney as to legal obligations and rights concerning the ethical conflict.
B) clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethical Counselor, an appropriate and confidential ethics hotline, or other impartial advisor.
C) consult with the local police.
D) discuss the situation with an immediate supervisor.
Answer: A
Explanation: Per the IMA Code of Ethics, consulting your own attorney is a last step.
Difficulty: 2 Medium
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
43) According to the Institute of Management Accountants (IMA), the first step in resolving an ethical dilemma is to:
A) consult your own attorney as to legal obligations and rights concerning the ethical conflict.
B) call the IMA's ethics hotline.
C) clarify relevant ethical issues by initiating a confidential discussion with an IMA Ethical Counselor or other impartial advisor.
D) discuss the situation with an immediate supervisor, except when it appears that the supervisor is involved, or with the next level supervisor if involvement of the immediate supervisor is suspected.
Answer: D
Explanation: It is best to discuss the situation with the immediate supervisor before bringing in outsiders.
Difficulty: 2 Medium
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
44) Which of the following is not one of the basic standards of the Institute of Management Accountants (IMA) Code of Ethics?
A) Competence
B) Confidentiality
C) Honesty
D) Integrity
Answer: C
Explanation: Competence, confidentiality, and integrity are all basic standards of the IMA Code of Ethics. Honesty is not.
Difficulty: 2 Medium
Topic: Appendix-Institute of Management Accountants Code of Ethics; Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
45) Which of the following is not one of the overarching ethical principles of the Institute of Management Accountants (IMA) Code of Ethics?
A) Competence
B) Responsibility
C) Honesty
D) Objectivity
Answer: A
Explanation: Competence is not one of the overarching ethical principles of the IMA Code of Ethics.
Difficulty: 2 Medium
Topic: Appendix-Institute of Management Accountants Code of Ethics; Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
46) A general term for a metric that indicates how well an individual, business, product, or firm is working is called:
A) a performance measure.
B) benchmarking.
C) a budget.
D) a responsibility center.
Answer: A
Explanation: A performance measure is a metric that indicates how well an individual, business, product, or firm is working.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47) The cost accounting system that minimizes wasteful or unnecessary transaction processes is:
A) performance measure.
B) benchmarking.
C) budgeting.
D) lean accounting.
Answer: D
Explanation: Lean accounting systems are designed to minimize wasteful or unnecessary transaction processes.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48) The continual process of measuring a company's own products, services, or activities against competitors' performance is:
A) performance measure.
B) benchmarking.
C) budgeting.
D) responsibility center.
Answer: B
Explanation: Benchmarking is a process of measuring a company's own products, services, or activities against competitors' performance.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
49) The costing method that first assigns costs to activities and then assigns them to products based on the products' consumption of activities is called:
A) lean accounting.
B) responsibility centers.
C) activity-based costing.
D) budgeting.
Answer: C
Explanation: This costing method is a basic concept of ABC.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
50) Having one or more of the firm's activities performed by another firm or individual in the supply or distribution chain is called:
A) lean accounting.
B) responsibility centers.
C) activity-based costing.
D) outsourcing.
Answer: D
Explanation: Outsourcing is having one or more of the firm's activities performed by another firm or individual in the supply or distribution chain.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
51) Systems that identify the costs of producing defective units as well as low-quality items that lose sales are called:
A) customer relationship management systems.
B) distribution chains.
C) enterprise resource planning systems.
D) cost of quality systems.
Answer: D
Explanation: Cost of quality systems identify costs of producing defective units as well as the lost sales associated with poor-quality products.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
52) Systems that allow firms to target profitable customers by assessing customer revenue and costs are called:
A) customer relationship management systems.
B) distribution chains.
C) enterprise resource planning systems.
D) cost of quality systems.
Answer: A
Explanation: CRM systems allow firms to target more precisely those customers who are profitable by assessing the costs to serve a customer along with the revenues a customer generates.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
53) Information technology that links the various processes of the company into a single comprehensive information system is called:
A) a customer relationship management system.
B) a distribution chain.
C) a cost of quality system.
D) an enterprise resource planning system.
Answer: D
Explanation: ERP systems are integrated information systems that link various activities in an organization.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
54) A management method by which the organization seeks to excel on all dimensions of quality is called:
A) customer relationship management.
B) a just-in-time method.
C) total quality management.
D) cost of quality.
Answer: C
Explanation: The key words are "management method" and "all dimensions of quality."
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
55) Which of the following is not a key financial manager in an organization?
A) Chief financial officer
B) Treasurer
C) External auditor
D) Controller
Answer: C
Explanation: Correct! The external auditor is not a financial manager in an organization.
Difficulty: 1 Easy
Topic: Key Financial Players in the Organization
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
56) Which of the following is not normally considered part of the value chain?
A) Research and development
B) Purchasing
C) Administration
D) Distribution
Answer: C
Explanation: Administration is imbedded in all of the business functions; it is not a separate function of the value chain.
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
57) In 2020, the TransUnion Company had consulting revenues of $1,000,000 while costs were $750,000. In 2021, TransUnion will be introducing a new service that will generate $150,000 in sales revenues and $60,000 in costs. Assuming no changes are expected for the other services, operating profits are expected to increase between 2020 and 2021 by:
A) $250,000.
B) $150,000.
C) $90,000.
D) $60,000.
Answer: C
Explanation: Increase in operating profit would be $150,000 − $60,000 = $90,000.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
58) In 2020, the Merkel Company had revenues of $2,000,000 and costs of $1,500,000. During 2021, Merkel will be introducing a new product line that is expected to increase sales revenue by $200,000 and costs by $160,000. Assuming no changes are expected for the other products, the operating profits are expected to increase by:
A) $540,000.
B) $200,000.
C) $160,000.
D) $40,000.
Answer: D
Explanation: Increase in operating profit would be $200,000 − $160,000 = $40,000.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
59) Moving of inventory is an example of a(n):
A) cost-benefit analysis.
B) value-added activity.
C) activity-based cost.
D) nonvalue-added activity.
Answer: D
Explanation: Producing product adds value, moving it around does not add value.
Difficulty: 1 Easy
Topic: Our Framework for Assessing Cost Accounting Systems
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
60) Costs that differ among or between two or more alternative courses of action are:
A) differential costs.
B) cost-benefit analysis.
C) activity-based costs.
D) cost drivers.
Answer: A
Explanation: Differential costs are the costs that change in response to a particular course of action.
Difficulty: 2 Medium
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
61) Which of the following activities would not be included in the value chain of a manufacturing company?
A) Research and Development
B) Customer Service
C) Design
D) Accounting
Answer: D
Explanation: Accounting is not a separate component in the value chain, instead it is included in every business function of the value chain.
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
62) A firm's reply to customer questions via email would be an example of which component of the value chain?
A) Customer Service
B) Marketing
C) Design
D) Supply
Answer: A
Explanation: This is an example of customer service.
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
63) The delivery of products or services to customers is an example of which element in the value chain?
A) Production
B) Design
C) Marketing
D) Distribution
Answer: D
Explanation: This is an example of distribution.
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
64) Which of the following provides much of the information necessary for the coordination of the value chain?
A) Distribution chain.
B) Financial accounting system.
C) Cost accounting system.
D) Supply chain.
Answer: C
Explanation: The cost accounting system provides much of the information necessary for the coordination of the value chain.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
65) Advertising costs would be associated with which of the following value chain components?
A) Production.
B) Research and Development.
C) Distribution.
D) Marketing and sales.
Answer: D
Explanation: Advertising costs would be associated with the value chain component of marketing and sales.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
66) Which part of the value chain is outside the firm?
A) Design component
B) Research and Development component
C) Production activity
D) Distribution chain
Answer: D
Explanation: The distribution chain is a part of the value chain outside the firm.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
67) Which of the following statements regarding the value chain is true?
A) Service firms benefit from the value chain more than manufacturing firms.
B) Value chain components do not overlap.
C) Value is not created until after the research and development stage.
D) Administrative functions are not included as a separate component of the value chain.
Answer: D
Explanation: It is true that administrative functions are not included as a separate component of the value chain.They are included instead in every business function of the value chain.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
68) Which of the following statements concerning the value chain is false?
A) The goal of a value chain is to find areas where a company can either add value or reduce cost.
B) The value chain focuses on the entire production process, as well as the sale of the product and service after the sale.
C) If a company cannot compete in a specific area of the value chain, it might outsource that portion of the value chain to another entity which can perform it better.
D) Successful firms are ones that operate within the entire value chain, thereby overseeing every aspect of the value chain for the customer.
Answer: D
Explanation: A "total value chain focus" ensures the utility of each value chain function.
Difficulty: 3 Hard
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
69) Which of the following could be considered part of the value chain in a service firm?
A) Inspection of product
B) Advertising
C) Raw materials
D) Distribution
Answer: B
Explanation: Advertising would be a part of the marketing and sales component of the value chain in a service firm. The other three answer choices describe an activity with a "physical" product, not a service.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
70) Place the four components in the order they appear along the value chain: A = Customer service; B = Design; C = Distribution; and D = Production.
A) ABDC
B) ACDB
C) BDCA
D) BADC
Answer: C
Explanation: The correct order is Design, Production, Distribution, and Customer service.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
71) Managers evaluate value-added activities to determine how they contribute to the final product's:
A) service only.
