CHAPTER 1 THE ACCOUNTANTS ROLE IN THE ORGANIZATION 1-1 Management accounting measures, analyzes and reports financial and

nonfinancial information that helps managers make decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally accepted accounting principles (GAAP). Financial accounting focuses on reporting to external parties such as in estors, go ernment agencies, and banks. It measures and records business transactions and pro ides financial statements that are based on generally accepted accounting principles (GAAP). !ther differences include (") management accounting emphasizes the future (not the past), and (#) management accounting influences the beha ior of managers and other employees (rather than primarily reporting economic e ents). $inancial accounting is constrained by generally accepted accounting principles. %anagement accounting is not restricted to these principles. &he result is that management accounting allo's managers to charge interest on o'ners( capital to help )udge a di ision(s performance, e en though such a charge is not allo'ed under GAAP, management accounting can include assets or liabilities (such as *brand names+ de eloped internally) not recognized under GAAP, and management accounting can use asset or liability measurement rules (such as present alues or resale prices) not permitted under GAAP. &he business functions in the alue chain are Research and devel !"en#,generating and experimenting 'ith ideas related to ne' products, ser ices, or processes. $es%&n ' !r d(c#s) serv%ces) and !r cesses ,the detailed planning and engineering of products, ser ices, or processes. Pr d(c#% n,ac-uiring, coordinating, and assembling resources to produce a product or deli er a ser ice. *ar+e#%n&,promoting and selling products or ser ices to customers or prospecti e customers. $%s#r%,(#% n,deli ering products or ser ices to customers. C(s# "er serv%ce,pro iding after.sale support to customers. Supply chain describes the flo' of goods, ser ices, and information from the initial sources of materials and ser ices to the deli ery of products to consumers, regardless of 'hether those acti ities occur in the same organization or in other organizations. /ost management is most effecti e 'hen it integrates and coordinates acti ities across all companies in the supply chain as 'ell as across each business function in an indi idual company(s alue chain. Attempts are made to restructure all cost areas to be more cost.effecti e. &he fi e.step decision.making process is (") identify the problem and uncertainties (#) obtain information (0) make predictions about the future (1) make decisions by choosing among alternati es and (2) implement the decision, e aluate performance and learn. Agree. A successful management accountant re-uires general business skills (such as understanding the strategy of an organization) and people skills (such as moti ating other team members) as 'ell as technical skills (such as computer kno'ledge, calculating costs of products, and supporting planning and control decisions).

1-2

1-4

1--

1-.

1-11

1-12 (a)

(b) (c)

(d)

&he ne' controller could reply in one or more of the follo'ing 'ays3 4emonstrate to the plant manager ho' he or she could make better decisions if the plant controller 'as ie'ed as a resource rather than a dead'eight. In a related 'ay, the plant controller could sho' ho' the plant manager(s time and resources could be sa ed by ie'ing the ne' plant controller as a team member. 4emonstrate to the plant manager a good kno'ledge of the technical aspects of the plant. &his approach may in ol e doing background reading. It certainly 'ill in ol e spending much time on the plant floor speaking to plant personnel. 5ho' the plant manager examples of the ne' plant controller(s past successes in 'orking 'ith line managers in other plants. 6xamples could include assistance in preparing the budget, assistance in analyzing problem situations and e aluating financial and nonfinancial aspects of different alternati es, and assistance in submitting capital budget re-uests. 5eek assistance from the corporate controller to highlight to the plant manager the importance of many tasks undertaken by the ne' plant controller. &his approach is a last resort but may be necessary in some cases. 0al(e cha%n and class%'%ca#% n ' c s#s) c "!(#er c "!an12 C s# I#e" a. b. c. d. e. f. g. h. 0al(e Cha%n 3(s%ness 4(nc#% n Production 4istribution 4esign of products, ser ices or processes 7esearch and 4e elopment /ustomer 5er ice or %arketing 4esign of products, ser ices or processes (or 7esearch and 4e elopment) %arketing Production

1-1/

1-25

Plann%n& and c n#r l dec%s% ns2 Ac#% n a. b. c. d. e. $ec%s% n Planning /ontrol /ontrol Planning Planning

