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Product Cott has sales of $200,000, a contribution margin of 20% and a margin of safety of $80,000. What is Cott's fixed cost?

$24,000

Quantity (usage) Variance

(AQ - SQ) × SP

Total Variance

(AQ × AP) - (SQ × SP)

Selecting the best project from several competing projects involves three steps:

1. Assessing the cash flow pattern for each project 2. Computing the NPV for each project 3. Selecting the project with the greatest NPV

5 Steps for Implementing ABC

1. Define activities, activity cost pools, and activity measures 2. Assign overhead costs to activity cost pools 3. Calculate activity rates 4. Assign overhead costs to cost objects using activity rates and activity measures 5. Prepare management reports

At the end of the life of a project, there are two major sources of cash:

1. Release of working capital 2. Preparation, removal, and sale of the equipment

Use the information below to answer questions 4-7. Drake Company's income statement for the most recent year appears below: Sales (26,000 units)................................... $650,000 Less: Variable expenses............................. 442,000 Contribution margin.................................. 208,000 Less: Fixed expenses................................. 234,000 Net operating loss...................................... $ (26,000) 6. If the company desires a net operating income of $20,000, the number of units needed to be sold is:

31,750

At annual sales of $900,000, the Ebo product has the following unit sales price and costs: Sales Price $20 Prime Cost $6 Manufacturing Overhead: Variable 1 Fixed 7 Selling & Admin. Costs: Variable 1 Fixed 3 $18 Profit $2 What is Ebo's breakeven point in units?

37,500

28. Which of the following is an example of a discretionary fixed expense? a. contract workers b. property taxes on a factory building c. depreciation on a factory building d. insurance on a building

31. In the formula Y = F + VX, VX refers to the a. total variable costs. b. intercept. c. dependent variable. d. independent variable.

In, ____________ all manufacturing costs, whether they are fixed or variable, are treated as product costs.

Absorption costing

After-tax cash flow =

After-tax net income + Noncash revenues/expenses CF = NI + NC

_____________________: The assignment of indirect costs to cost objects. It is the least accurate cost assignment method. Often, no causal relationship exists between the cost and the basis used to assign the cost to the cost object.

Allocation

(Q9-12) Brighton Inc. has provided the following data to be used in evaluating a proposed investment project: Initial investment $280,000 Annual cash receipts $196,000 Life of the project 6 years Annual cash expenses $78,000 Salvage value $28,000 The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 16%. 10. When computing the net present value of the project, what are the annual after-tax cash expenses? A) $101,400 B) $50,000 C) $54,600 D) $23,400

Annual after-tax cash expenses = Annual cash expenses × (1 − Tax rate) = $78,000 × (1 − 0.30) = $54,600

LABOR EFFICIENCY VARIANCE:

LEV = (Actual Hrs × Standard Rate) - (Standard Hrs × Standard Rate) Or LEV = SR (AH - SH)

What is overhead?

Any cost that is not direct labor or direct materials

Cost object

Anything for which cost data are desired.

Period costs

Are always expensed in the same period in which they are incurred.

Inventoriable costs

Are regarded as assets before the products are sold. (Under an absorption costing system, inventoriable (product) costs include direct materials and conversion costs (direct labor and fixed and variable manufacturing overhead). Inventoriable costs are treated as assets until the products are sold because they represent future economic benefits.)

22. In a company that supplies muffins to bakeries, which of the following would be considered an input? a. delivered muffins b. flour c. baking d. none of these

Figure 3-3 The Sandoval Company has four process engineers that are each able to process 1,500 design changes. Last year 5,250 design changes were produced by the four engineers. Each engineer is paid $60,000 per year. ____ 30. Refer to Figure 3-3. What is the unused capacity in dollars? a. $60,000 b. $30,000 c. $240,000 d. $15,000

B unused capacity x activity rate = unused capacity in dollars 750 x $40 = $30,000

The general format for a cash budget is as follows:

Beginning cash balance + Cash receipts = Cash available - Cash disbursements - Minimum cash balance = Excess or deficiency of cash - Repayments + Loans + Minimum cash balance = Ending cash balance

47. The present value of $10,000 to be received each year for ten years and earning a 14 percent return (rounded) is a. $11,600. b. $26,000. c. $52,160. d. $52,436.

C SUPPORTING CALCULATIONS: $10,000 x 5.216 (PVAF, n = 10, 14%) = $52,160

____________ (performance drivers) are factors that drive future performance (e.g., hours of employee training).

Lead measures

Short-run decisions can often lead to:

Long-term consequences

What does ABC charge for?

Capacity used

Goods that are elastic:

Clothes, Toyota camryà - Hyundai Sonata, etc.

In order for the Balanced Scorecard to be effective, ____________ must be tied to the scorecard measures.

Compensation

CM Ratio Formula

Contribution Margin / Sales

_____________________ - manufacturing overhead combined with direct labor (term stems from the fact that direct labor costs and overhead costs are incurred to convert materials into finished products.)

Conversion cost

Why do we want to be able to carve out and classify costs in several different ways because it helps to identify areas for improvement?

Cost reduction

The following information pertains to Lap Co.'s Palo Division for the month of April: Number of Units Cost of Materials Beginning WIP 15,000 $5,500 Started in April 40,000 $18,500 Unites Completed 42,500 Ending WIP 12,500 All materials are added at the beginning of the process. Using the weighted-average method, the cost per equivalent unit for materials is

$0.43

_________________ are achievable under efficient operating conditions.

Currently attainable standards

Given the following information, the total contribution margin is: Sales revenue: $5,000 Variable cost of goods sold: 2,700 Full cost of goods sold: 2,900 Fixed selling and admin. expenses: 1,100 Variable selling and admin. expenses: 800

$1,500. Contribution margin equals sales revenue minus all variable costs. Hence, the total contribution margin can be calculated as follows: Sales $5,000 Variable cost of goods sold (2,700) Variable selling and admin. exps. (800) Contribution margin $1,500

Schneider, Inc., had the following information relating to Year 1: Budgeted factory overhead: $74,800 Actual factory overhead: $78,300 Applied factory overhead: $76,500 Estimated direct labor hours: 44,000 Actual direct labor hours: ? If Schneider decides to use the actual results from Year 1 to determine the Year 2 overhead rate, what is the Year 2 overhead rate?

$1.740

Use the information below to answer questions 1-3. Call Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $140.50 per unit. Sales volume (units).............................................. 6,000 7,000 Cost of sales.......................................................... $497,400 $580,300 Selling, general, and administrative costs............. $273,600 $294,700 2. The best estimate of the total variable cost per unit is:

$104.00

_____________________: Costs that can be easily and accurately traced to a cost object

Direct costs

Conversion costs do not include

Direct materials.

Predetermined Overhead Rate (POHR)

Estimated Manufacturing Overhead Costs/ Estimated Activity Base

3. _____Is required by regulatory bodies such as the SEC.

Financial

Mixed Costs

Has some variable and fixed elements which we'll need to parse-out

Qualitative Factors While cost and revenue information is important, other information, often qualitative in nature, is needed to make an __________________ **Don't focus exclusively on the quantitative analysis.**

Informed decision

What is the nature of the work-in-progress account?

Inventory

Janet Taylor Casual Wear has $75,000 in a bank account as of December 31, Year 3. If the company plans on depositing $4,000 in the account at the end of each of the next 3 years (Year 4, Year 5, and Year 6) and all amounts in the account earn 8% per year, what will the account balance be at December 31, Year 6? Ignore the effect of income taxes. 8% Interest Rate Factors Period Future Value of $1 Future Value of an Annuity of $1 1 1.08 1.00 2 1.17 2.08 3 1.26 3.25 4 1.36 4.51

$107,000 Both future value tables will be used because the $75,000 already in the account will be multiplied times the future value factor of 1.26 to determine the amount 3 years hence, or $94,500. The three payments of $4,000 represent an ordinary annuity. Multiplying the three-period annuity factor (3.25) by the payment amount ($4,000) results in a future value of the annuity of $13,000. Adding to the two elements together produces a total account balance of $107,500 ($94,500 + $13,000).

Margin of Safety as % of Sales is

MOS/ Sales

MATERIAL PRICE VARIANCE:

MPV = (Actual Qty × Actual Price) - (Actual Qty × Standard Price) Or MPV = AQ (AP - SP)

Outsourcing of technical and professional jobs is becoming an important ___________ issue.

Make-or-buy

4. _____Has its primary emphasis on the future.

Managerial

7. _____Primary emphasis is on the relevance of the data, even if it's not completely objective or verifiable.- (by relevant, we mean "appropriate for the problem at hand.)

Managerial

Manufacturing costs (three broad categories). 3) _______________________ - all costs of manufacturing except direct materials and direct labor.

Manufacturing overhead

When an organization is operating above the breakeven point, the degree or amount that revenues may decline before losses are incurred is the

Margin of safety

Lag measures vs Lead measures

Measures of results from past efforts vs. factors that drive future performance

A taxpayer can use either the straight-line method or the ______________________ (MACRS) to compute annual depreciation. MACRS uses double-declining balance with a half-year convention. This method also switches to the method of straight-line depreciation whenever the straight-line amount exceeds the double-declining balance amount.

Modified accelerated cost recovery system

____________ can be readily quantified and verified (e.g., market share)

Objective measures

__________________-time required for a firm to recover its original investment. Assuming evenly distributed cash flows:

Payback period

_______________ low initial price to build market share quickly or establish a customer base. Uses: when the product or service is new and customers have uncertainty as to its value. Note: Penetration pricing is not meant to destroy competition or it would be predatory pricing.

Penetration pricing

__________________ occurs when firms with market power price products "too high"

Price gouging

__________________: How much an input should cost.

Price standard

Equivalent units of production are used in process accounting to

Provide a means of assigning cost to partially completed units. Equivalent Units of Production (EUP) are used to allocate cost to incomplete goods. Thus, if 50% of the direct materials have been added to 100 units in the process, there are 50 EUP of materials. Similarly, if 30% of the conversion costs has been incurred for 1,000 units, 300 EUP have been produced.

________________: How much of a given input should be used to make a unit of output.

Quantity standard

____________________ specify how much of an input should be used per unit of output.

Quantity standards

____________________________ is the difference between the actual and standard quantity of inputs multiplied by the standard unit price of the input.

Quantity/Usage (efficiency) variance

1. _______________ - materials that are used to make the product (like plywood in the table example)

Raw materials

Standard Quantity of Input at Standard Price

SQ × SP

Equation to know (Basically the I/S for managerial)

Sales - Variable Costs = Contribution Margin - Fixed Costs = N/I

The Margin of Safety is quite simply the amount of ______________.

Sales dollars over the BEP

The ________ is the difference between actual price and expected price multiplied by the actual quantity or volume sold. In equation form, it is the following: Sales price variance = (Actual price - Expected price) × Quantity sold Sales volume variance = (Actual volume - Expected volume) × Expected price Overall sales variance = Sales price variance + Price volume variance

Sales price variance

There are several alternative denominator measures for applying overhead. Which is not commonly used?

Sales value of product produced.

Because cash expenses can be deducted from revenues to arrive at taxable income, the effect is to _____________________________________________________. The consequence of this shielding is to save taxes and to reduce the actual cash outflow associated with a given expenditure. Noncash expenses, such as depreciation, also shield revenues from taxation and thus create a tax savings.

Shield revenues from taxation

A ___________________ focuses on whether a specially priced order should be accepted or rejected.

Special-order decision

A ________________ is a benchmark or "norm" for measuring performance.

Standard

STANDARD COST CARD After standards have been set for materials, labor, and overhead, a ___________________ is prepared. The standard cost card indicates what the cost should be for a completed unit of product.

Standard cost card

____________ are targets that are set at levels, that, if achieved will transform the organization within a period of three to five years. The measures used as stretch targets should be linked by ____________ relationships, and the targets are set through a consensus of everyone in the organization.

Stretch targets Causal

(T/F) ____ 7. The break-even point is the point where total costs equal sales revenues.

__________________________ choosing among alternatives with an immediate or limited end in view.

Tactical decision making

_________________is a method of determining the cost of a product or service based on the price (target price) that customers are willing to pay.

Target costing

Management should implement a different and/or more expensive accounting system only when

The benefits of the system exceed the cost. (Changing to a different and/or expensive accounting system requires cost-benefit analysis. Changes should be undertaken only if the benefits of the proposed change exceed its cost.)

Internal Rate of Return

The interest rate that equates the present value of a project's cash inflows to present value of the project's cost (the point where NPV = 0).

Degree of Operating Leverage (DOL)

Total Contribution / (Total contribution - Fixed Costs)

High-Low Method Fixed cost Element =

Total cost - variable cost element

OVERHEAD EFFICIENCY VARIANCE:

VOEV = (Actual Hrs × Standard Rate) - (Standard Hrs × Standard Rate) Or VOEV = SR (AH - SH)

3 types of costs

Variable, fixed, mixed

In a process costing system, the application of factory overhead usually is recorded as an increase in

Work-in-process inventory

The completion of goods is recorded as a decrease in the work in process inventory account when using: Job-order costing/ Process costing

Yes/Yes

[5] A company that produces standard quality paint is considering manufacturing a high quality paint. The high quality product would be obtained by further processing the standard paint. Which cost is relevant in deciding whether to sell the standard or high quality paint? A. Average. B. Fixed. C. Direct. D. Incremental.

[5] The correct answer is D. D. The only relevant costs are those that differ between the choices (incremental costs). A. Average cost is not relevant to deciding whether to sell the standard or high quality paint. B. Fixed cost is not relevant to deciding whether to sell the standard or high quality paint. C. Direct cost is not relevant to deciding whether to sell the standard or high quality paint.

Absorption vs. Variable Costing

absorption: fixed MOH is a product cost variable: fixed MOH is a period cost

Equation method

sales - variable costs - fixed costs = profit (net income)

Key Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: Annual sales.......................................................... 2,500 units Selling price per unit........................................... $304 Variable costs per unit: Production.......................................................... $125 Selling................................................................. $49 Avoidable fixed costs per year: Production.......................................................... $50,000 Selling................................................................. $75,000 Allocated common corporate costs per year...... $55,000 If the new product is added, the combined contribution margin of the other, existing product lines is expected to drop $65,000 per year. Total common corporate costs would be unaffected by the decision of whether to add the new product. 1. If the new product line is added next year, the increase in net operating income resulting from this decision would be:

$135,000

Questions 14 through 17 are based on the following information. Peterson Company's records for the year ended December 31 show that no finished goods inventory existed at January 1 and no work was in process at the beginning or end of the year. Net sales $1,400,000 Manufacturing costs - Fixed 315,000 - Variable 630,000 Operating expenses - Fixed 140,000 - Variable 98,000 Units manufactured 70,000 Units sold 60,000 Question 15. What would be Peterson's finished goods inventory cost at December 31 under the absorption costing method?

$135,000. Absorption costing considers both variable and fixed manufacturing costs as product costs. Unit COGM is equal to the sum of the variable ($630,000) plus fixed ($315,000) costs divided by the number of units manufactured (70,000), or $13.50 per unit. Given that 10,000 units remain in inventory, EI is $135,000.

Use the information below to answer questions 1-3. Call Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $140.50 per unit. Sales volume (units).............................................. 6,000 7,000 Cost of sales.......................................................... $497,400 $580,300 Selling, general, and administrative costs............. $273,600 $294,700 1. The best estimate of the total monthly fixed cost is:

$147,000

Sipan Retail Company was recently created with a beginning cash balance of $12,000. The owner expects the following for the first month of operations: Cash sales to customers............................................... $8,000 Sales on account to customers..................................... $30,000 Cash collected from account customers...................... $12,000 Cost of merchandise purchased.................................. $35,000 Cash paid for merchandise purchased......................... $24,500 Cost of merchandise sold............................................ $26,600 Cash paid for display cases......................................... $9,600 Selling and administrative expenses............................ $4,000 The display cases above were purchased at the beginning of the month and are being depreciated at a rate of $200 per month. This amount is included in the selling and administrative expenses figure above. All other selling and administrative expenses are paid as incurred. Sipan wants to maintain a cash balance of $10,000. Any amount below this can be borrowed from a local bank as needed in increments of $1,000. All borrowings are made at month end. 1. In Sipan's cash budget for this first month, how much money will Sipan need to borrow at month end?

$16,000

The accounting records of Omar Company contained the following information for last year: Beginning Ending Direct materials inventory........................ $9,000 $7,000 Work in process inventory....................... $17,000 $31,000 Finished goods inventory........................ $10,000 $15,000 Manufacturing costs incurred Direct materials used............................... $72,000 Overhead applied..................................... $24,000 Direct labor cost (10,000 hours).............. $80,000 Depreciation............................................. $10,000 Rent......................................................... $12,000 Taxes........................................................ $8,000 Cost of goods sold................................... $157,000* * Selling and administrative costs incurred Advertising.............................................. $35,000 Rent......................................................... $20,000 Clerical..................................................... $25,000 *Does not include over- or underapplied overhead. Q4: The cost of goods manufactured for the year (prior to any under/over-applied adjustments) was:

$162,000

The accounting records of Omar Company contained the following information for last year: Beginning Ending Direct materials inventory........................ $9,000 $7,000 Work in process inventory....................... $17,000 $31,000 Finished goods inventory........................ $10,000 $15,000 Manufacturing costs incurred Direct materials used............................... $72,000 Overhead applied..................................... $24,000 Direct labor cost (10,000 hours).............. $80,000 Depreciation............................................. $10,000 Rent......................................................... $12,000 Taxes........................................................ $8,000 Cost of goods sold................................... $157,000* * Selling and administrative costs incurred Advertising.............................................. $35,000 Rent......................................................... $20,000 Clerical..................................................... $25,000 *Does not include over- or underapplied overhead. Q2: The total costs added to Work in Process during the year were:

$176,000

Sipan Retail Company was recently created with a beginning cash balance of $12,000. The owner expects the following for the first month of operations: Cash sales to customers............................................... $8,000 Sales on account to customers..................................... $30,000 Cash collected from account customers...................... $12,000 Cost of merchandise purchased.................................. $35,000 Cash paid for merchandise purchased......................... $24,500 Cost of merchandise sold............................................ $26,600 Cash paid for display cases......................................... $9,600 Selling and administrative expenses............................ $4,000 The display cases above were purchased at the beginning of the month and are being depreciated at a rate of $200 per month. This amount is included in the selling and administrative expenses figure above. All other selling and administrative expenses are paid as incurred. Sipan wants to maintain a cash balance of $10,000. Any amount below this can be borrowed from a local bank as needed in increments of $1,000. All borrowings are made at month end. 3. In Sipan's budgeted balance sheet at the end of this first month, at what amount will accounts receivable be shown?