B) quality only.
C) cost only.
D) service, quality, and cost.
Answer: D
Explanation: Managers evaluate value-added activities to determine how they contribute to the final product's service, quality, and cost.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
72) Which of the following is the best reason why cost accounting information does not need to be comparable to similar information in other organizations?
A) Because it is only used by investors and creditors.
B) Because no publicly traded companies use cost accounting.
C) Because IFRS and cost accounting are converging which eliminates the need for comparability.
D) Because managers that use this information are making decisions only for their organization.
Answer: D
Explanation: Because the managers are making decisions only for their own organization, there is no need for the information to be comparable to similar information in other organizations.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
73) Financial accounting:
A) focuses on the future.
B) must comply with GAAP (generally accepted accounting principles).
C) reports include detailed information on the various operating segments of the business.
D) is prepared for the use of management.
Answer: B
Explanation: Financial accounting must comply with GAAP. The other answer choices are characteristics of cost accounting.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
74) The individual who would most likely use only financial accounting information in making decisions is a:
A) vice president of marketing.
B) factory supervisor.
C) department manager.
D) company shareholder.
Answer: D
Explanation: Company shareholders would most likely use only financial accounting information in making decisions. The other answer choices are internal users who focus primarily on cost accounting information.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
75) The financial accounting system is the primary source of information for:
A) decision making on the factory floor.
B) improving the performance level of customer service.
C) planning the budget for next year.
D) preparing the income statement for shareholders.
Answer: D
Explanation: Financial accounting information is used primarily for preparing the income statement. The other answer choices describe internal functions that have to do with the cost accounting system.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
76) Managerial decisions using cost accounting are more appropriate for which types of costs?
A) future costs.
B) historical costs.
C) current costs.
D) externally reported costs.
Answer: A
Explanation: Managerial decisions deal with the future, so estimates of future costs are more valuable for decision making than are the historical and current costs that are reported externally.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
77) At the middle management level, where managers supervise work and make operating decisions, cost information highlights:
A) the company's overall performance.
B) comparability across firms.
C) financial position and income according to accounting rules.
D) some aspect of operations that is different from expectations.
Answer: D
Explanation: At the middle management level, where managers supervise work and make operating decisions, cost information is used to identify problems by highlighting when some aspect of operations is different from expectations.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
78) Financial accounting provides a historical perspective, while cost accounting emphasizes:
A) reporting to shareholders.
B) a current perspective.
C) the future.
D) past transactions.
Answer: C
Explanation: Future focus is a basic function of cost accounting. The other answer choices relate to financial accounting.
Difficulty: 2 Medium
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
79) The concept of considering both the costs and benefits of a proposal is known as:
A) cost-benefit analysis.
B) performance measurement.
C) nonvalue-added analysis.
D) preparation of financial statements.
Answer: A
Explanation: The concept of considering both the costs and benefits of a proposal is cost-benefit analysis.
Difficulty: 2 Medium
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
80) Departmental managers at Boswell Department Store are allowed considerable discretion in both sourcing and pricing of products, based on local tastes and competition, as well as being responsible for departmental staffing. Based on the concept of the responsibility center, which of the following would not be a performance measure that would be useful in evaluating the performance of departmental managers at the stores?
A) Departmental profit compared to budgeted departmental profit.
B) Trends in general and administrative expenses for each store.
C) Growth in departmental sales compared to the prior period sales
D) Departmental customer satisfaction.
Answer: B
Explanation: A responsibility center allows the specific unit of an organization to be assigned to a manager who is held accountable for its operations and resources. The departmental manager does not have responsibility for controlling all the administrative expenses for each store location.
Difficulty: 2 Medium
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
81) Snuggle Toys, Inc. had the following summarized results for the month ending July 31:
| Actual | | Budget |
Revenues | $ | 60,000 | | | $ | 52,000 | |
Costs | | 53,600 | | | | 45,600 | |
Operating profits | $ | 6,400 | | | $ | 6,400 | |
As the cost accountant, which single statement related to the above financial results is most appropriate in the report to management?
A) The departmental manager is performing to expectations because budgeted profits equals actual profits.
B) Revenues are above budget and a bonus based on this increase should be considered.
C) Costs as a percentage of revenues are above budget and a further scrutiny of the results might be appropriate.
D) Costs are 17.5% above budget and the department manager's position should be critically evaluated by senior management.
Answer: C
Explanation: If revenue is higher, then profits should be higher, unless there is a problem with costs.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
82) CraftMaster Corporation purchased a machine 7 years ago for $339,000 when it launched product X05K. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 360 machine costing $353,000 or by a new model 280 machine costing $332,000. Management has decided to buy the model 280 machine. It has less capacity than the model 360 machine, but its capacity is sufficient to continue making product X05K. Management also considered, but rejected, the alternative of dropping product X05K and not replacing the old machine. If that were done, the $332,000 invested in the new machine could instead have been invested in a project that would have returned a total of $426,000. In making the decision to buy the model 280 machine rather than the model 360 machine, the differential cost was:
A) $21,000.
B) $87,000.
C) $7,000.
D) $14,000.
Answer: A
Explanation: Model 360 cost ($353,000) − Model 280 cost ($332,000) = Differential cost ($21,000).
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
83) When comparing activity-based costing (ABC) with conventional costing methods, which of the following is the key benefit of the ABC method?
A) It is cheaper to implement.
B) It is based on only one or two factors, generally volume-related.
C) It is simpler.
D) It provides more accurate cost numbers.
Answer: D
Explanation: Activity-based costing provides more accurate cost numbers than conventional costing methods.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
84) Geno's Body Shop had sales revenues and operating costs in 2020 of $650,000 and $525,000, respectively. In 2021, Geno plans to expand the services it provides to customers to include detailing services. Revenues are expected to increase by $85,000 and operating costs by $50,000 as a result of this expansion. Assuming that there are no changes to the existing body shop business, operating profits would be expected to increase during 2021 by:
A) $125,000.
B) $85,000.
C) $160,000.
D) $35,000.
Answer: D
Explanation: Revenues ($85,000) − Operating costs ($50,000) = Additional operating profit ($35,000).
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
85) Geno's Body Shop had sales revenues and operating costs in 2020 of $650,000 and $525,000, respectively. In 2021, Geno plans to expand the services it provides to customers to include detailing services. Revenues are expected to increase by $85,000 and operating costs by $50,000 as a result of this expansion. Assuming that there are no changes to the existing body shop business, what is the amount of operating profits that are expected be earned in 2021?
A) $125,000
B) $85,000
C) $160,000
D) $35,000
Answer: C
Explanation: Total Revenues ($650,000 + $85,000) − Total Operating costs ($525,000 + $50,000) = Total operating profit = $160,000.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
86) The goals and objectives of establishing budgeting in an organization include all of the following except:
A) the ability to decide whether goals can be achieved.
B) the resources needed to carry out its tasks.
C) anticipated revenues to be generated.
D) the consistent application of generally accepted accounting principles.
Answer: D
Explanation: Correct! Consistent application of GAAP has nothing to do with goals and objectives of establishing budgets.
Difficulty: 2 Medium
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
87) In 2020, the Allen Company had consulting revenues of $1,000,000, while operating costs were $750,000. In 2021, Allen will be introducing a new service that will generate $150,000 in sales revenues and $60,000 in operating costs. Assuming no changes are expected for the other services, the differential operating costs for 2021 will be:
A) $250,000.
B) $150,000.
C) $90,000.
D) $60,000.
Answer: D
Explanation: The additional operating costs are the differential amount of $60,000.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
88) In 2020, the Allen Company had consulting revenues of $1,000,000 while operating costs were $750,000. In 2021, Allen will be introducing a new service that will generate $150,000 in sales revenues and $60,000 in operating costs. Assuming no changes are expected for the other services, the differential revenue for 2021 will be:
A) $250,000.
B) $150,000.
C) $90,000.
D) $60,000.
Answer: B
Explanation: The additional revenues are the differential amount of $150,000.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
89) San Juan, Inc. is considering two alternatives: A and B. The costs associated with the alternatives are listed below:
| Alternative A | | Alternative B | |
Material costs | $ | 35,000 | | | $ | 57,000 | |
Processing costs | | 36,000 | | | | 57,000 | |
Building costs | | 12,000 | | | | 28,000 | |
Equipment rental | | 19,000 | | | | 19,000 | |
| | | | | | | | |
Are the materials costs and processing costs differential in the choice between alternatives A and B? (Ignore the building costs and equipment rental in this question.)
A) Neither materials costs nor processing costs are differential.
B) Both materials costs and processing costs are differential.
C) Only processing costs are differential.
D) Only materials costs are differential.
Answer: B
Explanation: Both material costs and processing costs are differential because they differ between the two alternatives.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
90) San Juan, Inc. is considering two alternatives: A and B. The costs associated with the alternatives are listed below:
| Alternative A | | Alternative B | |
Material costs | $ | 35,000 | | | $ | 57,000 | |
Processing costs | | 36,000 | | | | 57,000 | |
Building costs | | 12,000 | | | | 28,000 | |
Equipment rental | | 19,000 | | | | 19,000 | |
| | | | | | | | |
If only the differential costs of the two decisions are considered, the total differential costs of Alternative B is:
A) $161,000.