1-26 ". (a) (b)

Pr 'ess% nal e#h%cs and end- '-1ear ac#% ns2 &he possible moti ations for the snack foods di ision 'anting to take end.of.year actions include3 %anagement incenti es. Gourmet $oods may ha e a di ision bonus scheme based on one.year reported di ision earnings. 6fforts to front.end re enue into the current year or transfer costs into the next year can increase this bonus. Promotion opportunities and )ob security. &op management of Gourmet $oods likely 'ill ie' those di ision managers that deli er high reported earnings gro'th rates as being the best

(c)

prospects for promotion. 4i ision managers 'ho deli er *un'elcome surprises+ may be ie'ed as less capable. 7etain di ision autonomy. If top management of Gourmet $oods adopts a *management by exception+ approach, di isions that report sharp reductions in their earnings gro'th rates may attract a sizable increase in top management super ision. &he *5tandards of 6thical /onduct . . . + re-uire management accountants to Perform professional duties in accordance 'ith rele ant la's, regulations, and technical standards. 7efrain from engaging in any conduct that 'ould pre)udice carrying out duties ethically. /ommunicate information fairly and ob)ecti ely.

#.

5e eral of the *end.of.year actions+ clearly are in conflict 'ith these re-uirements and should be ie'ed as unacceptable by &aylor. (b) &he fiscal year.end should be closed on midnight of 4ecember 0". *6xtending+ the close falsely reports next year(s sales as this year(s sales. (c) Altering shipping dates is falsification of the accounting reports. (f) Ad ertisements run in 4ecember should be charged to the current year. &he ad ertising agency is facilitating falsification of the accounting records. &he other *end.of.year actions+ occur in many organizations and fall into the *gray+ to *acceptable+ area. 8o'e er, much depends on the circumstances surrounding each one, such as the follo'ing3 (a) If the independent contractor does not do maintenance 'ork in 4ecember, there is no transaction regarding maintenance to record. &he responsibility for ensuring that packaging e-uipment is 'ell maintained is that of the plant manager. &he di ision controller probably can do little more than obser e the absence of a 4ecember maintenance charge. (d) In many organizations, sales are hea ily concentrated in the final 'eeks of the fiscal year.end. If the double bonus is appro ed by the di ision marketing manager, the di ision controller can do little more than obser e the extra bonus paid in 4ecember. (e) If &9 spots are reduced in 4ecember, the ad ertising cost in 4ecember 'ill be reduced. &here is no record falsification here. (g) %uch depends on the means of *persuading+ carriers to accept the merchandise. $or example, if an under.the.table payment is in ol ed, or if carriers are pressured to accept merchandise, it is clearly unethical. If, ho'e er, the carrier recei es no extra consideration and 'illingly agrees to accept the assignment because it sees potential sales opportunities in 4ecember, the transaction appears ethical. 6ach of the (a), (d), (e), and (g) *end.of.year actions+ may 'ell disad antage Gourmet $oods in the long run. $or example, lack of routine maintenance may lead to subse-uent e-uipment failure. &he di isional controller is 'ell ad ised to raise such issues in meetings 'ith the di ision president. 8o'e er, if Gourmet $oods has a rigid set of line:staff distinctions, the di ision president is the one 'ho bears primary responsibility for )ustifying di ision actions to senior corporate officers. 0. If &aylor belie es that 7yan 'ants her to engage in unethical beha ior, she should first directly raise her concerns 'ith 7yan. If 7yan is un'illing to change his re-uest, &aylor should discuss her concerns 'ith the /orporate /ontroller of Gourmet $oods. 5he could also initiate a confidential discussion 'ith an I%A 6thics /ounselor, other impartial ad iser, or her o'n attorney. &aylor also may 'ell ask for a transfer from the snack foods di ision if she percei es 7yan is un'illing to listen to pressure brought by the /orporate /ontroller, /$!, or e en President of Gourmet $oods. In the extreme, she may 'ant to resign if the corporate culture of Gourmet $oods is to re'ard di ision managers 'ho take *end.of.year actions+ that &aylor ie's