$18,000

Following are Mill Co.'s production costs for October: Direct materials: $100,000 Direct labor: $90,000 Factory Overhead: $4,000 What amount of costs should be traced to specific products in the production process?

$190,000 (Direct materials and direct labor can feasibly be identified with the production of specific goods. Factory overhead cannot be traced to a specific product but is allocated to all products produced. Thus, the amount of costs traceable to specific products in the production process equals $190,000. ($100,000 + $90,000))

The following information appeared in the accounting records of a retail store for the year ended December 31: Sales: $300,000 Purchases: $140,000 Inventory on January 1: $70,000 Inventory on December 31: $100,000 Sales Commissions: $10,000 The gross margin was

$190,000 (The gross margin (profit) equals sales minus cost of goods sold. The cost of goods sold equals purchases, plus beginning inventory, minus ending inventory. Consequently, the gross margin is $190,000. [$300,000 - ($140,000 + $70,000 - $100,000)].)

Fleet, Inc., manufactured 700 units of Product a, a new product, during the year. Product A's variable and fixed manufacturing costs per unit were $6.00 and $2.00, respectively. The inventory of Product A on December 31 consisted of 100 units. There was no inventory of Product A on January 1. What would be the change in the dollar amount of inventory on December 31 if variable costing were used instead of absorption costing.

$200 decrease. Given an inventory increase of 100 units during the year and the fixed manufacturing cost per per unit of $2.00, $200 (100 units * $2.00) of overhead would be deferred under absorption costing but expensed immediately using variable costing. thus variable costing inventory would be $200 less that absorption costing.

Use the information below to answer questions 1-3. Call Corporation is a wholesaler that sells a single product. Management has provided the following cost data for two levels of monthly sales volume. The company sells the product for $140.50 per unit. Sales volume (units).............................................. 6,000 7,000 Cost of sales.......................................................... $497,400 $580,300 Selling, general, and administrative costs............. $273,600 $294,700 3. The best estimate of the total contribution margin when 6,300 units are sold is:

$229,950

Garfield, Inc., is considering a 10-year capital investment project with forecasted revenues of $40,000 per year and forecasted cash operating expenses of $29,000 per year. The initial cost of the equipment for the project is $23,000, and Garfield expects to sell the equipment for $9,000 at the end of the 10th year. The equipment will be depreciated over 7 years. The project requires a working capital investment of $7,000 at its inception and another $5,000 at the end of Year 5. Assuming a 40% marginal tax rate, the expected net cash flow from the project in the 10th year is:

$24,000 The project will have an $11,000 before-tax cash inflow from operations in the 10th year ($40,000 - $29,000). Also, $9,000 will be generated from the sale of equipment. The entire $9,000 will be taxable because basis of the asset was reduced to zero in the seventh year Thus, taxable income will be $20,000 ($11,000 + $9,000), leaving a net after-tax cash inflow of $12,000 [$20,000 * (1 - .4)]. This $12,000 must be added to the $12,000 tied up in working capital ($7,000 + $5,000). The total net cash inflow in the 10th year will, therefore, be $24,000.

Questions 1 and 2 are based on the following information. Clifton Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price............................................... $63 Units in beginning inventory..................... 0 Units produced.......................................... 1,500 Units sold................................................... 1,100 Units in ending inventory.......................... 400 Variable costs per unit: Direct materials....................................... $14 Direct labor............................................. $15 Variable manufacturing overhead........... $1 Variable selling and administrative......... $7 Fixed costs: Fixed manufacturing overhead............... $16,500 Fixed selling and administrative............. $5,500 Question 2. The total gross margin for the month under the absorption costing approach is:

$24,200

Key Company is considering the addition of a new product to its current product lines. The expected cost and revenue data for the new product are as follows: Annual sales.......................................................... 2,500 units Selling price per unit........................................... $304 Variable costs per unit: Production.......................................................... $125 Selling................................................................. $49 Avoidable fixed costs per year: Production.......................................................... $50,000 Selling................................................................. $75,000 Allocated common corporate costs per year...... $55,000 If the new product is added, the combined contribution margin of the other, existing product lines is expected to drop $65,000 per year. Total common corporate costs would be unaffected by the decision of whether to add the new product. 2. What is the lowest selling price per unit that could be charged for the new product line and still make it economically desirable to add the new product line?

$250

Questions 1 and 2 are based on the following information. Clifton Company, which has only one product, has provided the following data concerning its most recent month of operations: Selling price............................................... $63 Units in beginning inventory..................... 0 Units produced.......................................... 1,500 Units sold................................................... 1,100 Units in ending inventory.......................... 400 Variable costs per unit: Direct materials....................................... $14 Direct labor............................................. $15 Variable manufacturing overhead........... $1 Variable selling and administrative......... $7 Fixed costs: Fixed manufacturing overhead............... $16,500 Fixed selling and administrative............. $5,500 Question 1. The total contribution margin for the month under the variable costing approach is:

$28,600

The accounting records of Omar Company contained the following information for last year: Beginning Ending Direct materials inventory........................ $9,000 $7,000 Work in process inventory....................... $17,000 $31,000 Finished goods inventory........................ $10,000 $15,000 Manufacturing costs incurred Direct materials used............................... $72,000 Overhead applied..................................... $24,000 Direct labor cost (10,000 hours).............. $80,000 Depreciation............................................. $10,000 Rent......................................................... $12,000 Taxes........................................................ $8,000 Cost of goods sold................................... $157,000* * Selling and administrative costs incurred Advertising.............................................. $35,000 Rent......................................................... $20,000 Clerical..................................................... $25,000 *Does not include over- or underapplied overhead. Q3: If Omar Company applies overhead to jobs on the basis of direct labor hours and Job 3 took 120 hours, how much overhead should be applied to that job?

$288

The following information pertains to the August manufacturing activities of Griss Co.: Beginning work-in-progress (BWIP): $12,000 Ending work-in-progress (EWIP): $10,000 Cost of goods manufactured (COGM): $97,000 Direct materials issued to production: $20,000 Factory overhead is assigned at 150% of direct labor. What was the August direct labor?

$30,000

During May, Roy Co. purchased 10,000 units of Product X. Costs incurred by Roy during May: Direct materials $10,000 Direct labor 20,000 Variable manufacturing overhead 5,000 Variable selling and general expenses 3,000 Fixed manufacturing overhead 9,000 Fixed selling and general expenses 4,000 Total 51,000 Under absorption costing, Product X's unit cost was:

$4.40 Unit cost under absorption costing is equal to the sum of manufacturing costs divided by the units produced. Selling and general expenses are not considered product costs. (10,000 + 20,000 + 5,000 + 9,000) / (10,000 units) = $4.40.

Use the information below to answer questions 4-7. Drake Company's income statement for the most recent year appears below: Sales (26,000 units)................................... $650,000 Less: Variable expenses............................. 442,000 Contribution margin.................................. 208,000 Less: Fixed expenses................................. 234,000 Net operating loss...................................... $ (26,000) 7. The sales manager is convinced that a $60,000 expenditure on advertising will increase unit sales by fifty percent without any other increase in fixed expenses. If the sales manager is correct, the company's net operating income would increase by:

$44,000

Questions 20 and 21 are based on the following information. Osawa, Inc., planed and actually manufactured 200,000 units of its single product during its first year of operations. Variable manufacturing costs were $30 per unit of product. Planned and actual fixed manufacturing costs were $600,000, and selling and administrative costs totaled $400,000. Osawa sold 120,000 units of product at a selling price of $40 per unit. Question 20. Osawa's operating income for the year using absorption (full) costing is:

$440,000.

Questions 18 and 19 are based on the following information. Presented are Valenz Company's records for the current fiscal year ended November 30. Direct materials used $300,000 Direct labor 100,000 Variable factory overhead 50,000 Fixed factory overhead 80,000 Selling and admin. costs - variable 40,000 Selling and admin. costs - fixed 20,000 Question 18. If Valenz Company uses variable costing, the inventoriable costs for the current fiscal year are:

$450,000

During the month of April, Vane Co. produced and sold 10,000 units of a product. Manufacturing and selling costs incurred during April were as follows: Direct materials $400,000 Variable manufacturing overhead 90,000 Fixed manufacturing overhead 20,000 Variable selling costs 10,000 Assume that direct labor is a variable cost. The unit product cost under variable costing was:

$49. Variable costing includes variable manufacturing costs only: direct materials, direct labor, and manufacturing overhead. Fixed manufacturing overhead and selling expenses are treated as period costs. Hence, the unit cost is $49. (400,000 + 90,000) / 10,000 units

Lucy Sportswear manufactures a specialty line of T-shirts using a job-order cost system. During March, the following costs were incurred in completing Job ICU2: direct materials, $13,700; direct labor, $4,800; administrative, $1,400; and selling, $5,600. Factory overhead was applied at the rate of $25 per machine hour, and Job ICU2 required 800 machine hours. If Job ICU2 resulted in 7,000 good shirts, the cost of goods sold per unit would be

$5.50

New-Range Cosmetics has used a traditional cost accounting system to apply quality control costs uniformly to all products at a rate of 14.5% of direct labor cost. Monthly direct labor cost for Satin Sheen makeup is $27,500. In an attempt to more equitably distribute quality control costs, New-Rage is considering activity-based costing. The monthly data shown in the chart below have been gathered for Satin Sheen makeup. Activity Cost Driver Cost Rates Quantity for Satin Sheen Incoming material inspection Type of material $11.50 per type 12 types In-process units inspection Number of units $0.14 per unit 17,500 units Product certification Per order $77 per order 25 orders The monthly quality control cost assigned to Satin Sheen makeup using activity-based costing (ABC) is

$525.50 higher than the cost using the traditional system.

Questions 18 and 19 are based on the following information. Presented are Valenz Company's records for the current fiscal year ended November 30. Direct materials used $300,000 Direct labor 100,000 Variable factory overhead 50,000 Fixed factory overhead 80,000 Selling and admin. costs - variable 40,000 Selling and admin. costs - fixed 20,000 Question 19. Using absorption (full) costing, Valenz Company's inventoriable costs are:

$530,000.

The following information pertains to Guillotine Corporation: Beg Inventory 1,000 units End Inventory 6,000 units Direct labor per unit $40 Direct materials per unit 20 Variable overhead per unit 10 Fixed overhead per unit 30 Variable selling and admin. costs per unit 6 Fixed selling and admin. costs per unit 14 What is the value of the ending inventory using the absorption costing method?

$600,000

Pole Co. is investing in a machine with a 3-year life. The machine is expected to reduce annual cash operating costs by $30,000 in each of the first 2 years and by $20,000 in Year 3. Present values of an annuity of $1 at 14% are Period 1 - 0.88 Period 2 - 1.65 Period 3 - 2.32 Using a 14% cost of capital, what is the present value of these future savings?

$62,900 The cost reductions constitute two annuities: a 3-year annuity of $20,000 per year and a 2-year annuity of $10,000 per year. Using a 14% cost of capital and ignoring tax effects, the present value of a $20,000 annuity discounted over a 3-year period is $46,400 ($20,000 * 2.32) The present value of the incremental $10,000 amounts in the first 2 years is $16,500 ($10,000 * 1.65). Hence, the total present value of the future savings is $62,900.

Sipan Retail Company was recently created with a beginning cash balance of $12,000. The owner expects the following for the first month of operations: Cash sales to customers............................................... $8,000 Sales on account to customers..................................... $30,000 Cash collected from account customers...................... $12,000 Cost of merchandise purchased.................................. $35,000 Cash paid for merchandise purchased......................... $24,500 Cost of merchandise sold............................................ $26,600 Cash paid for display cases......................................... $9,600 Selling and administrative expenses............................ $4,000 The display cases above were purchased at the beginning of the month and are being depreciated at a rate of $200 per month. This amount is included in the selling and administrative expenses figure above. All other selling and administrative expenses are paid as incurred. Sipan wants to maintain a cash balance of $10,000. Any amount below this can be borrowed from a local bank as needed in increments of $1,000. All borrowings are made at month end. 2. In Sipan's budgeted income statement for this first month, what will net income (loss) be for this first month?

$7,400

The accounting records of Omar Company contained the following information for last year: Beginning Ending Direct materials inventory........................ $9,000 $7,000 Work in process inventory....................... $17,000 $31,000 Finished goods inventory........................ $10,000 $15,000 Manufacturing costs incurred Direct materials used............................... $72,000 Overhead applied..................................... $24,000 Direct labor cost (10,000 hours).............. $80,000 Depreciation............................................. $10,000 Rent......................................................... $12,000 Taxes........................................................ $8,000 Cost of goods sold................................... $157,000* * Selling and administrative costs incurred Advertising.............................................. $35,000 Rent......................................................... $20,000 Clerical..................................................... $25,000 *Does not include over- or underapplied overhead. Q1. The amount of direct material purchased during the year was:

$70,000

$731,250

Use the information provided below to answer questions 1-2. In the past, Casiopia Hospital allocated all of its overhead costs to patients based on nursing time. Casiopia has decided to switch to an activity-based costing system using three activity cost pools. Information related to the new system is as follows: Activity Cost Pool Activity Measure Estimated Overhead Cost Estimated Activity Registration............... Number of patients $75,000 1,000 patients Patient care............... Nursing time $900,000 150,000 hours Billing....................... Number of bills $120,000 2,500 bills Data concerning two patients follows: Patient Nursing time Number of bills Wells......................... 100 hours 2 Muncie...................... 60 hours 3 1. Under the new activity-based costing system, how much overhead cost would be assigned to each patient? Wells/Muncie

$771/$579

$8.00

Questions 14 through 17 are based on the following information. Peterson Company's records for the year ended December 31 show that no finished goods inventory existed at January 1 and no work was in process at the beginning or end of the year. Net sales $1,400,000 Manufacturing costs - Fixed 315,000 - Variable 630,000 Operating expenses - Fixed 140,000 - Variable 98,000 Units manufactured 70,000 Units sold 60,000 Question 14. What is Peterson's finished goods inventory cost at December 31 under the variable costing method?

$90,000. Variable costing considers only variable manufacturing costs as product costs. Fixed manufacturing costs are considered period costs. The total variable manufacturing cost is given as $630,000.; For the 70,000 units produced, unit cost was $9.00 (630,000/70,000 units). If EI is 10,000 units (70,000 produced - 60,000 sold), total cost of FG inventory is $90,000 (10,000 units * $9.00)

Use the following information to answer questions #1-3 (Ignore income taxes in this problem.) Overland Company has gathered the following data on a proposed investment project: Investment in depreciable equipment........... $150,000 Annual cash flows........................................ $40,000 Salvage value of equipment......................... $0 Life of the equipment................................... 10 years Required rate of return................................. 10% The company uses straight-line depreciation on all equipment. 2. The net present value of this investment is

$95,800

The sales price variance is the difference between actual price and expected price multiplied by the actual quantity or volume sold. In equation form, it is the following: Sales price variance =

(Actual price - Expected price) × Quantity sold

The sales price variance is the difference between actual price and expected price multiplied by the actual quantity or volume sold. In equation form, it is the following: Sales volume variance =

(Actual volume - Expected volume) × Expected price

With cost-based pricing, a desired markup is generally added to the product's cost. The markup is a percentage applied to base cost; it includes desired profit and any costs not included in the base cost. Common markups can be calculated as follows: Markup on direct materials =

(Direct labor + Overhead + Selling and administrative expenses + Operating income)/Direct materials

(Selling and administrative expenses + Operating income)/Cost of goods sold

High-Low Method Variable Cost

(high cost - low cost) / (high activity - low activity) Change in cost / Change in activity

Responsibility Accounting has four essential elements:

1) Assigning responsibility 2) Establishing performance measures or benchmarks 3) Evaluating performance 4) Assigning rewards

Factors that are important for capital investment decisions:

1. Amount (magnitude) of cash flow 2. Timing of cash flows 3. Risk of the investment

The problem with using any estimate is that you will invariably be left with a difference between what actually occurred in terms of costs and what you had anticipated. Sometimes costs change, sometimes you have an unexpected reduction in a price of fuel for instance. Companies last year must have estimated very high energy costs for the coming season and these have plummeted. So what you end up with is either Over-Applied or Under-Applied Overhead. We have 2 ways to deal with this issue.

1. Close out the entire difference to COGS In Underapplied (meaning too little was charged against the product) Debit COGS (increasing the cogs) Credit MOH (to close it out) In Overapplied (meaning too much was charged against the product) Debit MOH (to close it out) Credit COGS (actually lowering the cogs) 2. Allocate between Accounts on a pro-rated basis between WIP, FG and COGS Debit WIP, FG , COGS Credit MOH or vice-versa

The six steps describing the tactical decision-making process, simplified - To make a decision: 1. ___________________________________________________ 2. ___________________________________________________

1. Eliminate costs and benefits that do not differ between alternatives. 2. Base the decision on the remaining costs and benefits.

Two steps are needed to compute cash flows:

1. Forecasting revenues, expenses, and capital outlays (magnitude and timing) 2. Adjusting these gross cash flows for inflation and tax effects

Although no one has developed a perfect budgetary system, there are certain key features that a sound budgetary system should possess. These factors include: 1. ________________________________ 2. ________________________________ 3. ________________________________ 4. ________________________________ 5. ________________________________ 6. ________________________________

1. Frequent feedback on performance 2. Monetary and nonmonetary incentives 3. Participation 4. Realistic standards 5. Controllability of costs 6. Multiple measures of performance

Price Discrimination refers to the charging of different prices to different customers for essentially the same product. The Robinson-Patman Act was passed in 1936 as a means of outlawing price discrimination. Price discrimination is allowed only under the following 2 conditions:

1. If the competitive situation demands it. 2. If costs can justify the lower price.

Budgeting has the following 4 purposes:

1. It forces managers to plan. 2. It provides resource information that can be used to improve decision making. 3. It aids in the use of resources and employees by setting a benchmark that can be used for the subsequent evaluation of performance. 4. It improves communication and coordination.

Manufacturing overhead is usually difficult to apply. Why?

1. It's an indirect cost, so it's difficult or impossible to trace to a particular job. 2. It consists of many different costs (examples include the solder used to weld the joints together in our coupling, and the factory foreman's salary).