B) $131,500.
C) $59,000.
D) $102,000.
Answer: C
Explanation: All of the costs except equipment rental are differential ($22,000 + $21,000 + $16,000 = $59,000).
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
91) Two alternatives, identified X and Y, are under consideration at Hayden Corporation. Costs associated with the alternatives are listed below.
| Alternative X | | Alternative Y | |
Material costs | $ | 44,000 | | | $ | 56,000 | |
Processing costs | | 37,000 | | | | 59,000 | |
Building costs | | 14,000 | | | | 14,000 | |
Equipment rental | | 11,000 | | | | 11,000 | |
| | | | | | | | | | |
Are the materials costs and processing costs differential in the choice between alternatives X and Y? (Ignore the building costs and equipment rental in this question.)
A) Both materials costs and processing costs are differential.
B) Only materials costs are differential.
C) Only processing costs are differential.
D) Neither materials costs nor processing costs are differential.
Answer: A
Explanation: Both material costs and processing costs are differential because they differ between the two alternatives.
Difficulty: 2 Medium
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
92) Two alternatives, identified X and Y, are under consideration at Hayden Corporation. Costs associated with the alternatives are listed below.
| Alternative X | | Alternative Y | |
Material costs | $ | 44,000 | | | $ | 56,000 | |
Processing costs | | 37,000 | | | | 59,000 | |
Building costs | | 14,000 | | | | 14,000 | |
Equipment rental | | 11,000 | | | | 11,000 | |
| | | | | | | | | | |
What is the total differential costs of Alternative Y over Alternative X?
A) $140,000
B) $123,000
C) $34,000
D) $106,000
Answer: C
Explanation: Both material costs and processing costs are differential ($12,000 + $22,000 = $34,000).
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
93) Marcus Roberts is putting together a training session about value chain components. Which of the following would be a good example of a cost for the component of purchasing?
A) Advertising
B) Warranty repairs
C) Vendor certification
D) Patent applications
Answer: C
Explanation: Vendor certification is an example related to the value chain component of purchasing.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
94) Anna Potts is putting together a training session about value chain components. Which of the following would be a good example of a cost for the component of distribution?
A) Advertising
B) Warranty repairs
C) Vendor certification
D) Website creation, hosting, and maintenance
Answer: D
Explanation: Website creation, hosting, and maintenance is an example related to the value chain component of distribution.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
95) Megan Towe is putting together a training session about value chain components. Which of the following would be a good example of a cost for the component of research and development?
A) Advertising
B) Warranty repairs
C) Vendor certification
D) Patent applications
Answer: D
Explanation: Patent applications is an example related to the value chain component of research and development.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
96) An Enterprise Resource Planning (ERP) System can best be described as:
A) a collection of programs that use a variety of unconnected databases.
B) a single database that collects data and feeds it into applications that support each of the company's business activities, such as purchases, production, distribution, and sales.
C) a database that is primarily used by a purchasing department to determine the correct amount of a particular supply item to purchase.
D) a sophisticated means of linking two or more companies to facilitate their planning processes.
Answer: B
Explanation: An ERP system links the various systems of the enterprise into a single comprehensive information system.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Technology
Accessibility: Keyboard Navigation
97) The approaches and activities of managers in short-run and long-run planning and control decisions that increase value for customers and lower costs of products and services are known as:
A) value chain management.
B) enterprise resource planning.
C) cost management.
D) customer value management.
Answer: A
Explanation: The objective of value chain management is to make decisions that increase value to customers and lower costs of products and services.
Difficulty: 2 Medium
Topic: Our Framework for Assessing Cost Accounting Systems
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Understand
AACSB: Technology
Accessibility: Keyboard Navigation
98) Research and development (R&D), production, and customer service are business functions that are all included as part of:
A) the value chain.
B) benchmarking.
C) marketing.
D) the supply chain.
Answer: A
Explanation: All three of these business functions are found in the value chain.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
99) All of the following words describe benchmarking except:
A) ongoing.
B) one-time event.
C) continuous.
D) measuring process.
Answer: B
Explanation: Benchmarking is a continuous process of measuring a company's own products, services, or activities against competitor's performance.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
100) All of the following are examples of total quality management (TQM) practices except:
A) Redesigning a product to reduce its parts by 50 percent.
B) Reducing the movement required in a manufacturing job.
C) Separating the sales and services functions.
D) Raising raw material quality standards.
Answer: C
Explanation: Separating the sales and services functions is not an example of TQM practices.
Difficulty: 3 Hard
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
101) Which area(s) of a business can be improved by using a just-in-time (JIT) system?
A) Production, purchasing, and delivery.
B) Production only.
C) Purchasing only.
D) Production and purchasing only.
Answer: A
Explanation: Production, purchasing, and delivery can be improved by using a JIT system.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
102) Examples of the controller's functions include all except:
A) cost accounting policies.
B) budgeting.
C) investor relations.
D) general ledger.
Answer: C
Explanation: All are examples of the controller's functions except for investor relations.
Difficulty: 1 Easy
Topic: Key Financial Players in the Organization
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
103) Cost accounting is an integral part of the ________ function in an organization.
A) treasurer's
B) controller's
C) internal auditor's
D) president's
Answer: B
Explanation: Cost accounting is an integral part of the controller's function.
Difficulty: 1 Easy
Topic: Key Financial Players in the Organization
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
104) All of the following actions enhance the new focus on making cost accounting information more relevant in helping a firm achieve strategic goals except:
A) increasing emphasis on the management accountant as a business partner.
B) increasing emphasis on external financial reporting.
C) decreasing emphasis on financial statement inventory cost valuation.
D) increasing emphasis on timely and useful information.
Answer: B
Explanation: Financial accounting focuses on external financial reporting; whereas, cost accounting information is designed to help managers make better decisions.
Difficulty: 3 Hard
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
105) Which of the following statements is false regarding total quality management (TQM)?
A) The adoption of TQM means that the organization is managed to excel on all dimensions.
B) The adoption of TQM means that the customer ultimately defines quality.
C) With TQM, managers determine the company's performance standards according to what is important to them.
D) TQM is a management method focused on quality for the customer.
Answer: C
Explanation: With TQM, the customers determine the company's performance standards according to what is important to them.
Difficulty: 2 Medium
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
106) The Institute of Management Accountants' (IMA) standards of ethical conduct for management accountants includes the elements of:
A) competence, confidentiality, integrity, and relevance.
B) competence, confidentiality, integrity, and credibility.
C) competence, confidentiality, independence, and objectivity.
D) competence, accuracy, integrity, and independence.
Answer: B
Explanation: IMA members have a responsibility to comply with and uphold the standards of Competence, Confidentiality, Integrity, and Credibility.
Difficulty: 2 Medium
Topic: Appendix-Institute of Management Accountants Code of Ethics; Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
107) According to the IMA Code of Ethics, what should a management accountant do if a significant ethical situation can't be resolved?
A) The accountant should confront the guilty party and demand the unethical action be stopped.
B) The accountant should try to rationalize and understand the position of the other party.
C) The accountant should say nothing about the matter until he or she has retired.
D) The accountant should first discuss the matter with the immediate supervisor.
Answer: D
Explanation: Correct! This is a step that the accountant should take.
Difficulty: 2 Medium
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
108) With the enactment of the Sarbanes-Oxley Act of 2002, CEOs and CFOs are now responsible for all of the following except:
A) stipulating that the financial statements do not omit material information.
B) attesting to the adequacy of the company's internal controls.
C) attesting to the accuracy of the company's credit rating with the largest rating agencies.
D) disclosing that they have notified the company's auditors and audit committee of any fraud that involves management.
Answer: C
Explanation: Attesting to the accuracy of external credit ratings is not a requirement under the Sarbanes-Oxley Act of 2002.
Difficulty: 2 Medium
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
109) The Sarbanes-Oxley Act of 2002 requires an effective internal control system for publicly owned firms. Therefore, with regards to strategic investment decisions, it is important that management consider including all of the following except:
A) internal audits of strategic decisions.
B) a code of ethics.
C) a system of preparing and reporting on investment decisions.
D) a system that limits information available to investors.
Answer: D
Explanation: The Sarbanes-Oxley Act does not suggest that management limit information available to investors.
Difficulty: 2 Medium
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Reflective Thinking; Ethics
Accessibility: Keyboard Navigation
110) Where there is a lack of good performance measures, it is difficult to motivate managers by using:
A) performance-based incentives.
B) monetary rewards.
C) compensation.
D) rewards for products.
Answer: A
Explanation: Good performance measures are necessary in implementing performance-based incentives.
Difficulty: 2 Medium
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Reflective Thinking; Ethics
Accessibility: Keyboard Navigation
111) Which of the following is a false statement regarding cost information and ethical responsibilities?
A) Compliance with Sarbanes-Oxley guarantees that a manager has met all of his or her ethical responsibilities.
B) Sarbanes-Oxley is important for managers who design cost information systems.
C) Managers must be aware of the potential that cost information could be misleading or support fraudulent activity.
D) Managers need to understand that performance measurement and compensation systems can lead to unethical conduct.
