Cost Acct.: Exam 2 Homework

9-2 Why is the term direct costing a misnomer?

1. variable costing does not include all direct costs as inventoriable costs. only variable direct manufacturing costs are included. any fixed direct manufacturing costs and any direct nonmanufacturing costs are excluded from inventoriable costs 2. variable costing includes as inventoriable costs not only direct manufacturing costs but also some indirect costs

6-7 Define rolling budget. Give an example.

A rolling budget, also called a continuous budget, is a budget or plan that is always available for a specified future period, by continually adding a period (month, quarter, or year) to the period that just ended. A four-quarter rolling budget for 2017 is superseded by a four-quarter rolling budget for April 2017 to March 2018, and so on.

9-9 Critics of absorption costing have increasingly emphasized its potential for leading to undesirable incentives for managers. Give an example.

A. Plant managers may switch production to those orders that absorb the highest amount of fixed manufacturing overhead, irrespective of the demand by customers. B. Plant managers may accept a particular order to increase production even though another plant in the same company is better suited to handle that order. C. Plant managers may defer maintenance beyond the current period to free up more time for production.

9-10 What are two ways of reducing the negative aspects associated with using absorption costing to evaluate the performance of a plant manager?

Approaches used to reduce the negative aspects associated with using absorption costing include: a. Change the accounting system: • Adopt either variable or throughput costing, both of which reduce the incentives of managers to produce for inventory. • Adopt an inventory holding charge for managers who tie up funds in inventory. b. Extend the time period used to evaluate performance. By evaluating performance over a longer time period (say, three to five years), the incentive to take short-run actions that reduce long-term income is lessened. c. Include nonfinancial as well as financial variables in the measures used to evaluate performance.

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In notebook; important bc of explanation

9-1 Differences in operating income between variable costing and absorption costing are due solely to accounting for fixed costs. do you agree? explain.

No. Differences in operating income between variable costing and absorption costing are due to accounting for fixed manufacturing costs. • Variable costing, only variable manufacturing costs are included as inventoriable costs. • Absorption costing, both variable and fixed manufacturing costs are included as inventoriable costs. • Fixed marketing and distribution costs are not accounted for differently under variable costing and absorption costing.

11-11 "A branch office or business segment that shows negative operating income should be shut down." Do you agree? Explain briefly.

No. For example, if the revenues that will be lost exceed the costs that will be saved, the branch or business segment should not be shut down. Shutting down will only increase the loss. Allocated costs and fixed costs that will not be saved are irrelevant to the shut-down decision

11-13 "Managers will always choose the alternative that maximizes operating income or minimizes costs in the decision model." Do you agree? Why?

No. Managers often favor the alternative that makes their performance look best so they focus on the measures used in the performance-evaluation model. If the performance-evaluation model does not emphasize maximizing operating income or minimizing costs, managers will most likely not choose the alternative that maximizes operating income or minimizes costs.

11-10 "Management should always maximize sales of the product with the highest contribution margin per unit." Do you agree? Why?

No. Managers should aim to get the highest contribution margin per unit of the constraining (that is, scarce, limiting, or critical) factor. The constraining factor is what restricts or limits the production or sale of a given product (for example, availability of machine-hours).

11-3 "All future costs are relevant." Do you agree? Why?

No. Relevant costs are defined as those expected future costs that differ among alternative courses of action being considered. Thus, future costs that do not differ among the alternatives are irrelevant to deciding which alternative to choose.

11-7 "A component part should be purchased whenever the purchase price is less than its total manufacturing cost per unit." Do you agree? Why?

No. Some of the total manufacturing cost per unit of a product may be fixed and, hence, will not differ between the make and buy alternatives. These fixed costs are irrelevant to the make-or-buy decision. The key comparison is between purchase costs and the costs that will be saved if the company purchases the component parts from outside plus the additional benefits of using the resources freed up in the next best alternative use (opportunity cost). Furthermore, managers should consider nonfinancial factors such as quality and timely delivery when making outsourcing decisions.

11-6 "Variable costs are always relevant, and fixed costs are always irrelevant." Do you agree? Why?

No. Some variable costs may not differ among the alternatives under consideration and, hence, will be irrelevant. Some fixed costs may differ among the alternatives and, hence, will be relevant.

11-9 "Managers should always buy inventory in quantities that result in the lowest purchase cost per unit." Do you agree? Why?

No. When deciding on the quantity of inventory to buy, managers must consider both the purchase cost per unit and the opportunity cost of funds invested in the inventory. For example, the purchase cost per unit may be low when the quantity of inventory purchased is large, but the benefit of the lower cost may be more than offset by the high opportunity cost of the funds invested in acquiring and holding inventory.

9-3 Do companies in either the service sector or the merchandising sector make choices about absorption costing versus variable costing?