The six steps describing the tactical decision-making process are as follows: 1. ___________________________________________________ 2. ___________________________________________________ 3. ___________________________________________________ 4. ___________________________________________________ 5. ___________________________________________________ 6. ___________________________________________________

1. Recognize and define the problem. 2. Identify alternatives as possible solutions to the problem, and eliminate any unfeasible alternatives. 3. Identify the costs and benefits associated with each feasible alternative. Eliminate the costs and benefits that are not relevant to the decision. 4. Compare the relevant costs and benefits for each alternative. 5. Assess qualitative factors. 6. Select the alternative with the greatest overall benefit.

The operating budget consists of a series of schedules for all phases of operations, culminating in a budgeted income statement, as follows: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1. Sales budget 2. Production budget 3. Direct materials purchases budget 4. Direct labor budget 5. Overhead budget 6. Ending finished goods inventory budget 7. Cost of goods sold budget 8. Marketing expense budget 9. Research and development expense budget 10. Administrative expense budget 11. Budgeted income statement

The remaining budgets found in the master budget are the financial budgets. The financial budgets typically include: 1. ________________________________ 2. ________________________________ 3. ________________________________ 4. ________________________________

1. The cash budget 2. The budgeted balance sheet 3. The budgeted statement of cash flows 4. The budget for capital expenditures

Conversion of Gross to After-Tax Cash Flows To analyze tax effects, cash flows are usually broken into three categories:

1. The initial cash outflows needed to acquire the assets of the project 2. The cash flows produced over the life of the project (operating cash flows) 3. The cash flows from the final disposal of the project

If NPV < 0, estimates suggest that

1. The initial investment may not be recovered. 2. The required rate of return has not been recovered. Thus, the project should be rejected.

If the NPV > 0, estimates suggest that

1. The initial investment will be recovered. 2. The required rate of return will be satisfied. 3. A return in excess of 1 and 2 has been received. Thus, project should be accepted

The payback period provides managers with information that can be used as follows:

1. To help to control the risks associated with the uncertainty of future cash flows. 2. To help to minimize the impact of an investment on a firm's liquidity problems. 3. To help to control the risk of obsolescence. 4. To help to control the effect of the investment on performance measures.

Flexible budgeting offers many advantages, including the following: (3)

1. Used to prepare the budget before the fact for the expected level of activity. 2. The flexible budget can be used to compare what costs should have been for the actual level of activity. 3. Help managers deal with uncertainty by allowing them to see the expected outcomes for a range of activities.

In recent years, managers have found numerous shortcomings with the traditional master budget. The traditional master budget is: 1. ________________________________ 2. ________________________________ 3. ________________________________

1. department oriented and does not recognize the interdependencies among departments. 2. static, not dynamic. 3. results, not process, oriented.

Doro Co. is considering the purchase of a $100,000 machine that is expected to result in a decrease of $25,000 per year in cash expenses after taxes. This machine, which has no residual value, has an estimated useful life of 10 years and will be depreciated on a straight-line basis. For this machine, the accounting rate of return based on initial investment will be:

15%

A machine costing $1,000 produces total cash inflows of $1,400 over 4 years. Determine the payback period given the following cash flows. Year After-Tax Cash Flows Cumulative Cash Flows 1 $400 $400 2 $300 $700 3 $500 $1,200 4 $200 $1,400

2.60 years Because $700 will be received in the first 2 years, only $300 will remain to be recovered in year 3. The payback period is therefore 2.6 years [2 years + ($300 / $500) of Year 3].

23%

3.75 years

At the beginning of the year, Smith, INc., budgeted the following: Units: 10,000 Sales: $100,000 Total variable expenses: $ 60,000 Total fixed expenses: $ 20,000 Variable factory overhead $ 30,000 Fixed factory overhead: $ 10,000 There were no beginning inventories. At the end of the year, no work was in process, total factory overhead incurred was $39,500, and underapplied factory overhead was $1,500. Factory overhead was applied on the basis of budgeted unit production. How many units were produced this year?

9,500

37. Goal congruence means a. there is alignment of organizational and managerial goals. b. the organization is aligned to the needs of the environment. c. the organization is aligned to shareholder goals. d. there is no divergence between organization and stockholder goals.

41. Future costs that differ across alternatives describe a. relevant costs. b. target cost. c. full costs. d. activity-based costs.

Use the following to answer questions 2-3: Bertucci Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below: TC GL NG Selling price per unit............... $494.40 $449.43 $469.68 Variable cost per unit.............. $395.20 $320.21 $373.92 Minutes on the constraint......... 8.00 7.10 7.60 3. Assume that sufficient constraint time is available to satisfy demand for all but the least profitable product. Up to how much should the company be willing to pay to acquire more of the constrained resource? A) $12.40 per minute B) $18.20 per minute C) $129.22 per unit D) $95.76 per unit

3. Bodacious Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the annual net after-tax cash flow (rounded)? a. $23,667 b. $8,633 c. $6,400 d. $28,778

A ($28,778 x 0.60) +[($80,000/5) x 0.40] = $23,667

4. Bellamy Company is considering the purchase of a computerized manufacturing system. The after-tax cash benefits/savings associated with the system are as follows: Decreased waste: $300,000 Increased quality: 400,000 Decrease in operating costs: 600,000 Increase in on-time deliveries: 200,000 The system will cost $9,000,000 and will last ten years. The company's cost of capital is 12 percent. What is the NPV for the computerized manufacturing system? a. ($525,000) b. ($5,610,000) c. $8,475,000 d. $9,000,000

A (5.650 x $1,500,000) - $9,000,000 = $(525,000) (PVAF n=10, 12%)

34. The following forecasted sales pertain to Rapid City: Month Sales June $160,000 July 200,000 August 120,000 September 80,000 Finished goods inventory as of May 31: 6,000 units Rapid City has a selling price of $5 per unit and expects to maintain ending inventories equal to 25 percent of next month's sales. How many units are expected to be produced in June? a. 36,000 units b. 50,000 units c. 82,000 units d. 42,000 units

A SUPPORTING CALCULATIONS: $160,000/$5 + [($200,000/$5) x 0.25] - 6,000 = 36,000 units

39. Biscuit Company sells its product for $50. In addition, it has a variable cost ratio of 45 percent and total fixed costs of $6,875. What is the break-even point in units for Biscuit Company? a. 250 units b. 3,600 units c. 375 units d. 2,400 units

A SUPPORTING CALCULATIONS: $6,875/($50 x 0.55) = 250 units

33. Wonder Company is planning to introduce a new product with an 80 percent incremental unit-time learning curve for production for batches of 1,000 units. The variable labor costs are $30 per unit for the first 1,000-unit batch. Each batch requires 100 hours. There are $10,000 in fixed costs not subject to learning. What is the cumulative total time (labor hours) to produce 2,000 units? a. 180 hours b. 160 hours c. 100 hours d. 80 hours

A SUPPORTING CALCULATIONS: (100 x 0.80) + 100 = 180 hours

35. Foremost Corporation manufactures boxes. The estimated number of boxes sold for the first three months of 2014 are as follows: Month Sales January 3,000 February 4,200 March 3,900 Finished goods inventory at the end of December was 900 units. Ending finished goods inventory is equal to 20 percent of the next month's sales. General Corporation expects to sell the boxes for $5 each. April 2014 sales is projected at 4,500 boxes. How many boxes should be produced in February? a. 4,140 boxes b. 4,200 boxes c. 4,260 boxes d. 3,900 boxes

A SUPPORTING CALCULATIONS: 4,200 + (0.20 x 3,900) - (0.20 x 4,200) = 4,140 boxes

Direct cost

A cost that can be easily and conveniently traced to a particular cost object under consideration.

Indirect cost

A cost that cannot be easily and conveniently traced to a particular cost object under consideration.

Sunk cost

A cost that has already been incurred and cannot be changed by any decision made now or in the future.

Fixed cost

A cost that remains constant, in total, regardless of changes in the level of activity.

Variable cost

A cost that varies, in total, in direct proportion to changes in the level of activity.

A company services office equipment. Some customers bring their equipment to the company's service shop; other customers prefer to have the company's service personnel come to their offices to repair their equipment. The most appropriate costing method for the company is

A job-order costing system.

___________________ Here we really want to look at reconciling the 2 income statements to show why they differ and to check our calculations. If we look back at Exercise 1 we see that it isn't difficult to reconcile how these differences occurs. To do a reconciliation start with one method's Net Income.... Absorption 50,000 - Inventoried Fixed MOH (32,000) (4000 x $8) = Variable Costing $18,000

A reconciliation to explain the differences

7. Killer Pow-Bro Corporation uses a standard cost system to collect costs related to the production of its ski lift chairs. Killer Pow-Bro uses machine hours as an overhead base. The variable overhead standards for each chair are 1.2 machine hours at a standard cost of $18 per hour. During the month of September, Killer Pow-Bro incurred 34,000 machine hours in the production of 32,000 ski lift chairs. The total variable overhead cost was $649,400. What is Killer Pow-Bro's variable overhead spending variance for the month of September? A) $37,400 unfavorable B) $41,800 favorable C) $79,200 favorable D) $84,040 favorable

A) $37,400 unfavorable Solution: Variable overhead spending variance = (Actual hours × Actual rate) − (Actual hours × Standard rate) = $649,400 − (34,000 × $18) = $37,400 unfavorable

Each of three mutually exclusive projects costs $200. Using the table provided, rank the projects in descending NPV order. Year Present Value Interest Factor (10)% Projects' Cash Flow 1 .91 A = $300 B = $200 C = $0 2 .83 A = $200 B = $100 C = $100 3 .75 A = $100 B = $0 C = $100 4 .68 A = $0 B = $100 C = $200 5 .62 A = $0 B = $200 C = $300

A, C, B

What is the journal entry to record the purchase of materials on account? A. Raw materials inventory XXX Accounts payable XXX B. Accounts payable XXX Raw materials inventory XXX C. Accounts receivable XXX Accounts payable XXX D. Cash XXX Accounts receivable XXX

A: debit raw materials inv, credit a/p

50. The following costs were incurred by the Awesome Company: Direct labor $ 600,000 Direct material purchases 555,000 Depreciation on plant 30,000 Factory supervisor's salary 75,000 Plant maintenance 15,000 Plant utilities 27,000 Sales 1,950,000 Selling and administrative expenses 300,000 Beginning direct materials inventory 51,000 Beginning work-in-process inventory 24,000 Beginning finished goods inventory 54,000 Ending direct materials inventory 45,000 Ending work in process 39,000 Ending finished goods 72,000 Required: Calculate the following values: a. Direct materials used b. Cost of goods manufactured c. Cost of goods sold d. Operating income

ANS: a. $51,000 + $555,000 - $45,000 = $561,000 b. $561,000 + $600,000 + $75,000 + $30,000 + $15,000 + $27,000 + $24,000 - $39,000 = $1,293,000 c. $54,000 + $1,293,000 - $72,000 = $1,275,000 d. $1,950,000 - $1,275,000 - $300,000 = $375,000

51. Lionheart Manufacturing has a theoretical capability to produce 20,250 printers per quarter but currently produces 10,125 printers. The conversion cost per quarter is $4,860,000. There are 6,750 production hours available within the plant per quarter. In addition to the processing minutes per unit used, the production of printers uses 12 minutes of move time, 8 minutes of wait time, and 10 minutes of rework time. (All work is done by cell workers.) Required: a. Calculate the current MCE. b. If poor employee training is the root cause of wait time and move time, develop an improvement strategy as a series of if-then statements that will reduce the conversion cost per printer.

ANS: a. MCE = processing time/(processing time + wait time + move time + rework time) = 40/(40 + 12 + 8 + 10) = 0.157 b. If training is improved, then the wait time, move time, and rework time will be decreased, thereby increasing the MCE. The conversion cost per unit will also decrease.

53. What are relevant costs? How do they relate to decision making?

ANS: Relevant costs are future costs that would differ among alternatives. They are important to decision making because only relevant costs should be considered. Decisions are about something that will take place in the future. Costs that are past costs or that do not differ between alternatives should not be considered in decision making.

ALLOTING THE CONSTRAINED RESOURCE Total time available on Machine N34 (a)..................... 2,400 minutes Planned production and sales of Product Y.................. 2,200 units Time required to process one unit............................. × 0.5 minute Total time required to make Product Y (b)................... 1,100 minutes Time available to process Product X (a) - (b)............... 1,300 minutes Time required to process one unit............................. ÷ 1 minute per unit Planned production and sales of Product X.................. 1,300 units RESULTS OF FOLLOWING THE ABOVE PLAN X Y Total Planned production and sales (units)............. 1,300 2,200 Contribution margin per unit........................ × $24 × $15 Total contribution margin............................ $31,200 $33,000 $64,200 EXAMPLE: Suppose the available time on Machine N34 can be increased by paying the machine's operator to work overtime. Would this be worthwhile?

ANSWER: Because the additional time would be used to make more of Product X, each minute of overtime is worth $24 to the company and hence each hour is worth $1,440 (60 minutes × $24 per minute)

Price Variance

AQ × (AP - SP)

Actual Quantity of Input at Actual Price

AQ × AP

Actual Quantity of Input at Standard Price

AQ × SP

The income approach to determine operating cash flows can be decomposed to assess the after-tax, cash flow effects of each individual item on the income statement. The __Decomposition__________ approach calculates the operating cash flows by computing the after-tax cash flows for each item of the income statement as follows:

ATCF = [(1 - Tax rate) × Revenues] - [(1 - Tax rate) × Cash expenses] + (Tax rate × Noncash expenses) = (1 - Tax rate)* [Revenues- Cash expenses- Noncash expenses]

_________________________, is required for _______________________. According to GAAP, profit is a long-run concept and depends on the difference between revenues and expenses. Over the long run _____________________________. Therefore, fixed costs are treated as if they were variable by assigning some to each unit of production. Absorption costing assigns all manufacturing costs, (direct materials, direct labor, variable overhead, ____________________________, to each unit of product. In this way, each unit of product absorbs some of the fixed manufacturing overhead in addition to its variable manufacturing costs. When a unit of product is finished, it takes these costs into inventory with it. When it is sold, these manufacturing costs are shown on the income statement as cost of goods sold. It is absorption costing that is used to calculate three measures of profit: 1. Gross profit 2. Operating income 3. Net income

Absorption costing, or full costing External financial reporting All costs are variable Fixed overhead

The relationships between production, sales, and income are as follows: If Then ? 2. Production < Sales

Absorption-costing income < Variable-costing income

The relationships between production, sales, and income are as follows: If Then ? 3. Production = Sales

Absorption-costing income = Variable-costing income

The relationships between production, sales, and income are as follows: If Then ? 1. Production > Sales

Absorption-costing income > Variable-costing income

Which one of the following capital investment evaluation methods does not take the time value of money into consideration? Accounting rate of return. Discounted payback. Net present value. Internal rate of return.

Accounting rate of return The accounting rate of return (unadjusted rate of return or book value rate of return) equals accounting net income divided by the required initial or average investment. The accounting rate of return ignores the time value of money.

______________ - In ABC, an activity is anything that consumes overhead resources.

Activity

_____________________: A basic unit of work performed within an organization

Activity

________________________ begin with the __________________ and ___________________________________________. Each department adopts an activity-based approach to budgeting in order to achieve this. The activity-based budget works backwards from activities and their drivers to the underlying costs.

Activity-based budgets Output desired Determine the resources necessary to create that output

The total overhead variance is the difference between the ___________________ and the ______________________.

Actual overhead Applied overhead

Marketing or selling costs - all costs necessary to secure customer orders and get the finished product into the hands of the customer. What are some examples?

Advertising-Geico Salespeople's salaries and commissions. Shipping - delivering the product to the customer Finished goods warehousing costs

The internal rate of return (IRR) is: The break-even borrowing rate for the project in question. The yield rate/effective rate of interest quoted on long-term debt and other instruments. The discount rate at which the NPV of the cash flows is zero. All of the answers are correct.

All of the answers are correct. The internal rate of return (IRR) is the discount rate at which the present value of the cash flows equals the original investment. Thus, the NPV of the project is zero at the IRR. The IRR is also the maximum borrowing cost the firm could afford to pay for a specific project. The IRR is similar to the yield/effective rate quoted in the business media.

Periodic (or period) costs

All the costs that are not included in product costs. These costs are expensed on the income statement in the period in which they are incurred.

Determining the profit attributable to subdivisions of the company is harder than determining overall profit because of _______________________. ____________________________ can provide better information than absorption costing when analyzing the profitability of product lines.

Allocated expenses Variable costing

(Q9-12) Brighton Inc. has provided the following data to be used in evaluating a proposed investment project: Initial investment $280,000 Annual cash receipts $196,000 Life of the project 6 years Annual cash expenses $78,000 Salvage value $28,000 The company's tax rate is 30%. For tax purposes, the entire initial investment will be depreciated over 5 years without any reduction for salvage value. The company uses a discount rate of 16%. 9. When computing the net present value of the project, what are the annual after-tax cash receipts? A) $112,000 B) $137,200 C) $29,400 D) $58,800

Annual after-tax cash receipts = Annual cash receipts × (1 − Tax rate) = $196,000 × (1 − 0.30) = $137,200

Keep-or-Drop Decisions (Drop-or-Retain) The management of Wengel Corporation is considering dropping product B90D. Data from the company's accounting system appear below: Sales................................................................. $720,000 Variable expenses............................................ $374,000 Fixed manufacturing expenses........................ $245,000 Fixed selling and administrative expenses...... $209,000 All fixed expenses of the company are fully allocated to products in the company's accounting system. Further investigation has revealed that $173,000 of the fixed manufacturing expenses and $150,000 of the fixed selling and administrative expenses are avoidable if product B90D is discontinued. Required: What would be the effect on the company's overall net operating income if product B90D were dropped? Should the product be dropped?

Ans: Keep the Product Drop the Product Difference Sales................................................ $720,000 $ 0 ($720,000) Variable expenses........................... 374,000 0 374,000 Contribution margin....................... 346,000 0 ( 346,000) Fixed expenses: Fixed manufacturing expenses....... 245,000 72,000 173,000 Fixed selling and administrative expenses...................................... 209,000 59,000 150,000 Total fixed expenses....................... 454,000 131,000 323,000 Net operating income (loss)........... ($108,000) ($131,000) ($ 23,000) Net operating income would decline by $23,000 if product B90D were dropped. Therefore, the product should not be dropped.