Answer: A
Explanation: Compliance with Sarbanes-Oxley does not mean that a manager has met all of his or her ethical responsibilities.
Difficulty: 2 Medium
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Reflective Thinking; Ethics
Accessibility: Keyboard Navigation
112) Carley Inc. incurs many types of costs in its operations. Place the number of the appropriate stage in the value chain in Column 2 in the blank next to each cost in column 1.
| Cost | Stage in the Value Chain | |
________ | Transportation costs to ship vans to customers | 1. Customer Service | | |
________ | Labor costs for factory workers | 2. Distribution | | |
________ | Overtime costs for scientists working on new engine technology | 3. Research & Development | | |
________ | Utilities cost for the design testing center | 4. Marketing | | |
________ | Costs to survey customers about their satisfaction | 5. Production | | |
________ | Costs to sponsor a sporting event | 6. Design | | |
Answer:
| Cost | Stage in the Value Chain |
2 | Transportation costs to ship vans to customers | 1. Customer Service |
5 | Labor costs for factory workers | 2. Distribution |
3 | Overtime costs for scientists working on new engine technology | 3. Research & Development |
6 | Utilities cost for the design testing center | 4. Marketing |
1 | Costs to survey customers about their satisfaction | 5. Production |
4 | Costs to sponsor a sporting event | 6. Design |
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
113) SuperMax is an integrated provider of genetically engineered corn. Many types of costs are incurred in its operations. Place the number of the appropriate stage in the value chain in Column 2 in the blank next to each cost in column 1.
| Cost | Stage in the Value Chain |
| Warehouse costs to store seed awaiting shipment to customers | 1. Customer Service |
| Utility costs for seed mill | 2. Distribution |
| Equipment costs in genetics laboratory | 3. Research & Development |
| Labor costs to staff help-line call center | 4. Marketing |
| Costs to prepare advertising campaign in national agriculture magazine | 5. Production |
| Costs to contract with growers to provide seed | 6. Purchasing |
Answer:
| Cost | Stage in the Value Chain |
2 | Warehouse costs to store seed awaiting shipment to customers | 1. Customer Service |
5 | Utility costs for seed mill | 2. Distribution |
3 | Equipment costs in genetics laboratory | 3. Research & Development |
1 | Labor costs to staff help-line call center | 4. Marketing |
4 | Costs to prepare advertising campaign in national agriculture magazine | 5. Production |
6 | Costs to contract with growers to provide seed | 6. Purchasing |
Difficulty: 1 Easy
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
114) Travon's Limo Service provides transportation services in and around Bentonville. Its profits have been declining, and management is planning to add a package delivery service that is expected to increase revenue by $275,000 per year. The total cost to lease additional delivery vehicles from the local dealer is $60,000 per year. The present manager will continue to supervise all services. However, labor and utilities costs will increase by 40% and rent and other costs will increase by 15% when the package delivery service is added.
a. Prepare a report of the differential costs and revenues if the delivery service is added.
b. Should management start up the delivery service? Explain your answer.
Answer:
a.
Travon's Limo Service | |
Income Statement | |
| Status Quo No Delivery Service | | Alternative: With Delivery Service | | Difference | | |
| (1) | | | (2) | | | (3) | | |
Sales Revenue | $ | 960,000 | | | | $ | 1,235,000 | | | | $ | 275,000 | | |
Costs: | | | | | | | | | | | | | | |
Vehicle leases | | 400,000 | | | | | 460,000 | | | | | 60,000 | | |
Labor | | 290,000 | | | | | 406,000 | | | | | 116,000 | | |
Utilities | | 50,000 | | | | | 70,000 | | | | | 20,000 | | |
Rent | | 100,000 | | | | | 115,000 | | | | | 15,000 | | |
Other Costs | | 60,000 | | | | | 69,000 | | | | | 9,000 | | |
Manager's Salary | | 120,000 | | | | | 120,000 | | | | | 0 | | |
Total Costs | $ | 1,020,000 | | | | $ | 1,240,000 | | | | $ | 220,000 | | |
Operating Profit (Loss) | $ | (60,000 | ) | | | $ | (5,000 | ) | | | $ | 55,000 | | |
| | | | | | | | | | | | | | | | | | | | | |
b.
The decision to expand and offer the delivery service results in differential profits of $55,000, 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 was not included.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
115) Morris Inc. is a management consulting firm that specializes in management training programs. Tackle Manufacturing Inc. has approached Morris to contract for management training for a one-year period. Last year's income statement for Morris is as follows:
| |
Sales Revenue | | | | | $ | 360,000 | |
Costs: | | | | | | | |
Labor | $ | 120,000 | | | | | |
Equipment Lease | | 12,000 | | | | | |
Rent | | 24,000 | | | | | |
Utilities | | 8,400 | | | | | |
Supplies | | 23,600 | | | | | |
Other Costs | | 14,400 | | | | | |
Manager's Salary | | 80,000 | | | | | |
Total Costs | | | | | | 282,400 | |
Operating Profit (Loss) | | | | | $ | 77,600 | |
| | | | | | | | |
To satisfy the Tackle contract, another part-time trainer will need to be hired at $42,000. Supplies will increase by 12% and other costs will increase by 15%. In addition, new equipment will need to be leased at a cost of $2,500.
a. What are the differential costs that would be incurred if the Tackle contract is signed?
b. If Tackle will pay $55,000 for one year, should Morris accept the contract? Explain your answer.
Answer: a.
Differential costs incurred if the contract is signed:
|
(a) | Differential Costs | | | |
| Trainer | $ | 42,000 | |
| Supplies | | 2,832 | |
| Other Costs | | 2,160 | |
| New Equipment Lease | | 2,500 | |
| | $ | 49,492 | |
b.
Differential revenues of $55,000 will exceed the differential costs of $49,492. As a result, Morris will earn an additional $5,508 in operating profit if it accepts the contract.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
116) The Arielle Company reported the following results for the manufacture and sale of one of its products known as Controllers during the most recent year.
| |
Sales (6,500 Controllers at $130 each) | $ | 845,000 | |
Cost of sales | | 390,000 | |
Distribution costs | | 65,000 | |
Advertising expense | | 275,000 | |
Salaries | | 25,000 | |
Building costs | | 145,000 | |
Operating loss | $ | (55,000 | ) |
| | | | |
The Arielle Company is trying to determine whether or not to discontinue the manufacture and sale of Controllers. The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped. The building costs represent the costs of production facilities and equipment that the Controllers product shares with other products produced by Arielle. If the Controllers product were dropped, there would be no change in the building costs of the company. Management has determined that discontinuing the manufacture and sale of Controllers will have no effect on the company's other product lines. Determine the change in operating profits that will happen if the manufacture and sale of Controllers is discontinued.
Answer: Although the company's net operating profits would seem to increase by $55,000 if the manufacture and sale of Controllers were discontinued, the building costs, which amount to $145,000, would continue regardless. As a result, operating profits will actually decrease if the manufacture and sale of Controllers is discontinued as shown below. (Note that the decrease in revenues that would result will decrease operating profits and, as such, it is shown as a negative number below. The cost savings listed below would increase operating profits, which is why these amounts are shown as positive amounts below.)
|
Sales (6,500 Controllers at $130 each) | $ | (845,000 | ) |
Cost of sales | | 390,000 | |
Distribution costs | | 65,000 | |
Advertising expense | | 275,000 | |
Salaries | | 25,000 | |
Increase (decrease) in operating profits | $ | (90,000 | ) |
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
117) The management of Parachute Corporation is considering dropping product ABC123. Data from the company's accounting system appear below:
| |
Sales | $ | 260,000 | |
Cost of goods sold | | 125,000 | |
Building expenses | | 88,000 | |
Selling and administrative expenses | | 75,000 | |
| | | | |
All building expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $42,000 of the building expenses and $48,000 of the selling and administrative expenses will not be incurred if product ABC123 is discontinued.
a. According to the company's accounting system, what are the operating profits earned by product ABC123?
b. What would be the impact on the company's overall operating profits if product ABC123 is dropped? Should the product be dropped?
Answer:
a.
Operating profits (losses) earned by product ABC123:
| |
Sales | $ | 260,000 | |
Cost of goods sold | | 125,000 | |
Building expenses | | 88,000 | |
Selling and administrative expenses | | 75,000 | |
Operating profits (losses) | $ | (28,000 | ) |
| | | | |
b.
Impact on company's overall operating profits if product ABC123 is dropped:
|
Sales | $ | (260,000 | ) |
Cost of goods sold | | 125,000 | |
Building expenses ($88,000 − $46,000) | | 42,000 | |
Selling and administrative expenses ($75,000 − $27,000) | | 48,000 | |
Increase (decrease) in operating profits | $ | (45,000 | ) |
Overall operating profits would decrease by $45,000 if product ABC123 were dropped. Therefore, the product should not be dropped.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
118) The management of Marvel Corporation has been concerned for some time with the financial performance of its product EX123 and has considered discontinuing it on several occasions. Data from the company's accounting system appear below:
| |
Sales | $ | 650,000 | |
Cost of goods sold | $ | 293,000 | |
Building expenses | $ | 221,000 | |
Selling and administrative expenses | $ | 150,000 | |
| | | | |
In the company's accounting system all building expenses of the company are fully allocated to products. Further investigation has revealed that $95,000 of the building expenses and $85,000 of the selling and administrative expenses will not be incurred if product EX123 is discontinued.
a. According to the company's accounting system, what are the operating profits (losses) earned by product EX123?
b. What would be the effect on the company's overall operating profits if product EX123 is dropped?