No. difference accounts for fixed manufacturing costs. as service companies have no fixed manufacturing costs, these companies do not make choices between absorption costing and variable costing.

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15-21 Computational Problems

Notebook

11-8 Define opportunity cost.

Opportunity cost is the contribution to income that is forgone (rejected) by not using a limited resource in its next-best alternative use.

6-5 "Production managers and marketing managers are like oil and water. They just don't mix." How can a budget assist in reducing conflicts between these two areas?

Production and marketing traditionally have operated as relatively independent business functions. Budgets can assist in reducing conflicts between these two functions in two ways. Consider a beverage company such as Coca-Cola or Pepsi-Cola: · Communication. Marketing could share information about seasonal demand with production. · Coordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer.

11-2 Define relevant costs. Why are historical costs irrelevant?

Relevant costs are expected future costs that differ among the alternative courses of action being considered. Historical costs are irrelevant because they are past costs and, therefore, cannot differ among alternative future courses of action.

6-3 "Strategy, plans, and budgets are unrelated to one another." Do you agree? Explain.

Strategy, plans, and budgets are interrelated and affect one another. Strategy specifies how an organization matches its own capabilities with the opportunities in the marketplace to accomplish its objectives. Strategic analysis underlies both long-run and short-run planning. In turn, these plans lead to the formulation of budgets. Budgets provide feedback to managers about the likely effects of their strategic plans. Managers use this feedback to revise their strategic plans and sometimes their strategies.

11-1 Outline the five-step sequence in a decision process.

The five steps in the decision process outlined in Exhibit 11-1 of the text are 1. Identify the problem and uncertainties. 2. Obtain information. 3. Make predictions about the future. 4. Make decisions by choosing among alternatives. 5. Implement the decision, evaluate performance, and learn.

9-4 Explain the main conceptual issue under variable costing and absorption costing regarding the timing for the release of fixed manufacturing overhead as expense.

The main issue between variable costing and absorption costing is the proper timing of the release of fixed manufacturing costs as costs of the period: a. at the time of incurrence, or b. at the time the finished units to which the fixed overhead relates are sold.

6-2 Define master budget.

The master budget expresses management's operating and financial plans for a specified period (usually a fiscal year) and includes a set of budgeted financial statements. It is the initial plan of what the company intends to accomplish in the period.

15-8 What is Conceptually the most defensible method for allocating support department costs? why?

The reciprocal method is theoretically the most defensible method because it fully recognizes the mutual services provided among all departments, irrespective of whether those departments are operating or support departments.

6-9 "The sales forecast is the cornerstone for budgeting." Why?

The sales forecast is typically the cornerstone for budgeting because production (and, hence, costs) and inventory levels generally depend on the forecasted level of sales.

6-8 Outline the steps in preparing an operating budget.

The steps in preparing an operating budget are as follows: 1. Prepare the revenues budget. 2. Prepare the production budget (in units). 3. Prepare the direct material usage budget and direct material purchases budget. 4. Prepare the direct manufacturing labor budget. 5. Prepare the manufacturing overhead budget. 6. Prepare the ending inventories budget. 7. Prepare the cost of goods sold budget. 8. Prepare the nonmanufacturing costs budget. 9. Prepare the budgeted income statement.

15-7 Distinguish among the three methods of allocating the costs of support departments to operating departments.

The three methods differ in how they recognize reciprocal services among support departments: a. The direct (allocation) method ignores any services rendered by one support department to another; it allocates each support department's costs directly to the operating departments. b. The step-down (allocation) method allocates support-department costs to other support departments and to operating departments in a sequential manner that partially recognizes the mutual services provided among all support departments. c. The reciprocal (allocation) method allocates support-department costs to operating departments by fully recognizing the mutual services provided among all support departments.

11-5 Describe two potential problems that should be avoided in relevant-cost analysis.

Two potential problems that should be avoided in relevant cost analysis are (i) Do not assume all variable costs are relevant and all fixed costs are irrelevant. (ii) Do not use unit-cost data directly. It can mislead decision makers because a. it may include irrelevant costs, and b. comparisons of unit costs computed at different output levels lead to erroneous conclusions.

9-7 Give an example of how, under absorption costing, operating income could fall even though the unit sales level rises.

Under absorption costing, heavy reductions of inventory during the accounting period might combine with low production and a large production volume variance. This combination could result in lower operating income even if the unit sales level rises.

9-6 The main trouble with variable costing is that it ignores the increasing importance of fixed costs in manufacturing companies. Do you agree? Why?

Variable costing does not view fixed costs as unimportant or irrelevant, but it maintains that the distinction between behaviors of different costs is crucial for certain decisions. The planning and management of fixed costs is critical, irrespective of what inventory costing method is used.