Exercise 2: MAKE OR BUY DECISION A decision concerning whether an item should be produced internally or purchased from an outside supplier is called a "make or buy" decision. Foubert Company makes 40,000 units per year of a part it uses in the products it manufactures. The unit product cost of this part is computed as follows: Direct materials..................................... $13.80 Direct labor........................................... 18.10 Variable manufacturing overhead............ 4.30 Fixed manufacturing overhead................ 24.60 Unit product cost.................................... $60.80 An outside supplier has offered to sell the company all of these parts it needs for $51.80 a unit. If the company accepts this offer, the facilities now being used to make the part could be used to make more units of a product that is in high demand. The additional contribution margin on this other product would be $268,000 per year. If the part were purchased from the outside supplier, all of the direct labor cost of the part would be avoided. However, $17.00 of the fixed manufacturing overhead cost being applied to the part would continue even if the part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied to the company's remaining products. Required: a. How much of the unit product cost of $60.80 is relevant in the decision of whether to make or buy the part? b. What is the net total dollar advantage (disadvantage) of purchasing the part rather than making it? c. What is the maximum amount the company should be willing to pay an outside supplier per unit for the part if the supplier commits to supplying all 40,000 units required each year?

Ans: a. Relevant cost per unit: Direct materials........................................... $13.80 Direct labor................................................. 18.10 Variable manufacturing overhead.................. 4.30 Fixed manufacturing overhead...................... 7.60 Relevant manufacturing cost......................... $43.80 b. Net advantage (disadvantage): Manufacturing cost savings.......................... $1,752,000 Additional contribution margin..................... 268,000 Cost of purchasing the part........................... (2,072,000) Net advantage (disadvantage)....................... ($ 52,000) c. Maximum acceptable purchase price: Manufacturing cost savings.......................... $1,752,000 Additional contribution margin..................... 268,000 Total benefit................................................ $2,020,000 Number of units........................................... 40,000 Benefit per unit............................................ $50.50

SPECIAL ORDERS Feinan Sports, Inc., manufactures sporting equipment, including weight-lifting gloves. A national sporting goods chain recently submitted a special order for 4,600 pairs of weight-lifting gloves. Feinan Sports was not operating at capacity and could use the extra business. Unfortunately, the order's offering price of $12.80 per pair was below the cost to produce them. The controller was opposed to taking a loss on the deal. However, the personnel manager argued in favor of accepting the order even though a loss would be incurred; it would avoid the problem of layoffs and would help maintain the community image of the company. The full cost to produce a pair of weight-lifting gloves is presented below. Direct materials $7.50 Direct labor 3.90 Variable overhead 1.60 Fixed overhead 3.10 TOTAL $16.10 No variable selling or administrative expenses would be associated with the order. Non-unit-level activity costs are a small percentage of total costs and are therefore not considered. Required: 1. Assume that the company would accept the order only if it increased total profits. Should the company accept or reject the order? Provide supporting computations. 2. Suppose that Feinan Sports has negotiated with the potential customer, and has determined that it can substitute cheaper materials, reducing direct materials cost by $0.95 per unit. In addition, the company's engineers have found a way to reduce direct labor cost by $0.50 per unit. Should the company accept or reject the order? Provide supporting computations. 3. Consider the personnel manager's concerns. Discuss the merits of accepting the order even if it decreases total profits.

Answer 1. The company should reject the offer as the additional revenue is less than the additional costs (assuming fixed overhead is allocated and will not increase with the special order): Incremental revenue per pair............. $12.80 Incremental cost per pair.................... 13.00* Incremental loss per pair..................... $ (0.20) Total decrease in income: $(0.20) × 4,600 = $(920) *$7.50 + $3.90 + $1.60 = $13.00 2. Now the company should accept the offer as the additional revenue is greater than the additional costs (assuming fixed overhead is allocated and will not increase with the special order): Incremental revenue per pair............. $12.80 Incremental cost per pair.................... 11.55* Incremental gain per pair.................... $ 1.25 Total increase in income: $1.25 × 4,600 = $5,750 *($7.50 - $0.95) + ($3.90 - $0.50) + $1.60 = $11.55 3. If the idle capacity is viewed as a temporary state, then accepting an order that shows a loss in order to maintain labor stability and community image may be justifiable. Qualitative factors often outweigh quantitative factors (at least in the short run).

Inventoriable costs

Are regarded as assets before the products are sold.

Accounting Rate of Return - measures the return on a project in terms of income, as opposed to using the project's cash flow Accounting rate of return =

Average income / Original income

1. Which of the following is an example of an independent project? a. A manufacturing plant considering a major overhaul of an existing machine or replacing the existing machine with a new model. b. A hospital considering the purchase of a new MRI machine and a new cardiac monitoring system. c. A bank deciding between keeping a manual check sorting process or an automated sort process. d. A retailer deciding between an inventory management system offered by two different vendors.

20. The acceptance of a savings bond from a supplier would be a violation of which standard of ethical conduct for management accountants? a. confidentiality b. integrity c. reliability d. none of these

21. The certification sponsored by the Institute of Management Accountants that emphasizes economics, finance, management, financial accounting and reporting, management reporting, and decision analysis is the a. CPA b. CMA c. CIA d. all of these.

32. The scatterplot method of cost estimation a. is influenced by extreme observations. b. requires the use of judgment. c. uses the least-squares method. d. is superior to other methods in its ability to distinguish between discretionary and committed fixed costs.

Cutterski Corporation manufactures a propeller. Shown below is Cutterski's cost structure: Variable cost per propeller Total fixed cost for the year Manufacturing cost................... $114 $810,000 Selling and administrative........ $20 $243,000 In its first year of operations, Cutterski produced 60,000 propellers but only sold 54,000. 3. What is the total cost that would be assigned to Cutterski's finished goods inventory at the end of the first year of operations under the variable costing method? A) $765,000 B) $684,000 C) $804,000 D) $912,000

Cutterski Corporation manufactures a propeller. Shown below is Cutterski's cost structure: Variable cost per propeller Total fixed cost for the year Manufacturing cost................... $114 $810,000 Selling and administrative........ $20 $243,000 In its first year of operations, Cutterski produced 60,000 propellers but only sold 54,000. 4. At what amount will Cutterski report its cost of goods sold for this first year for external reporting purposes? A) $6,156,000 B) $6,885,000 C) $6,966,000 D) $8,208,000

Use the following to answer questions 2-3: Bertucci Corporation makes three products that use the current constraint-a particular type of machine. Data concerning those products appear below: TC GL NG Selling price per unit............... $494.40 $449.43 $469.68 Variable cost per unit.............. $395.20 $320.21 $373.92 Minutes on the constraint......... 8.00 7.10 7.60 2. Rank the products in order of their current profitability from most profitable to least profitable. In other words, rank the products in the order in which they should be emphasized. A) TC, NG, GL B) GL, NG, TC C) GL, TC, NG D) TC, GL, NG

Figure 2-11 Information from the records of the Abel Corporation for July 2014 was as follows: Sales: $1,230,000 Selling and administrative expenses: 210,000 Direct materials used: 264,000 Direct labor: 300,000 Factory overhead *: 405,000 *variable overhead is $205,000, fixed overhead is $200,000 Inventories July 1, 2014 July 31, 2014 Direct materials $36,000 $42,000 Work in process 75,000 84,000 Finished goods 69,000 57,000 ____ 24. Refer to Figure 2-11. The total product cost is a. $1,179,000 b. $ 969,000 c. $ 615,000 d. $ 764,000

B $264,000 + $300,000 + 405,000 = $969,000

36. Firefly Manufacturing Company needs to know its anticipated cash inflows for the next quarter by month. Cash sales are 20 percent of total sales each month. Historically, sales on account have been collected as follows: 50 percent in the month of the sale, 35 percent in the month after the sale, and the remaining 15 percent two months after the sale. Sales for the quarter are projected as follows: January, $60,000; February, $30,000; and March, $90,000. Accounts receivable on December 31 were $45,000. The expected cash collections of Firefly Manufacturing Company for March are a. $90,000. b. $69,600. c. $64,500. d. $114,600.

B SUPPORTING CALCULATIONS: ($90,000 x 0.20) + ($90,000 x 0.80 x 0.50) + ($30,000 x 0.80 x 0.35) + ($60,000 x 0.80 x 0.15) = $69,600

46. Laramie Corporation is considering an investment in equipment for $20,000. Laramie uses the straight-line method of depreciation. In addition, its tax rate is 40 percent, and the life of the equipment is five years with no salvage value. The expected income before depreciation and taxes is projected to be $10,000 per year. The cost of capital is 20 percent. What is the net present value of the investment? a. $(1,366) b. $2,732 c. $22,991 d. $22,000

B SUPPORTING CALCULATIONS: Cash flow = ($10,000 x 0.60) + ($20,000/5 x 0.40) = $7,600 NPV = ($7,600 x 2.991) - $20,000 = $2,731.60 (PVAF n=5, 20%)

48. Callendula Company is considering the purchase of a new machine for $80,000. The machine would generate an annual cash flow before depreciation and taxes of $28,778 for five years. At the end of five years, the machine would have no salvage value. The company's cost of capital is 12 percent. The company uses straight-line depreciation with no mid-year convention and has a 40 percent tax rate. What is the internal rate of return for the machine rounded to the nearest percent? a. between 16 and 18% b. between 14 and 16% c. between 12 and 14% d. below 12%

B SUPPORTING CALCULATIONS: Cash flow = ($28,778 x 0.60) + ($80,000/5 x 0.40) = $23,666.80 $80,000/$23,666.80 = 3.380, which is the pv factor for n = 5 and i between 14 and 16%

On January 1, Lake Co. increased its direct labor wage rates. All other budgeted costs and revenues were unchanged. How did this increase affect Lake's budgeted breakeven point and budgeted margin of safety? Budgeted Breakeven Point Budgeted Margin of Safety A Increase Increase B Increase Decrease C Decrease Decrease D Decrease Increase

B - Increase/Decrease

The completion of goods is recorded as a decrease in work-in-process control when using A Job-Order Costing: Yes Process Costing: No B Job-Order Costing: Yes Process Costing: Yes C Job-Order Costing: No Process Costing: Yes D Job-Order Costing: No Process Costing: No

B - Yes/Yes

Use the following to answer questions 8-10: Dudley, Inc. makes a single product which has the following standards: · Direct materials: 2 kilograms at $4.30 per kilogram · Direct labor: 3 hours at $6 per hour · Variable manufacturing overhead: $19.50 per unit of output At the beginning of June there were no inventories. The following data pertain to June's operations: · Direct labor was $820,500 for 147,000 hours worked. · Direct material purchases were 110,000 kilograms for $485,000. · Variable manufacturing overhead incurred was $986,000. · 92,000 kilograms of direct materials were used. · The company sold 42,000 units at $130 each. · Variable manufacturing overhead is applied based on direct labor hours. · 46,000 units were produced during the year. 9. The material quantity variance is: A) $77,400 U B) $0 C) $14,800 F D) $14,800 U

B) $0 Solution: Standard quantity = Standard hours per unit × Actual output = 2 × 46,000 = 92,000 Material quantity variance = Standard price × (Actual quantity − Standard quantity) = $4.30 × (92,000 − 92,000) = $0

3. The standards for direct materials in making a certain product are 20 pounds at $0.75 per pound. During the past period, 56,000 units of product were made and the material quantity variance was $30,000 U. The number of pounds of direct material used during the period amounted to: A) 1,080,000 B) 1,160,000 C) 1,200,000 D) 784,000

B) 1,160,000 Solution: Standard quantity = Standard quantity per unit × Actual output = 20 × 56,000 = 1,120,000 Materials quantity variance = Standard price × (Actual quantity − Standard quantity) $30,000 = $0.75 × (Actual quantity − 1,120,000) Actual quantity = 1,160,000

In an income statement prepared as an internal report, total fixed costs normally are shown separately under: Absorption Costing Variable Costing A No No B No Yes C Yes Yes D Yes No

B. No/Yes In a variable-costing income statement, all variable costs are deducted from sales revenue to arrive at the contribution margin. total fixed costs are then deducted from the contribution margin to determine operating income. In an absorption-costing income statement, fixed factory overhead included in the cost of goods sold is deducted from sales revenue in the calculation of the gross margin. Other fixed costs are subtracted from the gross margin to determine operating income.

The ______________ is a strategic management system that translates the vision and strategy of an organization into operational objectives and measures. The Balanced Scorecard is compatible with activity-based responsibility accounting because it focuses on processes and requires the use of activity-based information to implement many of its objectives and measures.

Balanced Scorecard

The _______________________ permits an organization to create a strategic focus by translating an organization's strategy into operational objectives and performance measures. The Balanced Scorecard typically identifies objectives and measures for four different perspectives. 1. ____________ 2. ____________ 3. ____________ 4. ____________

Balanced scorecard 1. The financial perspective 2. The customer perspective 3. The internal business process perspective 4. The learning and growth (infrastructure) perspective

5 Levels of Activities ________________ - Purchase orders for the batch to be made, tooling and setup i.e. pick and place machines, shipment of the batch, customer order, etc..

Batch level activities

If a base is used to compute overhead rates that do not "drive" overhead costs, then the result can be inaccurate overhead rates. Why is this a problem?

Because for firms who do custom work, they generally bid on projects. If they are consistently bidding too low, they are losing money on the jobs. For a firm that makes all of its equipment using machines, machine hours may be a good cost driver to use as an allocation base. If a firm makes half of its machines by hand, and half by machine, then machine hours probably isn't a good allocation base, because all the machine made items will receive all the overhead, while the handmade items won't. Additionally, if your business is running a hospital, machine hours wouldn't make any sense at all. You would want to use something like hospital beds occupied.

A basic tenet of variable costing is that period costs should be currently expensed. What is the rationale behind this procedure?

Because period costs will occur whether or not production occurs, it is improper to allocate these costs to production and defer a current cost of doing business. Fixed costs are a basic expense of being in business; they are incurred to continue operating the business regardless of production levels. Accordingly, they are not controllable in the short run and should not be deferred.

A company that builds anything will always have some sort of _________ or BOM The __________ is a _________ for building the product and lists all the direct materials and amounts necessary to make the product.

Bill of Materials BOM Recipe

Use the information provided below to answer questions 1-2. In the past, Casiopia Hospital allocated all of its overhead costs to patients based on nursing time. Casiopia has decided to switch to an activity-based costing system using three activity cost pools. Information related to the new system is as follows: Activity Cost Pool Activity Measure Estimated Overhead Cost Estimated Activity Registration............... Number of patients $75,000 1,000 patients Patient care............... Nursing time $900,000 150,000 hours Billing....................... Number of bills $120,000 2,500 bills Data concerning two patients follows: Patient Nursing time Number of bills Wells......................... 100 hours 2 Muncie...................... 60 hours 3 2. To determine a price for its services, Casiopia Hospital takes the total cost assigned to a patient and multiplies that number by two. Compared to the old system, which patients above will be charged more under the new activity-based costing system?

Both Wells and Muncie

Which one of the following best describes direct labor?

Both a product cost and a prime cost. (Direct labor is both a product cost and a prime cost. Product costs are incurred to produce units of output and are deferred to future periods to the extent that output is not sold. Prime costs are defined as direct materials and direct labor.)

______________means that we have zero profit. That the contribution margin equals our fixed costs...in other words, "how much do we need to sell to break even?"

Break - Even

___________are the quantitative plans for the future, stated in either physical or financial terms (or both). Translate GOALS -> Operational terms

Budgets

23. Which cost assignment method would likely assign the cost of heating in a plant that makes beds and dressers when the bed product line is the cost object? a. driver tracing b. direct tracing c. allocation d. arbitration

29. Salaries paid to shift supervisors are an example of a: a. step-variable cost. b. mixed cost. c. step-fixed cost. d. variable cost.

38. Which of the following is NOT a measure commonly used to evaluate asset utilization? a. return on investment b. economic value added c. market share d. all of the above

Cutterski Corporation manufactures a propeller. Shown below is Cutterski's cost structure: Variable cost per propeller Total fixed cost for the year Manufacturing cost................... $114 $810,000 Selling and administrative........ $20 $243,000 In its first year of operations, Cutterski produced 60,000 propellers but only sold 54,000. 5. Which costing method (variable or absorption) will generate a higher net operating income in Cutterski's first year of operations and by how much? A) variable by $81,000 B) variable by $108,000 C) absorption by $81,000 D) absorption by $108,000

44. Octagonal Company has the following information for 2014: Selling price: $150 per unit Variable production costs: $40 per unit produced Variable selling and admin. expenses: $16 per unit sold Fixed production costs: $200,000 Fixed selling and admin. expenses: $140,000 Units produced: 10,000 units Units sold: 8,000 units There were no beginning inventories. What is the ending inventory for Eastwood using the absorption costing method? a. $300,000 b. $180,000 c. $120,000 d. $80,000

C SUPPORTING CALCULATIONS: ($40 + $200,000/10,000) x 2,000 = $120,000

7. Hologram Printing Company projected the following information for next year: Selling price per unit: $75.00 Contribution margin per unit: $30.00 Total fixed costs: $120,000 Tax rate: 40% What is the break-even point in dollars? a. $200,000 b. $120,000 c. $300,000 d. $500,000

C SUPPORTING CALCULATIONS: CM ratio = $30/$75 = 40% $120,000/0.40 = $300,000

If the fixed costs attendant to a product increase while variable costs and sales price remain constant, what will happen to contribution margin (CM) and breakeven point (BEP)? CM BEP A Increase Decrease B Decrease Increase C Unchanged Increase D Unchanged Unchanged

C - Unchanged/increase

What is the entry to record completion of a particular product or group of products? A. Finished goods XXX Cost of goods sold XXX B. Work-in-process XXX Finished goods XXX C. Finished goods XXX Work-in-process XXX D. Cost of goods sold XXX Work-in-process XXX

C - debit FG / credit WIP

4. Poorly trained workers could have an unfavorable effect on which of the following variances? Labor Rate Variance Materials Quantity Variance A) Yes Yes B) Yes No C) No Yes D) No No

C) No Yes

2. Five mutually exclusive projects had the following information: NPV IRR A $200 11% B $400 13% C $2,000 10% D $1,000 12% E $(400) 8% Which project is preferred? a. Project A b. Project B c. Project C d. Project D

C, Highest NPV

Immaterial variances are generally charged to ______________. Significant variances can be either closed or prorated among Work in Process, Cost of Goods Sold, and Finished Goods.