Answer:
a.
Operating profits (losses) earned by product EX123:
| |
Sales | $ | 650,000 | |
Cost of goods sold | | 293,000 | |
Building expenses | | 221,000 | |
Selling and administrative expenses | | 150,000 | |
Operating profits (losses) | $ | (14,000 | ) |
| | | | |
b.
Impact on company's overall operating profits if product EX123 is dropped:
Sales | $ | (650,000 | ) |
Cost of goods sold | | 293,000 | |
Building expenses | | 95,000 | |
Selling and administrative expenses | | 85,000 | |
Increase (decrease) in operating profits | $ | (177,000 | ) |
Overall operating profits would decrease by $177,000 if product EX123 were dropped. Therefore, the product should not be dropped.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
119) Place the letter of the appropriate element of an organization's value chain in Column 2 in the blank next to each operation in Column 1.
| | Column 1 | Column 2 | |
| | Macy's replies to customers' questions on merchandise | A. | Research and Development |
| | Updating PetSmart's electronic Internet catalogue of chew bones and leash merchandise. | B. | Design |
| | Development of new software applications at Apple. | C. | Production |
| | Contracting with United Parcel Services to ship computers to customers at Best Buy | D. | Marketing |
| | Writing of software programs at QuickBook's Professional Accountant Division. | E. | Distribution |
| | Creation of new movie ideas at Universal Studios. | F. | Customer Service |
| | | | | |
Answer:
| | Column 1 | Column 2 | |
| F | Macy's replies to customers' questions on merchandise | A. | Research and Development |
| D | Updating PetSmart's electronic Internet catalogue of chew bones and leash merchandise. | B. | Design |
| B | Development of new software applications at Apple. | C. | Production |
| E | Contracting with United Parcel Services to ship computers to customers at Best Buy | D. | Marketing |
| C | Writing of software programs at QuickBook's Professional Accountant Division. | E. | Distribution |
| A | Creation of new movie ideas at Universal Studios. | F. | Customer Service |
| | | | | |
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
120) Old-Fashion Flavors is a local ice cream shop. The company currently is showing an operating loss, as evidenced by the income statement below:
|
Sales | $ | 75,000 | |
Costs: | | | |
Food supplies | | 20,000 | |
Labor | | 16,000 | |
Utilities | | 4,000 | |
Rent | | 12,000 | |
Other | | 4,000 | |
Manager's salary | | 25,000 | |
Total Costs | | 81,000 | |
Operating Profits (Losses) | $ | (6,000 | ) |
The President of the company is considering adding sandwiches to the menu. Sales will be expected to increase by $60,000. The cost of sandwich supplies would be $30,000. Labor costs would increase 40% and other costs 10%. The current manager will continue to manage the operation.
a. Prepare a quantitative analysis of the decision to add sandwiches to the menu.
b. What qualitative considerations should the company consider in this decision?
Answer:
a.
| | | | Alternative: | | | | |
| | Status Quo | | Add Sandwiches | | Difference | | |
Sales | | $ | 75,000 | | | | | $ | 135,000 | | | | | $ | 60,000 | | |
Costs: | | | | | | | | | | | | | | | | | |
Food supplies | | | 20,000 | | | | | | 50,000 | | | | | | 30,000 | | |
Labor | | | 16,000 | | | | | | 22,400 | | | | | | 6,400 | | |
Utilities | | | 4,000 | | | | | | 4,000 | | | | | | 0 | | |
Rent | | | 12,000 | | | | | | 12,000 | | | | | | 0 | | |
Other | | | 4,000 | | | | | | 4,400 | | | | | | 400 | | |
Manager's salary | | | 25,000 | | | | | | 25,000 | | | | | | 0 | | |
Total Costs | | | 81,000 | | | | | | 117,800 | | | | | | 36,800 | | |
Operating Profits (Losses) | | $ | (6,000 | ) | | | | $ | 17,200 | | | | | $ | 23,200 | | |
| | | | | | | | | | | | | | | | | | | | | | |
b.
Qualitative considerations should include the impact on the current manager's morale with the large increase in responsibility, the ability of the company to successfully integrate the new menu and the response of customers to the addition of sandwiches in an ice cream shop.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
121) The Brogan family currently lives in a suburb of a major city. They have a lovely home close to major routes of transportation. Both Mr. and Mrs. Brogan have convenient commutes of 30 minutes or less. Because the school system in their town does not have a quality reputation, they currently send their daughter to private school, conveniently located less than one mile from their home. The family's current monthly living expenses are listed below:
| Monthly Budget |
Mortgage, including taxes and insurance | $ | 5,000 | |
Other utilities, including water, heat and telephone | | 500 | |
Costs of running automobiles | | 800 | |
Cost of private school | | 2,000 | |
Total monthly budget | $ | 8,300 | |
The Brogans are considering moving to a town approximately 20 minutes away. Because of the desirability of the local schools and strict zoning, housing is very expensive in this town. Their daughter would attend public schools. The Brogans estimate that their monthly mortgage, taxes and insurance would increase to $7,000 per month, while the cost of running automobiles would increase 20% and other utilities 10%. Mortgage interest costs are tax deductible and the Brogans are in the 25% tax bracket. Assume that $700 of the increase in their monthly budget is for mortgage interest. What are the costs and benefits of moving? Which can be quantified and which cannot?
Answer: The Brogans should recognize that their total household expenses will not increase significantly. The increased mortgage will be offset by the savings on private school. In addition, since the mortgage is tax deductible and the school is not, the savings in taxes will just about offset the increased monthly costs:
|
Additional mortgage cost | $ | 2,000 | |
Private school savings | | (2,000 | ) |
Tax savings ($700 × 25%) | | (175 | ) |
Increased auto cost ($800 × 20%) | | 160 | |
Increased utilities ($500 × 10%) | | 50 | |
Net Increase (decrease) | $ | 35 | |
Other costs and benefits are not measurable. The Brogans are assuming that their daughter will receive the same quality of education in the public school. Commuting time will increase by 40 minutes per day for both Mr. and Mrs. Brogan. The convenience of being located very close to a major route of transportation will no longer be theirs.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
122) Place the letter of the appropriate business function of the value chain in Column 2 in the blank next to each cost item in Column 1.
| | Column 1 | Column 2 |
| | Cost of customer order forms | A | Research and Development |
| | Cost of paper used in manufacture of books | B | Design |
| | Cost of paper used in packing cartons to ship books | C | Production |
| | Cost of paper used in display at national trade show | D | Marketing |
| | Depreciation of trucks used to transport books to college bookstores | E | Distribution |
| | Cost of the wood used to manufacture paper | F | Customer Service |
| | Salary of the scientists attempting to find another source of printing ink | | |
| | Cost of defining the book size so that a standard-sized box is filled to capacity | | |
Answer:
| | Column 1 | Column 2 |
| D | cost of customer order forms | A | Research and Development |
| C | cost of paper used in manufacture of books | B | Design |
| E | cost of paper used in packing cartons to ship books | C | Production |
| D | cost of paper used in display at national trade show | D | Marketing |
| E | depreciation of trucks used to transport books to college bookstores | E | Distribution |
| C | cost of the wood used to manufacture paper | F | Customer Service |
| A | salary of the scientists attempting to find another source of printing ink | | |
| B | cost of defining the book size so that a standard-sized box is filled to capacity | | |
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
123) Morgantown Manufacturing produces electronic storage devices and uses the following three-part classification for its manufacturing costs: materials, labor, and support costs. Total support costs for June were $300 million and were allocated to each product on the basis of labor costs of each line. Summary data (in millions) for June for the most popular electronic storage device, the Giant Watt, was:
| |
Material costs | $ | 9,000,000 | |
Labor costs | $ | 3,000,000 | |
Support costs | $ | 8,500,000 | |
Units produced | | 40,000 | |
a. Compute the manufacturing cost per unit for each Giant Watt produced in June.
b. Suppose production will be reduced to 30,000 units in July. Speculate as to whether the unit costs in July will most likely be higher or lower than unit costs in June; it is not necessary to calculate the exact July unit cost. Briefly explain your reasoning.
Answer:
a.
Unit costs for June were:
($9,000,000 + $3,000,000 + $8,500,000) ÷ 40,000 = $512.50 per unit
b.
Unit costs should be higher in July if only 30,000 units are to be produced. Indirect manufacturing costs most likely include both fixed and variable components. Since fewer units are expected to be produced in July, total fixed costs will be spread over fewer units. This will result in an increase in total cost per unit since variable costs per unit will most likely not change with the decreased production.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
124) The list of representative cost drivers in the right column below are randomized with respect to the list of functions in the left column. That is, they do not match.
Function | | Representative Cost Driver |
Purchasing | A. | Number of employees |
Billing | B. | Number of shipments |
Shipping | C. | Number of customers |
Computer Support | D. | Number of invoices |
Personnel | E. | Number of desktop computers |
Customer Service | F. | Number of purchase orders |
Required:
Match each business function with its representative cost driver.
| Function | Insert letter of appropriate driver (A through F) |
1. | Purchasing | |
2. | Billing | |
3. | Shipping | |
4. | Computer Support | |
5. | Personnel | |
6. | Customer Service | |
Answer:
| Function | Insert letter of appropriate driver (A through F) |
1. | Purchasing | F |
2. | Billing | D |
3. | Shipping | B |
4. | Computer Support | E |
5. | Personnel | A |
6. | Customer Service | C |
Difficulty: 1 Easy
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
125) A restaurant is deciding whether it wants to update its image or not. It currently has a cozy appeal with an outdated décor that is still in good condition, menus and carpet that need to be replaced anyway, and loyal customers. Identify the following for the restaurant management:
a. Costs that are relevant to this decision.
b. Costs that would not be differential to this decision.
c. Any qualitative factors that should be considered.
Answer: For the decision of whether to update the restaurant's image:
a. Relevant costs include a one-time cost of the renovation for the updated image, and a change in future sales which includes an increase in sales due to the updated image, decrease in sales due to loss of that cozy appeal, and loss of sales due to being closed or having a limited serving area during renovation.
b. Costs that are not differential include replacing the menus and the carpet since they need to be replaced whether the image is updated or not.
c. Qualitative considerations include whether the restaurant will lose that cozy appeal it currently has, if the restaurant needs to be closed for renovations it may result in loss of customers, and new customers may not be the type of customer they want to attract.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
126) You have been employed as an entry-level management accountant for a little under a year. You suspect that your immediate supervisor is involved in a significant fraud involving diverting company assets to personal use. Briefly describe the steps you might take to resolve this dilemma.
Answer: The management accountant should first consult any internal company procedures concerning the resolution of ethical issues, and make sure these procedures are followed as closely as possible. At the same time, the management accountant should make sure that the facts are accurate and are not based on rumors or inaccurate information. If these policies do not resolve the situation, the management accountant should:
∙ DISCUSS the conflict with your immediate superior or, if the conflict involves your superior, the next level in authority. This might require contacting the board of directors or an appropriate committee of the board, such as the audit committee or the executive committee;
∙ CLARIFY the relevant issues and concepts by discussions with a disinterested party or by contacting an appropriate and confidential ethics "hotline";
∙ CONSULT your attorney about your rights and obligations.
Difficulty: 3 Hard
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Analyze
AACSB: Ethics
Accessibility: Keyboard Navigation
127) Snacking Macs, Inc., currently manufactures three different types of scientifically balanced dog food. The firm is considering eliminating one of the three products. What factors should be taken into account in making this decision?
Answer: In deciding whether or not to eliminate a product, the firm should determine if costs that can be eliminated will exceed the revenues that will be lost. The firm needs to classify the costs into those costs which will be eliminated and therefore are relevant, and which costs will continue even if the product is deleted. Costs that often continue are those costs which have been allocated rather than incurred directly by the product. The firm must also look to see if any other products may be harmed by the elimination of the product. Maybe the products are complements, and loss of one sale will result in loss of another. The firm should consider whether another product's sales might increase if the product is deleted, which could be an opportunity to earn more contribution from another area. Can the firm use the space freed up for some other purpose that could generate additional inflows, which is an opportunity cost? The firm must also look at how its reputation among its customers for selling a full line of products might be damaged as a result of this decision.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Evaluate
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
128) Clancy Mining Company mines iron ore for production into various metal products. During recent years, the company had large fluctuations in its inventories of metal ingots. Much of the volatility of the inventory levels is due to the variability of demand by the company's largest customers, automobile manufacturers. For large orders, the company has the technology to quickly shift production from one product to another. Explain how the company can improve its inventory control system and give the advantages of whatever you recommend.
Answer: The company can probably benefit from changing to a just-in-time system for inventory control. This would allow the company to be responsive to actual needs rather than finished goods inventory building. The advantages would be:
1. | Lower inventory requirements; |
2. | Reductions in carrying and handling costs of inventories; |
3. | Reduction in risks of obsolete inventories; |
4. | Reduction in total manufacturing costs; and |
5. | Reductions in paperwork. |
Difficulty: 3 Hard
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Evaluate
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
129) MegaStores is a large, publicly-held corporation. The company does about 80% of its work in government contracts. All contracts use a cost plus fixed fee basis; costs of jobs are agreed upon by contract. Any overruns will result in losses to the company. The company controller, Ricky Bowers CPA, CMA, is discussing two current jobs with the Job Supervisor, Leslie Dawn. Job 100 is currently coming in under budget, but due to construction problems, Job 102 is 20% over budget. Bowers is considering the possibility of having employees who work on Job 102 record their time to Job 101. What are the implications of this decision?
Answer: This is clearly an unethical practice. Since the contract price is a legally binding document, MegaStores would first be violating a legal arrangement with the government. The company could be held liable for the excess charges. This could result in fines, interest and punitive damages; criminal and civil charges could be levied against the employees knowingly involved in these practices. The practice also misleads managers who rely on accurate cost information for pricing, cost control and other decisions. If the jobs are cost plus fixed fee, the client is paying more than he should for the work. In fact, a government indictment could have ramifications of future lost business, not only with the government, but also other potential customers. In addition, Ricky and Leslie could be faced with the loss of their jobs and reputations. As a CPA, Ricky could further lose his professional certification by violating the Code of Ethics of the American Institute of CPAs.
Difficulty: 3 Hard
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Evaluate
AACSB: Ethics
Accessibility: Keyboard Navigation
130) The owner of a small retail business asks, "Why do I need cost accountants? My CPA produces financial statements, which are sufficient for me to discover my costs. Look at my Income Statement. I expect sales to increase by 10% next year, so I am planning on a 10% increase in profits. I don't need a cost accountant to tell me that."
Income Statement for the Year | |
Ending December 31 | |
Sales Revenue | $ | 457,234 | |
Cost of Goods Sold | | 296,348 | |
Gross Margin | | 160,886 | |
Selling Costs | | 76,234 | |
Administrative Costs | | 62,350 | |
Profit before Taxes | $ | 22,302 | |
| | | | |
Use your knowledge of the concept of differential costs and explain why a cost accountant would question the conclusion that a 10% increase in sales would yield a 10% increase in profit.
Answer: The primary purpose of this exercise is to challenge students to think beyond the material presented in the chapter and to write/justify their responses. Answers will vary in depth and breadth but should mention the change in costs may not be linear, some costs are certainly fixed and others are variable, and the above changes are based on estimates of changes in the cost drivers.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
131) Create a diagram of the value chain by putting the following components into the correct order: a) purchasing; b) marketing and sales; c) research and development; d) customer service; e) distribution; f) design; g) production.
Answer: c) research and development → f) design → a) purchasing → g) production → b) marketing and sales → e) distribution → d) customer service
Difficulty: 3 Hard
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
132) Explain the difference between a value chain, a supply chain, and a distribution chain.
Answer: The value chain is the set of activities that expand the entire transformation process from raw resources into goods or services purchased and consumed by the end users. The supply chain is the set of firms and individuals that sells goods and services to a firm. The supply chain is an input for a firm. The distribution chain is the set of firms or individuals that buy and distribute the goods from the firm. The distribution chain is the output from a firm.
Difficulty: 2 Medium
Topic: Value Creation in Organizations
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
133) Compare financial accounting and cost accounting using the following concepts: users of the information; important criteria; who establishes or defines the system; and how to determine an accounting treatment.
Answer:
Concepts | Financial accounting | Cost accounting |
Users of the information | External: investors, creditors, owners | Internal: managers |
Important criteria | Comparability, decision relevance for investors | Decision relevance for managers, timeliness |
Who establishes or defines the system | External standard-setting group | Managers |
How to determine an accounting treatment | Standards and rules | Relevance for decision making |
Difficulty: 3 Hard
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
134) The IMA Code of Ethics describes three basic steps a cost accountant should take when faced with an ethical conflict: Discuss, clarify, and consult. Describe each of these three steps.
Answer: Discuss the conflict with your immediate supervisor or, if the immediate supervisor is involved, the next level in authority.
Clarify the relevant issues and concepts by discussions with a disinterested party.
Consult with an attorney about your rights and obligations.
Difficulty: 2 Medium
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
135) Respond to this comment: "Since cost accountants just prepare accounting data for internal management, cost accountants do not need to be concerned with GAAP or IFRS."
Answer: Although internal accounting is concerned with decision relevance for managers, the cost accountant still needs to be informed as to the GAAP/IFRS concepts regarding recording and measuring of costs.
Difficulty: 3 Hard
Topic: Accounting Systems
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
136) What are characteristics of information used in decision making?
Answer: Information used in decision making must be relevant, accurate, timely, and it may be qualitative in nature. Relevant information is pertinent to a decision, i.e., it will make a difference in the decision being made. Because different managerial problems usually require different data, a difficulty is deciding what information is relevant to the situation under review.
Information used in decision making must also be accurate or it will be of little use. Accurate information is precise. If cost information is imprecise because of incorrect calculations or incomplete records, the information will not be very useful. But, the information must also be relevant. Highly accurate but irrelevant data are of no value to the decision-maker.