COGS

If units are sold, the fixed overhead appears on the income statement under ___________. If the units are not sold, the fixed overhead goes into ___________. Under variable costing, however, all fixed overhead for the period is _________. As a result, absorption costing allows managers to manipulate operating income by producing for inventory. The variable-costing income statement has an advantage in addition to providing better signals regarding performance. It also provides more useful information for management decision making.

COGS Inventory Expensed

Cost of Goods Sold for a merchandising Company/Inventory equation

COGS = Beginning merchandise inventory + purchases - ending merchandise inventory.

EXAMPLE: Ensign Company makes two products, X and Y. The current constraint is Machine N34. Selected data on the products follow: X Y Selling price per unit........................................ $60 $50 Variable expenses per unit.............................. 36 35 Contribution margin......................................... $24 $15 Contribution margin ratio................................. 40% 30% Current demand per week (units)................... 2,000 2,200 Processing time required on Machine N34 per unit................................................................ 1.0 minute 0.5 minute Machine N34 is available for 2,400 minutes per week, which is not enough capacity to satisfy demand for both product X and product Y. Should the company focus its efforts on product X or product Y?

CONTRIBUTION MARGIN PER UNIT OF THE CONSTRAINED RESOURCE X Y Contribution margin per unit (a)............ $24 $15 Constrained resource required to produce one unit (b).................................... 1.0 minute 0.5 minute Contribution margin per unit of the constrained resource (a)÷ (b)............. $24 per minute $30 per minute • Product Y should be emphasized because it has the larger contribution margin per unit of the constrained resource. A minute of processing time on Machine N34 can be used to make 1 unit of Product X, with a contribution margin of $24, or 2 units of Product Y, with a combined contribution margin of $30. • In the absence of other considerations (such as satisfying an important customer), the best plan would be to produce to meet current demand for Product Y and then use any remaining capacity to make Product X.

An advantage of the net present value method over the internal rate of return model in discounted cash flow analysis is that the net present value method: Computes the maximum interest rate that can be used over the life of the project to break even. Uses a discount rate that equates the discounted cash inflows with the outflows. Computes a desired rate of return for capital projects. Can be used when the rate of return required fluctuates over each year of the project.

Can be used when the rate of return required fluctuates over each year of the project. The IRR method is relatively easy to use when cash inflows are the same from one year to the next. However, when cash inflows differ from year to year, the IRR can be found only through the use of trial and error. In such cases, the NPV method is usually easier to apply. Also, the NPV method can be used when the rate of return required for each year varies. For example, a company might want to achieve a higher rate of return in later years when risk might be greater. Only the NPV method can incorporate varying levels of rates of return.

A sunk cost

Cannot be avoided because it has already been incurred. (A sunk cost is a past cost or a cost that the entity has irrevocably committed to incur. Because it is unavoidable and will therefore not vary with the option chosen, it is not relevant to future decisions.)

__________________: the process of making capital investment decisions.

Capital budgeting

The budgeted balance sheet and the budgeted statement of cash flows can be prepared after the preparation of the cash budget. The _______________________________ is a financial plan outlining the expected acquisition of long-term assets and typically covers a number of years.

Capital expenditures budget

________________________: the process of planning, setting goals and priorities, arranging financing, and using certain criteria to select long-term assets. In general terms, a sound capital investment will earn back its original capital outlay over its life and, at the same time, provide a reasonable return on the original investment.

Capital investment decisions

Everything else being equal, the internal rate of return (IRR) of an investment project will be lower if: The investment cost is lower. The project has a shorter payback period. Cash inflows are received later in the life of the project. Cash inflows are larger.

Cash inflows are received later in the life of the project. The IRR is the discount rate at which the net present value is zero. Because the present value of a dollar is higher the sooner it is received, projects with later cash flows will have lower net present values for any given discount rate than will projects with earlier cash flows, if other factors are constant. Hence, projects with later cash flows will have a lower IRR.

______________________ The ____________ is a useful tool that graphically illustrates the cause-and-effect relationships and connects the Balanced Scorecard strategy with an organization's operating activities. The strategy map provides a concise and pictorial representation of the firm's strategy.

Cause-and-effect relationship Strategy map

_________________: The President or BOSS would make all the decisions and the managers would be there simply to carry out those decisions made at the top.

Centralized

The percentage change in earnings before interest and taxes associated with the percentage change in revenues is the degree of

Combined leverage Operating leverage is based on the degree to which fixed costs are used in production. Firms may increase fixed costs, such as by automation, to reduce variable costs. The result is a greater degree of operating leverage (DOL), which is the percentage change in operating income (earnings before interest and taxes) divided by the percentage change in revenues (or contribution margin). It can also be determined from dividing the total contribution margin by operating income.

Under a job-order system of cost accounting, the dollar amount of the general ledger entry involved in the transfer of inventory from work-in-process to finished goods is the sum of the costs charged to all jobs

Completed during the period.

UTILIZATION OF CONSTRAINED RESOURCES • Anything that prevents an organization from getting more of what it wants (for example, profits) is a __________________. • A particular machine may not have enough capacity to satisfy current demand. • Supplies of a critical part may not be sufficient to satisfy current demand. • When the constraint is a machine or a work center, it is called a ___________________.

Constraint Bottleneck

The preparation is referred to as the mechanics of budgeting and the implementation as the behavioral dimension. Most budgets are for a one-year period and are broken down into monthly and quarterly segments. However, some organizations have developed a ______________________________. This is a moving 12-month budget. As a month expires, an additional month in the future is added so that the company always has a 12-month plan on hand.

Continuous budgeting philosophy

Contribution Margin Ratio

Contribution Margin / Sales

Cost-volume-process analysis is a key factor in many decisions, including choice of product lines, pricing of products, marketing strategy, and use of productive facilities. A calculation used in a CVP analysis is the breakeven point. Once the breakeven point has been reached, operating income will increase by the

Contribution margin per unit for each additional unit sold.

___________ is the process of setting standards, receiving feedback on actual performance, and taking corrective action whenever actual performance deviates significantly from planned performance.

Control

Once the customers and segments are defined, then ________________________ are developed which will be common across all organizations. There are five key core objectives: 1. ____________ 2. ____________ 3. ____________ 4. ____________ 5. ____________

Core objectives and measures 1. Increase market share 2. Increase customer retention 3. Increase customer acquisition 4. Increase customer satisfaction 5. Increase customer profitability

_____________________: The cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the organization.

Cost

______________ - A bucket where costs are accumulated

Cost Pool

______________________ recognition and recording of costs.

Cost accumulation

A. Make-or-Buy Decisions In all of the relevant costs questions, you want to pay attention to __________________, particularly if these costs will not go away (and will therefore just be reallocated).

Cost allocations

_____________________ refers to distributing costs to units of product manufactured or units of service delivered.

Cost assignment

A _______________ is a factor that causes overhead costs to be incurred.

Cost driver

_______________________ classifying costs by determining dollar amounts of direct materials, direct labor, and overhead. Two common methods of cost measurement in production are (1) actual costing and (2) normal costing. An actual costing system uses actual costs for direct materials, direct labor, and overhead to determine unit cost. A normal costing system uses actual costs for direct materials and direct labor but measures overhead costs on a predetermined basis (e.g. absorption costing...described next).

Cost measurement

_____________________: Any item for which costs are measured and assigned. Examples include products, customers, departments, projects, activities, and so on. For example, a bicycle is a cost object when you are determining the cost to produce a bicycle.

Cost object

what is cost of goods sold?

Cost of Goods Sold (COGS) includes all manufacturing costs associated with the production of goods or services the company sells (this includes all the materials, labor, and overhead costs we talked about earlier.)

ABC first classifies costs with similar cost behavior to ____________, or buckets where costs accumulate. Next, a logical ________________ is assigned. These are the activities thought to cause costs to be incurred (resources to be consumed). This could be set-ups for the pool depreciation of machines, the number of colors of paint for the paint shop on Orange County Chopper, or the amount of electricity consumed for electric costs at a semi-conductor manufacturer.

Cost pools Cost driver

In a manufacturing environment, job-order cost accounting systems and process cost accounting systems differ in the way

Costs are assigned to production runs and the number of units for which costs are averaged.

The matching principle

Costs incurred to generate a revenue are expensed in the same period that the revenue is recognized. In managerial it is similar for product costs, but slightly different for period costs.

_____________________________ - In traditional costing, all OH costs are absorbed including idle capacity. If a machine can produce 10,000 units but only 5000 are made, the depreciation is spread over the 5000, not 10,000 so the per unit cost is inflated. Likewise, if the factory were to run an extra shift, the per unit costs would decline as well....

Costs of Idle Capacity

What are transferred-in costs in a process costing system?

Costs of the output of a previous internal process that is subsequently used in a succeeding internal process.

Product costs

Costs that are involved in acquiring/making a product that the company will eventually sell. These costs are recognized as expenses when the product is sold. These are also called inventoriable costs. These are because these costs stay "attached" to the inventory on the balance sheet

Unlike the traditional full-absorption cost system, activity-based costing (ABC) assigns

Costs to individual projects based on various activities involved.

5 Levels of Activities ________________ - specific to a customer - sales calls, catalog mailings

Customer level activities

The ________________________ is the source of the revenue component for the financial objectives. This perspective defines the customer and market segments in which the business unit will compete and describes the way that value is created for customers. Failure to deliver the right kinds of products and services to the targeted customers means revenue will not be generated.

Customer perspective

1. Kinsi Corporation manufactures five different products. All five of these products must pass through a stamping machine in its fabrication department. This machine is Kinsi's constrained resource. Kinsi would make the most profit if it produces the product that: A) uses the lowest number of stamping machine hours. B) generates the highest contribution margin per unit. C) generates the highest contribution margin ratio. D) generates the highest contribution margin per stamping machine hour.

25. When calculating the absorption-costing income for external reporting, all a. manufacturing costs ultimately become nonmanufacturing costs. b. manufacturing costs are product costs and product costs are never expensed. c. costs of selling manufactured products are classified as product costs. d. selling and administrative costs are classified as nonmanufacturing costs.

27. Which of the following statements is TRUE about fixed and variable costs? a. Variable costs are constant in total and fixed costs are constant per unit. b. Both costs are constant when considered on a total basis. c. Both costs are constant when considered on a per-unit basis. d. Fixed costs are constant in total and variable costs are constant per unit.

40. In a cost-volume-profit graph, a. the total revenue line crosses the horizontal axis at the break-even point. b. beyond the break-even sales volume, profits are maximized at the sales volume where total revenues equal total costs. c. an increase in unit variable costs would decrease the slope of the total cost line. d. an increase in the unit selling price would shift the break-even point in units to the left.

42. Concierge Industries manufactures 40,000 components per year. The manufacturing cost of the components was determined as follows: Direct materials: $75,000 Direct labor: 120,000 Variable manufacturing overhead: 45,000 Fixed manufacturing overhead: 60,000 Total: $300,000 An outside supplier has offered to sell the component for $12.75. What is the effect on income if Concierge Industries purchases the component from the outside supplier? a. $30,000 increase b. $30,000 decrease c. $270,000 increase d. $270,000 decrease

Amster Corporation has not yet decided on the required rate of return to use in its capital budgeting. This lack of information will prevent Amster from calculating a project's: Payback Net Present Value Internal Rate of Return A) No No No B) Yes Yes Yes C) No Yes Yes D) No Yes No

26. The direct material cost is $20,000 when 2,000 units are produced. What is the direct material cost for 2,500 units produced? a. $15,000 b. $5,000 c. $20,000 d. $25,000

D SUPPORTING CALCULATIONS: $20,000/2,000 x 2,500 = $25,000

43. The following information pertains to Guillotine Corporation: Beginning inventory: 1,000 units Ending inventory: 6,000 units Direct labor per unit: $40 Direct materials per unit: 20 Variable overhead per unit: 10 Fixed overhead per unit: 30 Variable selling and admin. costs per unit: 6 Fixed selling and admin. costs per unit: 14 What is the value of the ending inventory using the absorption costing method? a. $240,000 b. $360,000 c. $420,000 d. $600,000

D SUPPORTING CALCULATIONS: ($40 + $20 + $10 + $30) x 6,000 = $600,000

What is the normal effect on the numbers of cost pools and cost assignment bases when an activity-based costing (ABC) system replaces a traditional cost system? A Cost Pools: No effect Cost Assignment Bases: No effect B Cost Pools: Increase Cost Assignment Bases: No effect C Cost Pools: No effect Cost Assignment Bases: Increase D Cost Pools: Increase Cost Assignment Bases: Increase

D - Increase/Increase

In developing a predetermined factory overhead application rate for use in a traditional process costing system, which of the following could be used in the numerator and denominator? A Numerator: Actual factory overhead Denominator: Actual machine hours B Numerator: Actual factory overhead Denominator: Estimated machine hours C Numerator: Estimated factory overhead Denominator: Actual machine hours D Numerator: Estimated factory overhead Denominator: Estimated machine hours

D - Numerator: Estimated factory overhead; Denominator: Estimated machine hours

4. During a recent lengthy strike at Morell Manufacturing Company, management replaced striking assembly line workers with office workers. The assembly line workers were being paid $18 per hour while the office workers are only paid $10 per hour. What is the most likely effect on the labor variances in the first month of this strike? Labor Rate Variance Labor Efficiency Variance A) Unfavorable No effect B) No effect Unfavorable C) Unfavorable Favorable D) Favorable Unfavorable

D) Favorable Unfavorable

The budget for May called for production of 9,000 units. Actual output for the month was 8,500 units with total direct materials cost of $127,500 and total direct labor cost of $77,775. The direct labor standards call for 45 minutes of direct labor per unit at a cost of $12 per direct labor-hour. The direct materials standards call for one pound of direct materials per unit at a cost of $15 per pound. The actual direct labor-hours were 6,375. Variance analysis of the performance for the month of May would indicate: A) $7,500 favorable materials quantity variance. B) $1,275 favorable direct labor efficiency variance. C) $1,275 unfavorable direct labor efficiency variance. D) $1,275 unfavorable direct labor rate variance.

D) $1,275 unfavorable direct labor rate variance. Actual rate = Direct labor cost ÷ Direct labor-hours = $77,775 ÷ 6,375 = $12.20 Labor rate variance = Actual hours × (Actual rate − Standard rate) = 6,375 × ($12.20 − $12) = $1,275 unfavorable Standard hours = Standard hours per unit × Actual output = (45 minutes ÷ 60 minutes) × 8,500 = 6,375 Labor efficiency variance = Standard rate × (Actual hours − Standard hours) = $12 × (6,375 − 6,375) = 0

Use the following to answer questions 8-10: Dudley, Inc. makes a single product which has the following standards: · Direct materials: 2 kilograms at $4.30 per kilogram · Direct labor: 3 hours at $6 per hour · Variable manufacturing overhead: $19.50 per unit of output At the beginning of June there were no inventories. The following data pertain to June's operations: · Direct labor was $820,500 for 147,000 hours worked. · Direct material purchases were 110,000 kilograms for $485,000. · Variable manufacturing overhead incurred was $986,000. · 92,000 kilograms of direct materials were used. · The company sold 42,000 units at $130 each. · Variable manufacturing overhead is applied based on direct labor hours. · 46,000 units were produced during the year. 8. The material price variance is: A) $89,400 F B) $89,400 U C) $12,000 F D) $12,000 U

D) $12,000 U Solution: Material price variance = (Purchase quantity × Actual price) − (Purchase quantity × Standard price) = $485,000 − (110,000 × $4.30) = $12,000 unfavorable

Use the following to answer questions 8-10: Dudley, Inc. makes a single product which has the following standards: · Direct materials: 2 kilograms at $4.30 per kilogram · Direct labor: 3 hours at $6 per hour · Variable manufacturing overhead: $19.50 per unit of output At the beginning of June there were no inventories. The following data pertain to June's operations: · Direct labor was $820,500 for 147,000 hours worked. · Direct material purchases were 110,000 kilograms for $485,000. · Variable manufacturing overhead incurred was $986,000. · 92,000 kilograms of direct materials were used. · The company sold 42,000 units at $130 each. · Variable manufacturing overhead is applied based on direct labor hours. · 46,000 units were produced during the year. 10. The labor rate variance is: A) $61,500 U B) $54,000 U C) $54,000 F D) $61,500 F

D) $61,500 F Solution: Labor rate variance = (Actual hours × Actual rate) − (Actual hours × Standard rate) = $820,500 − (147,000 × $6) = $61,500 favorable

Amster Corporation has not yet decided on its hurdle rate for use in the evaluation of capital budgeting projects. This lack of information will prohibit Amster from calculating a project's Accounting Rate of Return Net Present Value Internal Rate of Return A No No No B Yes Yes Yes C No Yes Yes D No Yes No

D. No / Yes / No A hurdle rate is not necessary in calculating the accounting rate of return. That return is calculated by dividing the net income from a project by the investment in the project. Similarly, a company can calculate the internal rate of return (IRR) without knowing its hurdle rate. The IRR is the discount rate at which the NPV is $0. However, the NPV cannot be calculated without knowing the company's hurdle rate. The NPV method requires that future cash flows be discounted using the hurdle rate.

Using the variable costing method, which of the following costs are assigned to inventory? Variable Selling and Administrative Costs Variable Factory Overhead Costs A Yes Yes B Yes No C No No D No Yes

D. No/Yes Variable costing charges variable costs, except variable selling, general, and administrative expenses, to inventory. Variable factory overhead is part of the product cost, but fixed factory overhead is treated as an expense of the accounting period.

Being overly conservative with discount rates can prove to be ___________. In theory, if future cash flows are known with certainty, the correct discount rate is a firm's _____________. In practice, future cash flows are uncertain, and managers often choose a discount rate higher than the cost of capital to deal with that uncertainty. If the rate chosen is excessively high, it will bias the selection process toward short-term investments. Note: The treatment above (increasing the discount rate used in the model) is a stupid way to handle the risk/uncertainty of cash flows. You are far better off to assign a probability distribution to each of the cash flow transactions, and run a simulation (Monte Carlo) analysis. It's important to build any covariance that exists in cash flows into your model.

Damaging Cost of capital

________________: Decision-making is delegated throughout the organization by providing different managers with the authority to make decisions relating to their area of responsibility.