Relevant and accurate information is of value only if it is timely, that is, available in time to make a decision. In an ideal world, the best information will be relevant, accurate, and timely. However, rarely does an organization operates in an ideal environment and some compromise may be needed — particularly between accuracy and timeliness. More accurate information will take longer to produce. There is an inverse relationship between accuracy and timeliness, and the two characteristics must be balanced as to determine what is acceptable.
Decision making also involves qualitative characteristics, which are the factors in a decision problem that cannot be expressed in numerical terms. Examples could include poor employee morale, the loss of control that occurs if certain processes are outsourced, and the harm done to an organization if a manager places his or her own goals over the goals of the organization. Quantitative analysis can be used to determine the cost of qualitative factors. Weighing the quantitative and qualitative factors in making decisions is the essence of management.
Difficulty: 3 Hard
Topic: Our Framework for Assessing Cost Accounting Systems
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Apply
AACSB: Analytical Thinking; Reflective Thinking
Accessibility: Keyboard Navigation
137) The Flamboyant Flirt is a small but prosperous hair cutting salon. Diane Stock, the manager of the salon, has been asked by several clients if she will ever offer other "hair related" services (e.g., perm, dye, etc.). After careful thought, Ms. Stock is considering expanding her offerings. However, in order to do so, she will have to hire one additional stylist at a salary of $26,000 per year. Other expenses will increase as follows: rent by 20%, supplies and utilities by 25%, and miscellaneous expenses by 10%. Her revenues from additional services are likely to be $55,000 for the next year (i.e., 2021). The Flamboyant Flirt's income statement for the most recent year is presented below.
The Flamboyant Flirt |
Income Statement for the Year Ended December 2020 |
Sales Revenue | | | | | $ | 220,000 | |
Costs: | | | | | | | |
Labor | $ | 52,000 | | | | | |
Utilities | | 12,000 | | | | | |
Supplies | | 45,000 | | | | | |
Rent | | 18,000 | | | | | |
Miscellaneous | | 5,000 | | | | | |
Manager's Salary | | 30,000 | | | | 162,000 | |
Operating Profits | | | | | $ | 58,000 | |
a. Based on your financial analysis, should Diane Stock go ahead with the expansion?
b. What other factors must Ms. Stock consider before making a final decision?
Answer:
a.
The financial implications of expanding the services offered by The Flamboyant Flirt are as follows:
The Flamboyant Flirt | |
Income Statement for the Year Ended December 2021 | |
| Status Quo | | Alternative: Expand | | Difference | | |
Sales Revenue | $ | 220,000 | | | $ | 275,000 | | | $ | 55,000 | | |
Costs: | | | | | | | | | | | | |
Labor | $ | 52,000 | | | | 78,000 | | | $ | 26,000 | | |
Utilities (25% of $12,000) | | 12,000 | | | | 15,000 | | | | 3,000 | | |
Supplies (25% of $45,000) | | 45,000 | | | | 56,250 | | | | 11,250 | | |
Rent (20% of $18,000) | | 18,000 | | | | 21,600 | | | | 3,600 | | |
Miscellaneous (10% of $5,000) | | 5,000 | | | | 5,500 | | | | 500 | | |
Manager's Salary | | 30,000 | | | | 30,000 | | | | 0 | | |
Operating Profits | $ | 58,000 | | | $ | 68,650 | | | $ | 10,650 | | |
| | | | | | | | | | | | | | | | | | | |
Based on the financial analysis, Diane Stock should go ahead with the expansion because her profits will increase by $10,650 or 18.4%. However, the assumption underlying her decision is that she considers the estimates to be reliable.
b.
Other factors that Ms. Stock might consider are as follows:
∙ Expansion of the business may bring in new customers who may ask for a haircut in addition to other services. This will increase revenues from hair cutting also. Expansion may also take away some customers who liked the small size of the salon (provides a more relaxed feeling.)
∙ Offering a variety of services will allow Ms. Stock to quote package prices on different combinations of services.
∙ Ms. Stock will have more responsibilities in overseeing the expansion, additional employees and more customers reducing the quality and quantity of personal time available.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-02 Distinguish between the uses and users of cost accounting and financial accounting information.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
138) The manager of a profit center of a large electronics manufacturing corporation made some projections regarding sales and profits for the upcoming fourth quarter of the year. The managers' performance evaluation and compensation depended significantly on his ability to meet budget goals. The manager discovered that the fourth quarter would have to be a particularly good quarter in order to meet these goals. He decided to implement a sales program offering liberal payment terms in order to pull some sales that would normally occur next year into the current year. Customers accepting delivery in the fourth quarter would not have to pay the invoice for 140 days. Also, he sold some equipment that was not being used and realized a significant profit on the sale.
Are these actions ethical? Why or why not?
Answer: Each of the manager's actions needs to be considered separately:
∙ Liberal credit terms - Acceptable, a business strategy that should be judged on how it affects the firm's operations and profits.
∙ Attempt to pull sales from one period to another - may not be acceptable. If the purpose of the change in credit terms is simply to move sales from one period to another, then the result is misleading financial reports and fraudulent; if the objective is to increase sales through management of credit policies, then acceptable.
∙ Sale of equipment - may be acceptable, a business decision that should be judged on how it affects the firm's operations and profits; may not be acceptable if done just to show a short-term gain that would improve current period profit.
Difficulty: 3 Hard
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Evaluate
AACSB: Ethics
Accessibility: Keyboard Navigation
139) The controller of one division of IntroTel, a large diversified firm is compensated by salary plus bonus. The bonus is a significant part of total compensation and is based directly on the profits of the division. Thus, the controller has an incentive to find ways to increase profits, including the delay of discretionary expenses such as research and development, delay of maintenance and repair of manufacturing equipment, and delay of sales promotions.
Is finding ways to increase profits as described above unethical? Why or why not? Who is to blame, if anyone?
Answer: Since the actions contemplated by the controller are not in the best interests of the company, these actions are probably not ethical, and are in conflict with the ethical standard of integrity. The situation displays both conflict of interests and an attempt to subvert the firm's performance incentive system.
Probably both the incentive system and the controller are to blame in this case. While it is not reasonable to expect that the firm can design a bias-free incentive system, it appears that the firm has not done an acceptable job of developing a system that will reward performance based upon the firm's critical success factors, instead of short-term profits only. Improvements in the incentive scheme are possible and necessary. On the other hand, the controller cannot be excused by taking advantage of the opportunity to manipulate profits. The standards are clear on the required professional behavior in this case, and the controller has ignored them for self-serving purposes.
Difficulty: 3 Hard
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Evaluate
AACSB: Ethics
Accessibility: Keyboard Navigation
140) Dockside Sandal Company, a manufacturer of women's sandals, recently implemented a quality improvement program aimed at streamlining the manufacturing process. Bo Mattison, industrial engineer and a resident expert on process improvement, was assigned the task of implementing the program.
Mattison's first task was to educate all the employees involved with the production process. He sent a memo to representatives in product design and development, materials management (including purchasing), marketing, distribution, customer service and accounting, in addition to those in the production department, inviting them to attend an information session on the improvement program.
He began the meeting by thanking all those who were present (over 35 in number) and spent the first hour explaining the need for such a program. Soon after, the attendees were engaged in a discussion. Several questions were raised during the discussion. Among these, three questions stood out.
1. What is the need for including members from design, marketing, and other functional areas when the improvement program's focus is on streamlining the manufacturing process?
2. What is the role of the cost management expert in this program?
3. Finally, why should the machine operators be involved, as they are not engineers?
Consider the three questions that stood out in the discussion. Assume the role of Bo Mattison and prepare a response addressing the questions.
Answer:
1. A process improvement program typically cuts across departmental boundaries by extending through most of the components of the value chain of a company. It is important to recognize that decisions made in the upstream activities such as product design and development affect downstream activities (i.e., manufacturing, distribution and customer service). Individuals from these downstream functions can make design engineers aware of the implications of design decisions on their respective activities. For example, the production engineer can inform the design engineer that certain designs are more compatible with the existing assembly line than others (the latter will cost more to produce). Therefore, the inclusion of individuals from different functional areas is to educate and inform each other.
2. The cost management expert assumes a very significant role in a process improvement program by providing cost-benefit information pertaining to different improvement initiatives. Once again, this activity adds value to the process improvement program because the cost manager can identify the cost implications of upstream activities on the downstream activities. For example, a product designed with common parts simplifies the purchasing activity, production activity and customer service activity (if and when required, e.g., repairs are easy).
3. The involvement of machine operators in such an improvement initiative is critical because the operator is closest to the process and therefore is likely to be very knowledgeable about how the process works. Consequently, the operator can visualize problems and point them out to other individuals in the team. Many operators might also be in a position to offer suggestions for improvements. The involvement of operators in improvement teams is becoming more common in the modern business environment.
Difficulty: 3 Hard
Topic: Value Creation in Organizations; Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.; 01-04 Identify current trends in cost accounting.
Bloom's: Create
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
141) Megan Kris, the Vice-President for Human Resources in Learning, Inc. was concerned about a recent memo she had recently received from the CEO's office regarding the possibility of outsourcing the payroll function to Salary Experts, a growing provider of a variety of human resource services. She was shocked that the CEO's office had discussed this matter with the Board of Directors but failed to consult her.