Decentralized

Make-or-buy decision:

Decision of whether to make or buy components or services used in making a product

The income approach to determine operating cash flows can be decomposed to assess the after-tax, cash flow effects of each individual item on the income statement. The ____________ approach calculates the operating cash flows by computing the after-tax cash flows for each item of the income statement as follows: ATCF = [(1 - Tax rate) × Revenues] - [(1 - Tax rate) × Cash expenses] + (Tax rate × Noncash expenses) = (1 - Tax rate)* [Revenues- Cash expenses- Noncash expenses]

Decomposition

The most likely strategy to reduce the breakeven point would be to

Decrease the fixed costs and increase the contribution margin.

Profit is a measure of the difference between what a firm puts into making and selling a product or service and what it receives. Profits are measured for a number of reasons, including: · _______________________ · _______________________ · _______________________

Determining firm viability Measuring managerial performance Signaling the market about the opportunities for others to earn a profit

Manufacturing costs (three broad categories). 2) __________________ (touch labor) - Labor costs that can be easily traced to individual units of product.

Direct labor

In a labor-intensive industry in which more overhead (service, support, more expensive equipment, etc.) is incurred by the more highly skilled and paid employees, what denominator measure is most likely to be appropriate for applying overhead?

Direct labor cost.

Manufacturing costs (three broad categories). 1) ____________________ - consist of material inputs easily traced to product.

Direct materials

In a production cost report using process costing, transferred-in costs are similar to

Direct materials added at a point during the process. Transferred-in costs are similar to materials added at a point during the process because both attach to (become part of) the product at that point, which is usually the beginning of the process. Computations for transferred-in costs are usually separate from those for other direct materials costs and conversion costs.

_____________________: The process of identifying and assigning costs to a cost object that are specifically or physically associated with the cost object. This is the most precise method as it relies on physically observable causal relationships.

Direct tracing

The capital budgeting model that is ordinarily considered the best model for long-range decision making is the:

Discounted cash flow model. The capital budgeting methods that are generally considered the best for long-range decision making are the internal rate of return (IRR) and net present value (NPV) methods. These are both discounted cash flow methods.

_____________________: The use of drivers to assign costs to cost objects. The precision of driver tracing depends on the strength of the causal relationship described by the driver.

Driver tracing

_____________________: Factors that cause changes in resource usage, activity usage, costs, and revenues.

Drivers

The debits in work-in-process are BWIP, direct labor, direct materials, and factory overhead. The account should be credited for production that is completed and sent to finished goods inventory. The balance is

EWIP (debit).

Exercise 1 Relevant Costs for Foreign Trade Zones Global Reach, Inc., is considering opening a new warehouse to serve the Southwest U.S. region. Darnell Moore, controller for Global Reach, has been reading about the advantages of foreign trade zones. He wonders if locating in one would be of benefit to his company, which imports about 90 percent of its merchandise (e.g., chess sets from the Philippines, jewelry from Thailand, pottery from Mexico, etc.). Darnell estimates that the new warehouse will store imported merchandise costing about $16.78 million per year. Inventory shrinkage at the warehouse (due to breakage and mishandling) is about 8 percent of the total. The average tariff rate on these imports is 5.5 percent. Required: 1. If Global Reach locates the warehouse in a foreign trade zone, how much will be saved in tariffs? Why? (Round your answer to the nearest dollar.) 2. Suppose that the shifting economic situation leads to a new tariff rate of 13 percent. To combat these increases, Global Reach has instituted a total quality program emphasizing reducing shrinkage. The new shrinkage rate is 7 percent. Given this new information, if Global what will the total tariff-related savings be? (Round your answers to the nearest dollar.)

Exercise 1 1. Tariff savings = $16,780,000 × 0.08 × 0.055 = $73,832 By locating the warehouse in a foreign trade zone, Global Reach will not have to pay tariffs on the imported goods until they leave the zone when they are sold to retailers. Since the broken items will never leave the zone, tariffs will not be charged on them. 2. New tariff savings = $16,780,000 × 0.07 × 0.13 = $152,698

An analysis of a company's planned equity financing using the capital asset pricing model (or security market line) would incorporate only the: Expected market return and the price-earnings ratio. Current U.S. Treasury bond yield and the dividend payout ratio. Expected market return, the current U.S. Treasury bond yield, and the beta coefficient. Current U.S. Treasury bond yield, the price-earnings ratio, and the beta coefficient.

Expected market return, the current U.S. Treasury bond yield, and the beta coefficient. The capital asset pricing model adds the risk-free rate to the product of the market risk premium and the beta coefficient. The market risk premium is the amount above that must be paid to induce investment in the market. The beta coefficient of an individual stock is the correlation between the price volatility of the stock market as a whole and the price volatility of the individual stock.

_____________________: An expired cost or a cost used up in the production of revenues, such as the merchandise inventory of a retailer. (But note that an unexpired cost is classified as an asset, and if a cost expires without providing a benefit, it is classified as a loss.)

Expense

Salvage value should be _________________. It may mean the difference between acceptance and rejection.

Explicitly considered

____________ those that relate to customers and shareholders (e.g., customer satisfaction and return on investment).

External measures

(T/F) ____ 13. The perfectly competitive market has many buyers and sellers, none of which are large enough to influence the market.

(T/F) ____ 15. Product-level costs are highest in the maturity phase and fall through the decline phase.

(T/F) ____ 18. In an independent project, the required rate of return is used to calculate the future value of future cash flows.

(T/F) ____ 19. If the internal rate of return (IRR) is less than the cost of capital, then the investment is acceptable.

(T/F) ____ 3. Variable costs are defined as costs that, in total, are constant regardless of change in an activity driver.

(T/F) ____ 9. Increased sales of high contribution margin products increase the break-even point.

The wages of the factory janitorial staff should be classified as

Factory overhead cost. (Factory overhead normally includes indirect labor expense, supplies expense, and other production facility expenses, such as plant depreciation, taxes, and plant supervisors' salaries. It includes all manufacturing costs except for direct materials and direct labor. Janitorial costs are not directly traceable to specific units of production; thus, they are indirect labor costs included in fixed factory overhead and are inventoried as a product cost.)

T/F An increase in the expected salvage value at the end of a capital budgeting project will have no effect on the internal rate of return for that project.

False

T/F When cash flows are uneven and vary from year to year, the internal rate of return method is easier to use than the net present value method.

False

2. _____Provides information regarding the organization as a whole rather than segments of the organization in order to capture a broader perspective of the company's operations.

Financial

_________________________detail the inflows and outflows of cash and the overall financial position.

Financial Budgets

____________ those expressed in monetary terms (e.g., cost per unit),

Financial measures

The ______________________ establishes the long- and short-term financial performance objectives expected from the organization's strategy and simultaneously describes the economic consequences of actions taken in the other three perspectives.

Financial perspective

3. ____________________ - units of product that have been completed but not yet sold to customers

Finished goods

Depreciation based on the straight-line method is classified as what type of cost?

Fixed

At the breakeven point, the contribution margin equals total

Fixed Costs

Variable costing eliminates how _____________ per unit can strangely influence your net income.

Fixed costs

UTILIZATION OF CONSTRAINED RESOURCES When capacity is not sufficient to satisfy demand, something must be cut back. Which products should be cut back and by how much? ___________ are not usually affected by the decision of which products should be emphasized in the short run. All of the machines and other fixed assets are in place—it is just a question of how they should be used. When fixed costs are unaffected by the choice of which product to emphasize, maximizing the total _________________ will maximize total profits. The total contribution margin is maximized by emphasizing the products with the greatest contribution margin per unit of the constrained ___________.

Fixed costs Contribution margin Resource

A __________________ can provide cost estimates for a _______________________ or budgeted costs for an actual level of activity. Flexible budgets are useful in planning and performance reviews. This is because a flexible budget can be used to compute what the costs ___________________ for an actual level of activity. In order for flexible budgeting to be successful, the cost behavior of each budget item needs to be determined.

Flexible budget range of activity levels should have been

Relevant costs and benefits are also useful in decision making in the international trade arena. _______________ (FTZs) are areas that are physically located on U.S. soil but are considered to be outside U.S. commerce. Companies in FTZs can engage in warehousing and/or manufacturing. If the items leave the FTZ bound for non-U.S. destinations, then no ________, a tax on imports levied by the federal government, is due. If they leave the zone for U.S. destinations, then the tariff is due. Exercise 17.14 can be used to demonstrate relevant costs relating to FTZs. The Tax is only ___________ to units that proceed to the US

Foreign trade zones Tariff Relevant

Bonuses, salary increases, and promotions are often tied to budgetary performance. Clearly, budgets can have a significant effect on the behavior of managers. Whether the effect is positive or negative depends on how budgets are used. Hopefully, budgeting will help an organization align managerial and organizational goals and, simultaneously, create a drive in managers to achieve these organizational goals. This alignment is called ________________________. _________________________________ involves individual behavior that is in conflict with the goals of the organization.

Goal congruence Dysfunctional behavior

Huron Industries has developed two new products but has only enough plant capacity to introduce one product during the current year. The following data will assist management in deciding which product should be selected. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Raw materials: A $44.00 B $36.00 Machining @ $12/hr: A $18.00 B $15.00 Assembly @ $10/hr: A $30.00 B $10.00 Variable overhead @ $8/hr: A $36.00 B $18.00 Fixed overhead @ $4/hr: A $18.00 B $9.00 Total Cost: A $146.00 B $88.00 Suggested selling price: A $169.95 B $99.98 Actual R&D costs: A $240,000 B $175,000 Proposed advertising and promotion costs: A $500,000 B $350,000 The difference between the $99.98 suggested selling price for Huron's product B and its total unit cost of $88.00 represents the unit's ________.

Gross Profit. (Gross profit is the difference between sales price and the full absorption cost of goods sold.)

What happens to unused capacity?

Highlighted as lost and charged as a period cost (i.e. expensed outright)

What are standards based on? (1) ___________________ (2) ___________________ (3) ___________________

Historical experience Engineering studies Input from operating personnel

How are standards developed? What is the difference between ideal and currently attainable standards?

Historical experience, engineering studies, and input from operating personnel are three potential sources of quantitative standards. Ideal standards are standards that demand maximum efficiency and can be achieved only if everything operates perfectly. No machine breakdowns, slack, or lack of skill are allowed. Currently attainable standards can be achieved under efficient operating conditions. Allowance is made for normal breakdowns, interruptions, less than perfect skill, and so on.

What does the contribution margin ratio tell us?

How much of every sales dollar adds to our profits

_________________ demand maximum efficiency and can be achieved only if everything operates perfectly.

Ideal standards

_______________________ allow for no machine breakdowns or work interruptions, and can be attained only by working at peak effort 100% of the time. Such standards: • often discourage workers. • shouldn't be used for decision making.

Ideal standards

A. The Tactical Decision-Making Process The big issue:__________________________________________

Identifying relevant costs

Trick to know if something is product or period cost

If factory is in the question, it is product

What is the benefit of IRR? (2)

If you dont have a discount rate, you will be forced to use it. IRR can rank returns

The breakeven point in units increases when unit costs

Increase and sales price remains unchanged

The economist's concept of marginal cost is similar to

Incremental cost. (The economist's marginal cost equals the cost to produce one additional unit. No fixed costs are included in the computation. It is the equivalent of the accountant's unit variable cost, an incremental unit cost. However, the accountant's unit cost for financial statement purposes includes an allocation of fixed costs.)

_____________________: Costs that cannot be easily and accurately traced to a cost object

Indirect costs

Using absorption costing, fixed manufacturing overhead costs are best described as:

Indirect product costs. Using absorption costing, fixed manufacturing overhead is included in inventoriable (product) costs. Fixed manufacturing overhead costs are indirect costs because they cannot feasibly be directly traced to specific units produced.

Long-term investments in advanced technology and in pollution prevention (P2) technology can be the sources of a significant competitive advantage. When making capital investment decisions related to this type of technology, careful attention must be paid to the _____________ in the discounted cash flow models.

Inputs used

Good that are inelastic:

Insulin, NFL, electricity, water, cell phone, liver transplants

Operating cash flows should reflect both tangible and intangible benefits. With advanced technology and P2 investments, more effort is needed to measure the intangible and indirect benefits in order to assess more accurately the potential value of investments. Greater quality, more reliability, reduced lead time, improved customer satisfaction, and an enhanced ability to maintain market share are examples of important _____________________ that need to be considered.

Intangible benefits

The ____________ describes the internal processes needed to provide value for customers and owners.

Internal business process perspective

____________ relate to the processes and capabilities that create value for customers and shareholders (e.g., process efficiency and employee satisfaction).

Internal measures

The product life cycle describes the profit history of the product according to four stages: 1. _______________ 2. _______________ 3. _______________ 4. _______________

Introduction Growth Maturity Decline

Which of the following is a strength of the payback period? It considers the time value of money. It considers cash flows for all years of the project. It distinguishes the sources of cash inflows. It is easy to understand.

It is easy to understand The strength of the payback period is its simplicity. The payback period is the time required for undiscounted net cash inflows to equal the cost of initial investment.

A __________________ is maintained by the accounting department that tracks all charges to this job for direct materials, direct labor and the application of manufacturing overhead. Direct labor is usually recorded at work stations by the employees who either fill out a ______________ or electronically by scanning their badge once work starts or stops on a particular job in order to track the usage and efficiency of labor.

Job cost sheet Time ticket

In job-order costing, the basic document to accumulate the cost of each order is the

Job-cost sheet

A new advertising agency serves a wide range of clients including manufacturers, restaurants, service businesses, department stores, and other retail establishments. The accounting system the advertising agency has most likely adopted for its record keeping in accumulating costs is

Job-order costing

_________________: Since products or services are different, under job order costing costs are typically different. used when many different products are produced each period--think custom (think Boeing's planes)

Job-order costing

JOINT PRODUCT COSTS • Some companies make a number of end products from a single raw material input. Such end products are known as ___________________. • The _________________ is the point in the manufacturing process at which the joint products can be recognized as separate products. • The term __________________ is used to describe costs that are incurred up to the split-off point. • It is __________ to continue processing a joint product after the split-off point if the incremental revenue from further processing exceeds the incremental processing costs. • In practice, _____________ incurred up to the split-off point are almost always allocated to the joint products. Extreme caution should be exercised in interpreting these allocated joint costs. They are not relevant in decisions concerning whether joint products should be processed further because they are incurred whether or not there is further processing.

Joint products Split-off point Joint cost profitable joint costs

___________________ are continuous improvement standards. A kaizen standard is considered to be a currently attainable standard and focuses on planned improvement and cost reduction. Because of the emphasis on continuous improvement, the standards are constantly changing.

Kaizen standards

LABOR RATE VARIANCE:

LRV = (Actual Hrs × Actual Rate) - (Actual Hrs × Standard Rate) Or LRV = AH (AR - SR)

____________ are outcome measures—measures of results from past efforts (e.g., customer profitability).

Lag measures

________________: A person who is directly involved in achieving the basic objectives of the organization. For Dunder Mifflin, this might be Darryl. Darryl physically directs the flow of product to customers. If you visualize an actual production line (i.e." I Love Lucy" ).

Line position

MATERIAL QUANTITY VARIANCE:

MQV = (Actual Qty × Standard Price) - (Standard Qty × Standard Price) Or MQV = SP (AQ - SQ)

In a capital-intensive industry, which is most likely to be an appropriate basis for applying overhead?

Machine hours.

1. _____Uses whatever information is relevant to the decision even though the information may not conform to generally accepted accounting principles.

Managerial

6. _____Timeliness of the information (getting the info right away) is more important than the precision of the information.

Managerial

What is ABC a tool for?

Managers to use to identify and manage true costs of producing and managing a product from design to delivery. BOTH MANUFACTURING AND NON-MANUFACTURING!!

5. _____Is concerned primarily with the performance of segments rather than with the performance of the entire organization. (a segment might be a product line, a division, or a department)

Mangerial

Apple Computers.. what type of costs would we have? (manufacturing costs, advertising, distribution costs, billing, etc.) Apple is an example of a _____________ company. These companies convert raw materials into a product. What do you think the largest cost for this type of companies is? __________________________. This can be difficult to calculate. For example, if you're Apple computers there are various components that go into making something like an iPod. These all have to be reflected in the cost of the product sold.

Manufacturing Cost of goods sold

__________________ is an indirect cost and also needs to be calculated on the Job Cost Sheet. Overhead costs are generally assigned using an _____________________ such as MACHINE-HOURS (MH) or ____________________ . The allocation base chosen is usually the one which best reflects the rate at which MOH is consumed.

Manufacturing overhead Allocation base Direct Labor Hours

_________________ affects price, as well as the costs necessary to support that price: 1. Perfect competition 2. Monopolistic competition 3. Oligopoly 4. Monopoly

Market structure

The _____________________ is a comprehensive financial plan for the year made up of various individual departmental and activity budgets.

Master budget

When the production department gets a request from the sales department for 10 units of a product to be built, the production department fills out a _____________ which asks the raw materials handlers to provide the necessary quantities of raw materials to build it.

Materials requisition form

Huron Industries has developed two new products but has only enough plant capacity to introduce one product during the current year. The following data will assist management in deciding which product should be selected. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Raw materials: A $44.00 B $36.00 Machining @ $12/hr: A $18.00 B $15.00 Assembly @ $10/hr: A $30.00 B $10.00 Variable overhead @ $8/hr: A $36.00 B $18.00 Fixed overhead @ $4/hr: A $18.00 B $9.00 Total Cost: A $146.00 B $88.00 Suggested selling price: A $169.95 B $99.98 Actual R&D costs: A $240,000 B $175,000 Proposed advertising and promotion costs: A $500,000 B $350,000 The total overhead cost of $27.00 for Huron's product B is a ________.

Mixed cost. (A mixed cost is a combination of fixed and variable elements. The total overhead cost is mixed because it contains both fixed and variable overhead.)

NPV selects the wealth-maximizing alternative and IRR does not, NPV is generally preferred to IRR for choosing among ___________________

Mutually exclusive alternatives.

All decisions relate to the future so only future costs can be relevant to decisions. Two broad categories of costs are __________ relevant in decisions: 1. _____________- past (already happened) and therefore irrelevant 2. ______________________________________.

Never 1. Sunk costs- past (already happened) and therefore irrelevant 2. Future costs that do not differ between alternatives.

____________ measured in nonmonetary units (e.g., number of unsatisfied customers).

Nonfinancial measures

A master budget can be divided into _________________ and ________________ budgets.

Operating Financial

_________________________describe the income-generating activities of a firm: sales, production, and finished goods inventories.