Megan was preparing for a meeting with the CEO. In reading the memo and its attachments, Megan observed the following comparison of costs in a report prepared by the controller's office:
| |
Payroll department expenses: | | | |
Salaries of employees | $ | 210,000 | |
Share of utilities | | 75,000 | |
Share of building rent | | 39,350 | |
Manager's salary | | 69,000 | |
Computers and supplies | | 26,000 | |
Other department expenses | | 20,000 | |
Total annual expenses | $ | 439,350 | |
| | | | |
Megan also noted that Salary Experts quoted a fixed fee of $125,000 and variable processing costs of $7.50 per employee transaction. She did not believe that the company will actually save money by outsourcing the payroll function. For one, she did not think that the company will actually save all of the above-mentioned amounts. She knew that the payroll department manager could not be removed from the company because he had to oversee the payroll function and serve as a liaison with the outside company. However, all other employees in the department would likely not be required.
a. Assume Learning Inc. has 14,000 employees on its payroll. Can the company save money by outsourcing the payroll function?
b. What are the pros and cons of outsourcing the payroll function?
Answer:
a.
Outsourcing the payroll function will involve an out-of pocket expense of $230,000 [$125,000 + ($7.50 × 14,000)]. Moreover, some of the payroll department's costs will continue to be incurred by the company:
|
Utilities | $ | 75,000 | |
Rent | | 39,350 | |
Manager's salary | | 69,000 | |
| $ | 183,350 | |
The total cost associated with outsourcing the function will be $413,350 compared to $439,350 if the payroll function is not outsourced. Therefore, Learning, Inc. can save exactly $26,000 by outsourcing the payroll function. More money might be saved if there are savings in utilities. A portion of the unavoidable costs could also be recovered if this space is sublet or put to productive use in some other manner.
b.
Several considerations must be made before deciding to outsource the payroll function.
∙ Efficiency of the outside party vis-a-vis carrying out the function internally.
∙ In some cases, it may be worthwhile to outsource certain activities.
∙ Employee morale due to layoffs (with possible implications on the reputation of the company).
∙ Possibility of outsourcing other functions and their repercussions on employees.
∙ Sensitivity of the nature of the information being handled by individuals external to the organization.
Difficulty: 3 Hard
Topic: Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-04 Identify current trends in cost accounting.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
142) Mr. Lee is the production manager of Cathy Company. It is the beginning of the month and he storms into the controller's department, clutching a large folder of reports. "Why am I getting so many reports? I don't need them nor do I want all the details. I've delegated responsibility to my managers so I don't have to worry about details. You've got to do something about this, John."
John, the controller, starts to think about the problem that seems to have come about as the company decentralized with many layers of responsibility. He has a vague memory of something he learned from his old cost accounting class and has called you, his former professor, for some advice or suggestions in order to reduce the paper flow.
Briefly describe the concept of the hierarchy of performance reports.
Answer: The hierarchy of performance reports starts at the lowest level of responsibility and builds towards the top. Each manager receives the performance report for his or her own subunit in addition to the performance reports for the major subunits in the next lower level that he or she manages.
As the reports are prepared, the total cost line, for example, from the cost center is included as one line in the performance report of the production department along with total costs for the production department's other work centers. The production department's total cost is included as a single line item in the report for the next level up, and so on. As one moves up the organization chart, the reports get more and more aggregated; as one moves down, they get more disaggregated.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Apply
AACSB: Analytical Thinking; Reflective Thinking
Accessibility: Keyboard Navigation
143) Adair Company has been busy over the first few years of its existence in penetrating its market and gaining a respectable market share. To facilitate this, Mr. Adair, the CEO, and his controller, Mr. Brown, have been developing the annual master budgets. To date this approach has worked well.
Adair has been acquired by a company in a related business but will continue to operate as an independent subsidiary. The CFO of the acquiring company, Mr. Horwitz, has suggested to Mr. Adair that, since it was expected that his company would continue to grow, it adopt a departmental budgeting system; a suggestion Mr. Adair agreed to readily. Mr. Horwitz explained to Adair's departmental managers the concepts of a departmental participative budgeting system and their involvement. The managers were encouraged to take the information and come back with suggestions which could then be put into a formal budget process.
a. What benefits will accrue to Adair under this new budgeting system?
b. What behavioral issues might arise for departmental managers and for production workers?
c. What is the most probable long-term reaction of Adair's people to the participative budget system?
Answer:
a. There will be improved communication and coordination between departments; problems might be identified sooner since the managers are closer to the action; and accountability and performance evaluation should be easier to do.
b. Departmental managers will face some positive points in that they are more likely to be motivated to work with a budget they had a hand in developing. They also should accept the results of the performance evaluation and accountability more readily. Unfortunately, there may be tendencies to pad the budget before the fact or manipulate the figures after the fact in order to look better for the evaluation, especially if there are monetary rewards involved. Production workers will have some similar reactions depending on the degree of their involvement in the process. If they consider the budget fair, they will work with it; if not, they might sabotage it.
c. If there is a perception that the process has worked well, all involved will be motivated to continue with the process. If there is a feeling that things have not worked well or evaluations have been unfair, they will not work with the process.
Difficulty: 3 Hard
Topic: Cost Data for Managerial Decisions
Learning Objective: 01-03 Explain how cost accounting information is used for decision making and performance evaluation in organizations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
144) Traditionally, companies in the United States have employed a "push" manufacturing style. Studies in Activity Based Management and Quality Control have indicated that this approach is filled with many nonvalue-added activities, which increase overall costs and reduce profits. The "push" style is being replaced with a "pull" approach.
Briefly describe the major differences between the push and pull approaches. What nonvalue-added activities are eliminated in a pull manufacturing system?
Answer: A push manufacturer begins by forecasting total orders for a time period. The manufacturer orders materials based on the forecast. Production schedules are produced based on the forecast. Production is then "pushed" through. Because production is based on sales, the company may end up producing units for which there is not as much demand as forecasted or have too few units available of a product for which there is heavy demand. This creates costs of storing excess inventory and opportunity cost of lost sales. In addition, because units are pushed through the system, the timing of receiving materials is not balanced to the production of activities, particularly at production bottlenecks, which results in a wasteful buildup of inventories, either temporary or permanent. Push production can reduce motivation to improve quality and can reinforce motivation to overuse non-bottleneck activities.
A pull manufacturer "pulls" production through the process by customer orders, rather than "pushes" them through with master production schedules. A sales order triggers a production order. The production order triggers orders to suppliers, who ship parts immediately. The Just-in-Time approach is flexible to customer needs and requires lower inventory costs than traditional methods. Because suppliers tend to be preapproved and more reliable, costs of quality are reduced. Nonvalue-added activities such as storage, quality control, downtime, waiting time are avoided in a pull manufacturing system.
Difficulty: 3 Hard
Topic: Value Creation in Organizations; Trends in Cost Accounting throughout the Value Chain
Learning Objective: 01-01 Describe the way managers use accounting information to create value in organizations.; 01-04 Identify current trends in cost accounting.
Bloom's: Evaluate
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
145) The New York Times recently reported that a number of publicly-held corporations have been accused of illegally doctoring hourly employees' time records. Examples included:
∙ Workers sued Family Dollar and Pep Boys, accusing managers of deleting hours from their time records.
∙ More than a dozen former Walmart employees said in interviews and depositions that managers had altered time records to shortchange employees.
∙ The Department of Labor reached two back-pay settlements with Kinko's photocopy centers after finding that managers had erased time for 13 employees.
When interviewed, many of the managers cited pressure from upper-management and the impact of their actions on their own compensation as underlying causes for their actions. All of the companies strongly denied encouraging such illegal and unethical behavior by managers. Compensation experts interviewed agreed that the companies' incentive performance systems may have contributed to the managers' behavior. (New York Times, April 4, 2004)
a. Explain how the incentive performance systems of the above-named companies could have contributed to this illegal behavior by managers.
b. Discuss the ethical issues involved in the design of incentive performance systems. In designing a performance-based incentive system, what measures should companies take to avoid illegal and unethical behavior by supervisors?
Answer:
a. Incentive performance systems can lead to unethical conduct when managers fear losing their jobs when they fail to keep costs down. In addition, when a significant part of the managers' compensation comes from bonuses based on minimizing costs or maximizing profits, managers may be tempted to underreport labor hours in order to cut payroll costs. Many of the managers cited pressure from supervisors to erase hours, refuse to pay overtime, and otherwise manipulate payroll records.
b. Designers of performance-based incentive systems should identify the trade-offs between effective rewards, goal alignment, monitoring, and cost in designing an effective performance-based system. It is clear that upper-level management must strongly encourage ethical behavior by mid-level managers. Some of the possible measures that could be taken are:
∙ Regular written reminders of "payroll integrity" from top management.
∙ Distributing paper time records to employees, so that they can challenge significant discrepancies in their reported hours.
∙ Establishing an anonymous call-in line for employees to report possible unethical behavior.
Difficulty: 3 Hard
Topic: Choices: Ethical Issues for Accountants
Learning Objective: 01-05 Understand ethical issues faced by accountants and ways to deal with ethical problems that you face in your career.
Bloom's: Analyze
AACSB: Analytical Thinking; Ethics
Accessibility: Keyboard Navigation