Operating budgets

5 Levels of Activities ________________ - Carried out regardless of which customer served, product produced, number of batches etc...HR, general use equipment, heating and cooling factory, cleaning executive offices, in-house computer network servers etc...

Organization Sustaining Activities

Payback period =

Original investment/Annual cash flow

_____________________ refers to the move of a business function to another company, either inside or outside the United States.

Outsourcing

The following information is available from the records of a manufacturing company that applies factory overhead based on direct labor hours: Estimated overhead cost: $500,000 Estimated labor hours: $200,000 Actual overhead cost: $515,000 Actual labor hours: $210,000 Based on this information, factory overhead is

Overapplied by $10,000

The process of assigning overhead cost to jobs is called __________________.

Overhead application

Which formula is used to determine the future value that will be available if a given amount of money is invested?

PV(1 + i)^n

The length of time required to recover the initial cash outlay of a capital project is determined by using the:

Payback period The payback period measures the number of years required to complete the return of the original investment. This measure is computed by dividing the net investment by the constant annual cash inflow. If cash flows are not uniform, a cumulative approach is needed. The payback period gives no consideration to the time value of money or to returns after the payback period.

______________ is formulating long- and short-term objectives. This is why managerial accounting has a strong ______________ orientation. Management must identify its alternatives and select the one that considers economic conditions, customer needs and desires, competitive conditions, etc. What are the formal ways companies document these plans? A BUDGET will be prepared by the CONTROLLER/COMPTROLLER (the head of the accounting department) that represents these plans in quantitative terms.

Planning Future

Which one of the following categories of cost is most likely not considered a component of fixed factory overhead. Supervisory salaries Rent Power Property taxes

Power

__________________________ allow for "normal" down time, employee rest periods, and the like. Such standards: • are felt to motivate employees, since the standards are "tight but attainable." • are useful for decision-making purposes, since variances from standard will contain only "abnormal" elements.

Practical standards

__________________________ is the practice of setting prices below cost for the purpose of injuring competitors and eliminating competition. Predatory pricing on the international market is called dumping. This occurs when companies sell below cost in other countries, and domestic industry is injured.

Predatory pricing

Limits to "fair" competition are _________________ and ____________________.

Predatory pricing Price discrimination

______________________ is the difference between the actual and standard unit prices of an input multiplied by the actual quantity of inputs.

Price (rate) variance

_______________________ refers to the charging of different prices to different customers for essentially the same product. The Robinson-Patman Act was passed in 1936 as a means of outlawing price discrimination. Price discrimination is allowed only under the following conditions: 1. If the competitive situation demands it. 2. If costs can justify the lower price.

Price discrimination

____________________ : percentage change in ________________ divided by the percentage change in _______.

Price elasticity of demand Quantity demanded Price

________________ involves charging a higher price when a product or service is first introduced Ex: iPhones, iPads, etc.

Price skimming

____________________ specify how much should be paid for the quantity of the input to be used. Standard cost is the product of these two standards: Standard price (SP) x Standard quantity (SQ).

Price standards

Managerial accounting differs from financial accounting in that financial accounting is

Primarily concerned with external financial reporting.

_________________ - direct labor combined with direct materials.

Prime cost

Huron Industries has developed two new products but has only enough plant capacity to introduce one product during the current year. The following data will assist management in deciding which product should be selected. Huron's fixed overhead includes rent and utilities, equipment depreciation, and supervisory salaries. Selling and administrative expenses are not allocated to products. Raw materials: A $44.00 B $36.00 Machining @ $12/hr: A $18.00 B $15.00 Assembly @ $10/hr: A $30.00 B $10.00 Variable overhead @ $8/hr: A $36.00 B $18.00 Fixed overhead @ $4/hr: A $18.00 B $9.00 Total Cost: A $146.00 B $88.00 Suggested selling price: A $169.95 B $99.98 Actual R&D costs: A $240,000 B $175,000 Proposed advertising and promotion costs: A $500,000 B $350,000 For Huron's Product A, the unit costs for raw materials, machining, and assembly represent ________.

Prime costs. (Direct materials and direct labor (such as machining and assembly) are a manufacturer's prime costs.)

_____________: the easiest to think of...take the total manufacturing cost / total units produced = unit product cost. many units of a single product for long periods--think Hershey Kisses

Process costing

Companies characterized by the production of basically homogeneous products will most likely use which of the following methods for the purpose of averaging costs and providing management with unit-cost data?

Process costing.

Internal measures vs. External measures

Processes and capabilities that create value for customers and shareholders vs. those that relate to customers and shareholders

5 Levels of Activities ________________ - Designing, advertising, product manager, and support staff

Product level activities

A manufacturing company incurs direct labor cost as it transforms raw materials into marketable products. The cost of direct labor is properly treated as an expense on the income statement of a manufacturing company when the resulting

Products are sold.

A basic assumption of activity-based costing (ABC) is that

Products or services require the performance of activities, and different activities consume resources differently. (ABC identifies activities needed to provide products or services, assigns costs to those activities, and then reassigns costs to the products or services based on their consumption of activities. ABC helps to manage costs by providing more detailed analyses of costs than traditional methods. It also facilitates cost reduction by determining what activities do and not add value to the product or service.)

VARIABLE OVERHEAD STANDARDS There may be standards for variable overhead, as well as for direct materials and direct labor. The standards are typically expressed in terms of a "______" and "_______," much like direct labor. • The "rate" is the variable portion of the predetermined overhead rate. • The "hours" represent whatever base is used to apply overhead cost to products. Ordinarily, this would be direct labor-hours or machine-hours.

Rate Hours

The internal rate of return (IRR) is the: Hurdle rate. Rate of interest for which the net present value is greater than 1.0. Rate of interest for which the net present value is equal to zero. Accounting rate of return.

Rate of interest for which the net present value is equal to zero. The IRR is the interest rate at which the present value of the expected future cash inflows is equal to the present value of the cash outflows for a project. Thus, the IRR is the interest rate that will produce a net present value (NPV) equal to zero. The IRR method assumes that the cash flows will be reinvested at the internal rate of return.

Objective measures vs subjective measures

Readily quantified and verified vs judgmental in nature

_________________________ differ across alternatives

Relevant costs (revenues)

Which of the following is a fixed manufacturing cost for an automobile plant?

Rent of assembly line equipment. (For an automobile plant, the rent of assembly line equipment is a fixed manufacturing cost. It does not vary with production levels.)

Cost-volume-profit analysis assumes that over the relevant range total

Revenues are linear

break-even point (BEP)

Sales = total exp Sales = Variable costs + fixed costs CM (Sales - VC) = Fixed costs

The preparation of the _________________ is the first step in the budgeting process.

Sales budget

Good examples of periodic costs

Sales commissions, rent, advertising, executive salaries. Generally, all selling and administrative expenses are considered to be periodic costs.

The sales price variance is the difference between actual price and expected price multiplied by the actual quantity or volume sold. In equation form, it is the following: Overall sales variance =

Sales price variance + Price volume variance

Often, joint products are sold at the split-off point. But sometimes, it is more profitable to process a joint product further, beyond the split-off point, prior to selling it. Determining whether to ________________________ is an important decision that a manager must make. The key point in this decision is that all of the joint production costs are irrelevant to the sell or process further decision. By the time the split-off point is reached, all joint costs are sunk, and therefore, irrelevant. Cornerstone 17.4 (p. 897) shows the how and why of structuring a sell at split-off or process further decision.

Sell or process further

______________________ changes the assumptions on which the capital investment analysis relies and assesses the effect on the cash flow pattern.

Sensitivity analysis

Fast Freight, Inc., is planning to purchase equipment to make its operations more efficient. This equipment has an estimated life of 6 years. As part of this acquisition, a $75,000 investment in working capital is anticipated. In a discounted cash flow analysis, the investment in working capital: Should be treated as an immediate cash outflow recovered at the end of 6 years. Should be amortized over the useful life of the equipment. Should be treated as a recurring cash outflow over the life of the equipment. Should be treated as an immediate cash outflow.

Should be treated as an immediate cash outflow recovered at the end of 6 years. The investment in a new project includes more than the initial cost of new capital equipment. In addition, funds must be provided for increases in receivables and inventories. This investment in working capital is treated as an initial cost of the investment that will be recovered in full as a cash inflow at the end of the project's life.

_________________: A person who is indirectly involved in achieving the objectives of the organization. This might be the people who work in Human Resources (Toby). All of these individuals are not directly involved in making the product, rather they support others who do so. Dunder Mifflin has about three times as many people in staff functions as they do line functions, which is generally a poor business practice because it generates too much overhead (a topic visited later in this course). So if you don't make the iPods or Ferrari fenders or any of the products of the organization, you are considered staff.

Staff position

The __________________ provides the unit quantity and price standards and the _________________.

Standard cost sheet Standard cost per unit

DIRECT MATERIAL STANDARDS Speeds, Inc. makes a popular jogging suit. The company wants to develop standards for material, labor, and variable manufacturing overhead. The ______________________________ for direct materials should be the final, delivered cost of materials. The standard price should reflect: • Specified quality of materials. • Discounts for quantity purchases. • Discounts for early payment, if any. • Transportation (freight) costs. • Receiving and handling costs. The _________________________________ for direct materials is the amount of material that should go into each finished unit of product. The standard quantity should reflect: • Engineered (bill of materials) requirements. • Expected spoilage of raw materials. • Unavoidable waste of materials in the production process. • Materials in expected scrapped units (rejects).

Standard price per unit Standard quantity per unit

DIRECT LABOR STANDARDS The _________________________ for direct labor should include all the costs of direct labor workers, including: • Hourly wage rates. • Fringe benefits. • Employment taxes. Many companies prepare a single standard rate for all employees in a department, based on the expected mix of high and low wage rate employees. This procedure: • Simplifies the use of standard costs • Allows monitoring the actual mix of employees in the department The ______________________________ for direct labor specifies the amount of direct labor time required to complete one unit of product. This standard time should include: • Engineered labor time per unit. • Allowance for breaks, personal needs, and cleanup. • Allowance for setup and other machine downtime. • Allowance for rejects.

Standard rate per hour Standard hours per unit

A ______________ is a budget developed for ____________________. Once a sales number is calculated, the production, marketing, and administrative budgets are based on that sales number. A static budget does not take into consideration fluctuations in actual demand and sales for an organization. Since actual activity rarely equals a budgeted level, static budgets are not usually relevant when performance reports are needed. They are useful for planning purposes.

Static budget one level of activity

Budgets that are developed around one expected level of activity are ________________________. The budget that (1) provides expected costs for a variety of activity levels or (2) provides budgeted costs for the actual level of activity is called a _______________________.

Static budgets Flexible budget

Dowell Co. manufactures a wooden item. Which of the following is included with the inventoriable cost under absorption costing and excluded from the inventoriable cost under variable costing?

Straight-line depreciation on factory equipment. Under variable costing, all direct labor, direct materials, and variable overhead costs are handled in precisely the same manner as in absorption costing. only fixed factory overhead costs are treated differently. absorption costing treats fixed factory overhead as a product cost but fixed factory overhead as an expense of the accounting period (as are fixed and variable selling, general, and administrative expenses). Straight-line depreciation on factory equipment is an item of fixed factory overhead because it will not vary with output within the relevant range. Accordingly, it will be inventoried under absorption costing and expensed under variable costing.

_____________________________________________________________________________________translates the strategy of an organization into operational __________ and ____________. A strategic performance management system can assume different forms, the most common being that of the Balanced Scorecard.

Strategic-based responsibility accounting system (strategic-based performance management system) Objectives Measures

____________: choosing the market and customer segments the business unit intends to serve, identifying the critical internal and business processes that the unit must excel at to deliver the value propositions to customers in the targeted market segments, and selecting the individual and organizational capabilities required for the internal, customer, and financial objectives.

Strategy

____________ are less quantifiable and more judgmental in nature (e.g., employee capabilities)

Subjective measures

NPV =

Sum of [Cash inflows/(1+i)^t] - Sum of [Cash outflows/(1+i)^t]

(T/F) 1. The cost of goods sold is the cost of direct materials, direct labor and overhead attached to the units sold.

(T/F) ____ 10. Foreign trade zones are set up by the U.S. government to facilitate warehousing and/or manufacturing for companies.

(T/F) ____ 11. A special-order decision focuses on whether a specially priced order should be accepted or rejected.

(T/F) ____ 12. The relationship between supply and demand helps set pricing.

(T/F) ____ 14. The product life cycle describes the profit history of a product according to its introduction, growth, maturity, and decline stages.

(T/F) ____ 16. Profits are lower in the introductory phase because revenues are low and investment and learning may be high.

(T/F) ____ 17. The payback period is the time required for a company to recover its initial investment.

(T/F) ____ 2. Work in process consists of all partially completed units found in production at a given point in time.

(T/F) ____ 4. A feature of regression routines, not provided by the scatter plot of high-low methods, is to provide information to and in the assessment of reliability of the estimated costs formula.

(T/F) ____ 5. Both manufacturing and service firms may use standard costing systems.

(T/F) ____ 6. The total budget variances are categorized into price variances and usage variances.

(T/F) ____ 8. Income taxes are generally calculated as a percentage of income.

When Alfred M. Zeien stepped down after eight years of mostly spectacular results as CEO of Gillette Co., his final act was to assure investors at the April annual meeting that the troubles of his last months at the helm were over. There would soon be, Zeien promised, a "rolling thunder" of good news. "Gillette is a great investment," he roared, predicting that by the second half of 1999, "we will return to our historical 15% to 20% growth in earnings." It gave Zeien a nice exit but left his successor, Michael C. Hawley, with a promise that couldn't be kept. With only a gradual turnaround in the foreign markets that cratered two years ago and continuing weakness in lines beyond the three Bs--blades, batteries, and (tooth) brushes--Gillette is nowhere near its old game. In the first nine months of 1999, net income slumped 7%, to $921 million, on flat sales of $6.9 billion. Its shares, at 35, are down 45% since March. Now, Hawley is promising his own turnaround--on his terms. On Oct. 21, he announced a plan to take a huge whack out of Gillette's bulging inventories--even though that will produce a double-digit earnings decline in the fourth quarter. And, he says, this is the end of the line for poorly performing noncore businesses. Unless he can be convinced by early 2000 that they can be turned around, Hawley says, he's ready to get rid of such businesses--which together make up 15% of the company's $10 billion in annual sales. And, vows Hawley, "we're going to be the fiercest competitors in the world" in razor blades, batteries, and oral care. That, he says, will restore Zeien's double-digit earnings gains.LINGERING PROBLEMS. "Hawley is addressing all the items on the laundry list of what needs to be done," says Jay H. Freedman, an analyst for institutional shareholder Lincoln Capital. "But the question is whether the shirts will come out starched." Indeed, the affable Hawley--a 36-year veteran of Gillette--seems an unlikely axman. Part of the task will be to attack long-simmering problems left untended by Zeien. A key problem is inventories. Under Zeien, "there is no question Gillette was making its numbers (in part) by aggressively selling to the trade, and building inventories," charges William H. Steele, an analyst with Bank of America Securities. At the end of June, Gillette had $1.3 billion of finished goods inventories, up 43% since the end of 1996, even though Gillette's sales have barely increased since then. And its customers' warehouses are bulging. In the fourth quarter, Gillette will cut customer inventories by reducing shipments. In effect, Gillette will give up four weeks of razor-blade sales in Europe and two to three weeks globally. Hawley concedes that will produce an earnings decline in the "mid- to high teens." The payoff will come next year, when a similar attack on in-house inventories and receivables should free up $500 million in cash flow, much of which will be used to pay down debt. "This is a big step toward becoming a much more efficient company," says Steele. In the $1.2 billion toiletries line, Gillette is already in negotiations to sell White Rain shampoo, which commands just 2% of the U.S. market, according to market researcher Information Resources Inc. But Hawley wants to keep shaving cream and deodorant--even though the business earned an operating profit margin of just 4.4% last year, vs. 38% in the razor-blade unit. Pruning deadwood that represents 15% of Gillette would certainly put Hawley's stamp on the company. Although Gillette would be smaller, its margins and earnings growth would expand. Moreover, getting rid of such problem kids as pens and appliances would let management focus on the units in which prospects are brightest. Zeien was never willing to throw in the towel on these businesses. "Gillette overestimated what they could do," says Gary Stibel, principal and founder of New England Consulting Group. "But now they finally have a management team that understands what Gillette is and is not capable of doing." If Hawley doesn't put down that ax.

The Big Trim *** Talk about example in book of Gillette CEO who used absorption costing to inflate income to meet analyst expectations by ramping up production so as to have as many units as possible soaking up fixed costs but building up enormous stockpiles of inventory. The fixed costs got deferred into inventory instead of flushing out on the income statement. **** Imagine increasing NI simply by making more product but not selling any more!

____________ provides us with a means for looking at these relationships within a familiar framework (i.e. an income statement).

The contribution margin income statement

The terms direct cost and indirect cost are commonly used in accounting. A particular cost might be considered a direct cost of a manufacturing department but an indirect cost of the product produced in the manufacturing department. Classifying a cost as either direct or indirect depends upon

The cost object to which the cost is being related. (A direct cost can be specifically associated with a single cost object in an economically feasible way. Indirect costs cannot. They also are costs that are not identified directly with one final cost object but with (1) two or more final cost objects or (2) at least one intermediate cost object.)

Many companies recognize three major categories of costs of manufacturing a product. These are direct materials, direct labor, and overhead. Which of the following is an overhead cost in the production of an automobile?

The cost of small tools used in mounting tires on each automobile.

The net present value method

The difference in the present value of the cash inflows and outflows associated with a project. NPV is a measure of the profitability of an investment:

The net present value method of capital budgeting assumes that cash flow are reinvested at

The discount rate used in the analysis The NPV method assumes that periodic cash inflows earned over the life of an investment are reinvested at the company's cost of capital (the discount rate used in the analysis). The assumptions are that the return on reinvestment is an opportunity cost and that the alternative investment has an equal degree of risk.

All of the following items are included in discounted cash flow analysis except: The future asset depreciation expense. The tax effects of future asset depreciation. Future operating cash savings. The disposal prices of the current and future assets.

The future asset depreciation expense. Discounted cash flow analysis, using either the internal rate of return (IRR) or the net present value (NPV) method, is based on the time value of cash inflows and outflows. All future operating cash savings are considered as well as the tax effects on cash flows of future depreciation charges. The cash proceeds of future asset disposals are likewise a necessary consideration. Depreciation expense is a consideration only to the extent that it affects the cash flows for taxes. Otherwise, depreciation is excluded from the analysis because it is a noncash expense.

49. Discuss how the goal of profit maximization is affected by ethical considerations. What incentives are there for managers to manipulate accounting data in unethical ways in order to increase profits?

The objective of profit maximization should be constrained by the requirement that profits are achieved through legal and ethical means. Because performance evaluation and rewards for managers often are linked to reported profits, managers might manipulate accounting data to show increased profits in order to increase their own bonuses. The evaluation and reward system should be designed to discourage unethical behavior.

Difference between some COGS and other COGS

The only thing different between this COGS and the COGS for a merchandiser is that instead of adding "purchases" to beginning finished goods inventory we need to add "cost of goods manufactured." This is because manufacturers don't purchase the inventory the sell, like a retailer. Instead they create it.

Sunk cost example

The original cost of a building is a sunk cost when the building is being sold five years later.

The Balanced Scorecard is a collection of critical performance measures that have some special properties, including: 1. ____________________ 2. ___________________ 3. ___________________

The performance measures are derived from a company's vision, strategy, and objectives. Performance measures should be chosen so that they are balanced between outcome and lead measures. All scorecard measures should be linked by cause-and-effect relationships.

Opportunity cost

The potential benefit that is given up when one alternative is selected over another. Example: using up manufacturing space, raw materials, resources that could be used to produce other products, iPhones instead of iPods

Relevant range

The range of activity within which the assumptions about variable and fixed costs are valid.

Assuming no beginning work-in-process inventory, and that the ending work-in-process inventory is 100% complete as to materials costs, the number of equivalent units as to materials costs is

The same as the units placed in process.

Future value is best described as: The sum of dollars-in discounted to time zero. None of the answers are correct. The sum of dollars-out discounted to time zero. The value of a dollar-in or a dollar-out at a future time adjusted for any compounding effect.

The value of a dollar-in or a dollar-out at a future time adjusted for any compounding effect. The future value of a dollar is its value at a time in the future given its present value. The future value of a dollar is affected both by the discount rate and the time at which the dollar is received. hence, by both dollars-in and dollars-out in the future may be adjusted for the discount rate and any compounding that may occur.

Which of the following must be known about a production process to institute a variable costing system?

The variable and fixed components of all costs related to production. Variable costing considers only variable manufacturing costs to be product costs, i.e., inventoriable. Fixed manufacturing costs are treated as period costs. Thus, one need only be able to determine the variable and fixed manufacturing costs to institute a variable costing system.

Financial measures vs nonfinancial measures

Those expressed in monetary terms vs. nonmonetary units

Cost-volume-profit analysis assumes over the relevant range that

Total costs are linear

_____________________: The ability to assign a cost to a cost object in an economically feasible way by means of a causal relationship.

Traceability

T/F For capital budgeting decisions, the net present value method is superior to the simple rate of return method.

True

Variable costs

True variable and Step variable - describe the curvilinear function (also width of cost)

5 Levels of Activities ________________ - These are performed for each unit that is produced i.e. Electricity for each unit.

Unit level activities

OVERHEAD SPENDING VARIANCE:

VOSV = (Actual Hrs × Actual Rate) - (Actual Hrs × Standard Rate) Or VOSV = AH (AR - SR)

Depreciation based on the number of units produced is classified as what type of cost?

Variable

In the application of variable costing as a cost-allocation process in manufacturing, ________

Variable indirect costs are treated as product costs. Variable costing considers only variable manufacturing costs to be product costs. Variable indirect costs included in variable factory overhead are therefore inventoriable. Fixed costs are considered period costs and are expensed as incurred.

_____________________________________ measures the change in variable overhead consumption that occurs because of efficient (or inefficient) use of direct labor.

Variable overhead efficiency variance

____________________________________ measures the aggregate effect of differences in the actual variable rate (AVOR) and the standard variable overhead rate (SVOR)

Variable overhead spending variance

In a traditional manufacturing operation, direct costs normally include

Wood in a furniture factory. (Direct costs are readily identifiable with and attributable to specific units of production. Wood is a raw material (a direct cost) of furniture.)

2. _________________ - units of product that are only partially complete and require further work before they can be sold (like the top of the table. It's already been cut and manufactured but we have to still attach the legs)

Work in process

In a job-order cost system, the use of direct materials previously purchased usually is recorded as an increase in

Work-in process

Polo Co. requires higher rates of return for projects with a life span greater than 5 years. Projects extending beyond 5 years must earn a higher specified rate of return. Which of the following capital budgeting techniques can readily accommodate this requirement? Internal Rate of Return Net Present Value A Yes No B No Yes C No No D Yes Yes

Yes/Yes The IRR is the discount rate at which the NPV is zero. The NPV is the excess of the present value of the expected future net cash inflows over the cost of the investment. The calculation of the NPV (and therefore the IRR) can be readily adjusted for an increase in the desired return by changing the discount rate.

[Fact Pattern #1] (Might not need to know) Richardson Motors uses 10 units of Part No. T305 each month in the production of large diesel engines. The cost to manufacture one unit of T305 is presented as follows: Direct materials $ 2,000 Materials handling (20% of direct materials cost) 400 Direct labor 16,000 Manufacturing overhead (150% of direct labor) 24,000 Total manufacturing cost $42,400 Materials handling, which is not included in manufacturing overhead, represents the direct variable costs of the receiving department that are applied to direct materials and purchased components on the basis of their cost. Richardson's annual manufacturing overhead budget is one-third variable and two-thirds fixed. Simpson Castings, one of Richardson's reliable vendors, has offered to supply T305 at a unit price of $30,000. Assume Richardson Motors is able to rent all idle capacity for $50,000 per month. If Richardson decides to purchase the 10 units from Simpson Castings, Richardson's monthly cost for T305 would A. Decrease $14,000. B. Increase $46,000. C. Decrease $64,000. D. Increase $96,000.

[1] The correct answer is B. B. The out-of-pocket cost of making the part equals the total manufacturing cost minus the fixed overhead, or $26,400 {$42,400 - [(2 ÷ 3) × $24,000]}. The cost of the component consists of the $30,000 purchase price plus the $6,000 (20% of cost) of variable receiving costs, or a total of $36,000. Thus, unit out-of-pocket cost would increase by $9,600 if the components were purchased. For 10 components, the total cost increase would be $96,000, but the $50,000 rental would reduce the net increase to $46,000. A. Overlooking the $6,000 per unit of receiving costs for purchased components results in $14,000. C. Assuming all overhead is variable and ignoring rental revenue results in $64,000. D. Overlooking the rental revenue results in $96,000.

[2] In an insourcing or outsourcing decision, A. Direct labor and variable overhead are irrelevant in the short run. B. Costs already incurred (sunk costs) and fixed costs that can be avoided in the future are irrelevant. C. The possibility of using idle capacity and a need for quality control favor a decision to insource. D. Differential costs are those that do not vary with the option chosen.

[2] The correct answer is C. C. The use of idle capacity favors a decision to insource because opportunity cost is zero. Moreover, the decision to insource is indicated when quality control is crucial because an entity generally can exercise better control in its own facilities. A. Direct labor and variable overhead are variable expenses that are relevant to a short-run decision. B. Fixed costs that can be avoided in the future are relevant. D. Differential costs vary with the option selected.

[3] A company produces and sells three products: C J P Sales $200,000 $150,000 $125,000 Separable (product) fixed costs 60,000 35,000 40,000 Allocated fixed costs 35,000 40,000 25,000 Variable costs 95,000 75,000 50,000 The company lost its lease and must move to a smaller facility. As a result, total allocated fixed costs will be reduced by 40%. However, one product must be discontinued. The expected net income after the appropriate product has been discontinued is A. $10,000 B. $15,000 C. $20,000 D. $25,000

[3] The correct answer is D. D. Product P should be eliminated because it has the smallest product margin. A. The amount of $10,000 is 40% of net income after eliminating product P. B. The amount of $15,000 is net income if product C is eliminated. C. The amount of $20,000 is net income if product J is eliminated. After discontinuing P, total product margin is $85,000 ($45,000 + $40,000), and total allocated fixed costs are $60,000 [($35,000 + $40,000 + $25,000) × (1.0 - 0.4)]. Hence, expected net income is $25,000 ($85,000 - $60,000).

[4] Which one of the following is most relevant to a manufacturing equipment replacement decision? A. Original cost of the old equipment. B. Disposal price of the old equipment. C. Gain or loss on the disposal of the old equipment. D. A lump-sum write-off amount from the disposal of the old equipment.

[4] The correct answer is B. B. Management decision analysis is based on the concept of relevant costs. Relevant costs differ among decision choices. Thus, incremental or differential costs are always relevant. Because they were incurred in the past, historical costs, such as the original cost of the equipment, are not relevant. Similarly, any gain or loss on the old equipment is not relevant because this amount is based on the historical cost. However, the disposal price of the old equipment is relevant because it involves a future cash inflow that will not occur unless the equipment is disposed of. A. The original cost of the old equipment is a sunk cost with no relevance to future decision making. C. Gain or loss is based on historical cost, which is a sunk cost. D. A lump-sum write-off of a sunk cost is not relevant to a future decision.

[6] Which of the following cost allocation methods is used to determine the lowest price that can be quoted for a special order that will use idle capacity within a production area? A. Job order. B. Process. C. Variable. D. Standard.

[6] The correct answer is C. C. If idle capacity exists, the lowest feasible price for a special order is one covering the variable cost. Variable costing considers fixed cost to be a period cost, not a product cost. Fixed costs are not relevant to short-term inventory costing with idle capacity because the fixed costs will be incurred whether or not any production occurs. Any additional revenue in excess of the variable costs will decrease losses or increase profits. A. Job order is a cost accumulation procedure that may treat fixed costs as product costs. B. The process method is a cost accumulation procedure that may treat fixed costs as product costs. D. Standard costing attempts to measure deviations from expected costs.

[7] A company has received an offer from a supplier to produce units that the company currently produces and sells. The unit price quoted by the supplier is higher than the company's variable production cost per unit but lower than the price at which the company can market the units. Under which circumstance would the company's profits increase by purchasing units from the supplier? A. Market demand for the product exceeds the company's capacity. B. The company's fixed overhead would remain the same if the company purchased units from the supplier. C. The company has significant sunk costs. D. The company's administrative costs are zero.

[7] The correct answer is A. A. Fixed costs are relevant costs in the absence of idle capacity. Thus, when demand for a product exceeds a company's capacity to produce a product, fixed costs may be avoided by purchasing the product from a supplier, resulting in a decrease in expenses and an increase in profits. B. Costs that do not differ between two alternatives should be ignored because they are irrelevant to the decision being made. C. Sunk costs are irrelevant in decision making. D. This answer is a distractor and does not have a bearing on the decision. Also, costs that do not differ between two alternatives should be ignored because they are irrelevant to the decision being made.

[8] The following data pertains to Blue Co.: Product A: Per-unit data sales price - $70, Variable Cost - $42 Product B: Per-unit data sales price - $50, Variable Cost - $28 Product C: Per-unit data sales price - $60, Variable Cost - $32 A customer of Blue is going to spend a total of $40,000 on one product only. Which of the following products would Blue prefer to sell to the customer? A. A. B. B. C. C. D. Either A or C.

[8] The correct answer is C. C. One of the ways to determine which product to sell is by calculating the net profit from each product. The net profit from each product is calculated by multiplying the contribution margin (Sales - Variable costs) by the total number of products that it is possible to create based on the limited budget of $40,000. The net profit from Product A is $26,667 [($40,000 ÷ $42) × ($70 - $42)]. The net profit from Product B is $31,429 [($40,000 ÷ $28) × ($50 - $28)]. The net profit from Product C is $35,000 [($40,000 ÷ $32) × ($60 - $32)]. Therefore, Blue will choose to sell Product C. Another way to determine which product to sell is by comparing how much profit each product yields per $1 invested in the product. Product C yields $0.875 ($28 contribution margin ÷ $32 product cost) per each dollar invested, and this amount is greater than that for Product B (0.79) and Product A (0.67). A. Product A has the same contribution margin as Product C. Since Product A has a higher variable cost per unit than Product C, it results in lower net profit. B. Product B does not result in the highest possible profit. D. Blue would prefer to sell Product C rather than Product A because C has a lower variable cost and the same contribution margin.

[9] In a manufacturing environment, the best short-term profit-maximizing approach is to A. Maximize unit gross profit times the number of units sold. B. Minimize variable costs per unit times the number of units produced. C. Minimize fixed overhead cost per unit by producing at full capacity. D. Maximize contribution per unit times the number of units sold.

[9] The correct answer is D. D. In the short run, the best approach is to maximize the contribution margin [(price - unit variable cost) × units sold]. Fixed costs can be ignored. The important consideration is the total contribution margin available to cover fixed costs and contribute to profits. A. A long-term strategy is to maximize gross profit, which is calculated after subtracting fixed costs. B. Minimizing total variable cost ignores the effect of selling price on profit maximization. C. In the short run, fixed overhead does not change and is therefore not relevant.

High-Low Method

a method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels

Fixed costs LT About 1 year or so

a) Committed - (Long Term) - i.e. property plant and equipment b) Discretionary - (are about 1 year or so) - Advertising, Research

____ 1. During October, 10,000 direct labor hours were worked at a standard cost of $10 per hour. If the direct labor rate variance for October was $4,000 unfavorable, the actual cost per direct labor hour must be a. $10.40. b. $10.00. c. $9.60. d. $9.20.

a. $10.40 SUPPORTING CALCULATIONS: 10,000 x $10 = $100,000 $100,000 + $4,000 = $104,000 $104,000/10,000 = $10.40

Administrative Costs - all executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing, marketing or selling.

a. Executive compensation-(CFO-David Wallace's salary & benefits) b. General accounting (Angela, Oscar, and Kevin's salaries & benefits) c. Secretarial (Pam's salary) d. Public relations

If the IRR = the required rate of return,

acceptance or rejection is equal.

Project types: 1. independent projects- ______________________________________ 2. mutually exclusive projects: ________________________________________

accepting or rejecting these projects does not affect the cash flows of another project if accepted, preclude the acceptance of all other competing projects.

If, however, the cash flows are uneven, the payback period is computed by

adding the annual cash flows until such time as the original investment is recovered.

Inventory Valuation

analyze physical flow of units (make sure it balances) convert those things to equivalent units pool total units and costs (get cost per equivalent unit) Apply cost to units

A disadvantage of absorption costing is: a. that it is not a useful format for decision making. b. that it might encourage inventory build-up. c. both a and b

c. both a and b

There are two major differences between NPV and IRR two approaches: 1. NPV assumes that each _____________ at the required rate of return, whereas the IRR method assumes that each cash inflow is reinvested at the computed IRR. That is, because we provide the discount rate in NPV, the model assumes the rate that we assigned, whereas the IRR solves for the discount rate and therefore uses IRR for reinvestment. 2. NPV measures profitability in absolute terms, whereas the IRR method measures it in ________ terms (relative to other projects).

cash inflow received is reinvested relative

Differences between job-order and process costing i. Process costing is used when a single product is produced on a continuing basis or for a long period of time. Job-order costing is used when many different jobs having different production requirements are worked on each period. ii. Process costing systems accumulate costs by ________ and assign them uniformly to all units processed during the period. Job-order costing systems accumulate costs by_____________ .

department individual jobs

Operating leverage is a measure of ____________________

how sensitive N/I is to percentage changes in Sales Dollars

Collectively exhaustive:

includes the entire set of all alternatives

The closer you are to the BEP in terms of NI the higher the _______

leverage you are experiencing and vice-versa.

A. Similarities between job-order and process costing i. Both systems assign __________ costs to products and they provide a mechanism for computing unit product costs. ii. Both systems use the same manufacturing accounts, for example:__________ . __________. iii. The flow of costs through the manufacturing accounts is basically the same in both systems.

material, labor, and overhead raw materials, work in process, manufacturing overhead, and finished goods

A. Equivalent units - computed by: _______________________. . i. Equivalent units - the basic idea. 1. Two half completed products are equivalent to one complete product. 2. 10,000 units 70% completed are equivalent to 7,000 complete units. ii. Equivalent units can be calculated two ways (we'll focus on weighted-average): 1. The FIFO method 2. The weighted-average method

multiplying the number of partially completed units and the percentage completion of those units

variable costing:

only costs that vary with output (variable costs) are treated as product costs (fixed costs, such as fixed manufacturing overhead, not included)

Traditional Income Statement: (financial accounting) separates costs by whether they are ________ (selling and admin) or _________ costs (COGS).

period product

Overhead applied to a particular job =

predetermined overhead rate (x) amount of allocation base incurred by the job

1) direct materials, 2) direct labor, 3) manufacturing overhead (both fixed and variable)--> all included in what?

product costs

Cost-Volume-Profit Analysis (CVP Analysis) focuses on how____________ are affected by five general factors and the relationships among the variables at play: (Fill in blank)

profits

Cost-Volume-Profit Analysis (CVP Analysis) focuses on how____________ are affected by five general factors and the relationships among the variables at play: (What are the five general factors?)

selling prices sales volume unit variable cost total fixed cost mix of products sold

The purpose of an organizational chart is to

show how responsibility is divided among managers and to show formal lines of reporting and communication

In a _______________________, performance measures must be integrated so that they are mutually consistent and reinforcing. The performance measures must be balanced and linked to the organization's strategy. When the measures selected are balanced between lag measures and lead measures, between objective measures and subjective measures, between financial measures and nonfinancial measures, and between external measures and internal measures, the measures are considered to be balanced.

strategic-based responsibility accounting system

The ____________________________________ adds direction to improvement efforts by tying responsibility to the firm's strategy. Ideally, all individuals in the organization should understand the organization's strategy and know how their specific responsibilities support achievement of the strategy.

strategic-based responsibility accounting system

If the IRR > the required rate of return,

the project should be accepted.

If the IRR < the required rate of return,

the project should be rejected.

If NPV = 0

this indicates a breakeven scenario

MANAGING CONSTRAINTS Processing more units demanded by customers through the bottleneck is the key to increased profits:

• Produce only what can be sold. • Pay workers overtime to keep the bottleneck running after normal working hours. • Shift workers from non-bottleneck areas to the bottleneck. • Hire more workers or acquire more machines for the bottleneck. • Subcontract some of the production that would use the bottleneck. • Focus business process improvement efforts on the bottleneck. • Reduce defects. The potential payoff to effectively managing the constraint can be enormous.

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