as unethical and possibly illegal. It 'as precisely actions along the lines of (b), (c), and (f) that caused ;etty 9inson, an accountant at <orld/om to be indicted for falsifying <orld/om(s books and misleading in estors. CHAPTER 2 AN INTRO$UCTION TO COST TER*S AN$ PURPOSES 2-1 2-7 A cost object is anything for 'hich a separate measurement of costs is desired. 6xamples include a product, a ser ice, a pro)ect, a customer, a brand category, an acti ity, and a department. %anagers belie e that direct costs that are traced to a particular cost ob)ect are more accurately assigned to that cost ob)ect than are indirect allocated costs. <hen costs are allocated, managers are less certain 'hether the cost allocation base accurately measures the resources demanded by a cost ob)ect. %anagers prefer to use more accurate costs in their decisions. A cost driver is a ariable, such as the le el of acti ity or olume, that causally affects total costs o er a gi en time span. A change in the cost dri er results in a change in the le el of total costs. $or example, the number of ehicles assembled is a dri er of the costs of steering 'heels on a motor. ehicle assembly line. %anufacturing companies typically ha e one or more of the follo'ing three types of in entory3 Direct materials inventory. 4irect materials in stock and a'aiting use in the manufacturing process. Work-in-process inventory. Goods partially 'orked on but not yet completed. Also called work in progress2 Finished goods inventory. Goods completed but not yet sold. A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include pricing and product mix decisions, contracting 'ith go ernment agencies, and preparing financial statements for external reporting under generally accepted accounting principles. Class%'%ca#% n ' c s#s) "an('ac#(r%n& sec# r2

2-/

2215
". #. 0. 2-1

2-25

/ost ob)ect3 &ype of car assembled (/orolla or Geo Prism) /ost ariability3 <ith respect to changes in the number of cars assembled &here may be some debate o er classifications of indi idual items, especially 'ith regard to cost ariability. C s# I#e" A ; / 4 6 $ G 8 $ rI 4 I 4 4 4 I 4 I 0 r4 9 $ $ $ 9 9 9 $

2-26

4l 8 ' Inven# r%a,le C s#s2

(All numbers belo' are in millions). ". 4irect materials in entory =:":#>>= 4irect materials purchased 4irect materials a ailable for production 4irect materials used 4irect materials in entory =:0":#>>= #. &otal manufacturing o erhead costs 5ubtract3 9ariable manufacturing o erhead costs $ixed manufacturing o erhead costs for August 0. &otal manufacturing costs 5ubtract3 4irect materials used (from re-uirement ") &otal manufacturing o erhead costs 4irect manufacturing labor costs for August 1. <ork.in.process in entory =:":#>>= &otal manufacturing costs <ork.in.process a ailable for production 5ubtract3 /ost of goods manufactured (mo ed into $G) <ork.in.process in entory =:0":#>>= 2. $inished goods in entory =:":#>>= /ost of goods manufactured (mo ed from <IP) $inished goods a ailable for sale in August A. $inished goods a ailable for sale in August (from re-uirement 2) 5ubtract3 /ost of goods sold $inished goods in entory =:0":#>>= 2-71 ". C s# ' & ds "an('ac#(red2 ? @> 0A> 12> 0B2 B2 1=> (#2>) #0>

? ? ?

? ",A>> (0B2) (1=>) ? B12 ? #>> ",A>> ",=>> (",A2>) ? "2> "#2 ",A2> ? ",BB2

? ",BB2 (",B>>) ? B2

Cansec C "!an1 Sched(le ' C s# ' G ds *an('ac#(red 9ear Ended $ece",er 71) 2556 :%n #h (sands; ? ##,>>> B2,>>>

4irect materials3 ;eginning in entory, Canuary ", #>>@ Purchases of direct materials

/ost of direct materials a ailable for use 6nding in entory, 4ecember 0", #>>@ 4irect materials used 4irect manufacturing labor Indirect manufacturing costs3 Indirect manufacturing labor Plant insurance 4epreciation,plant building D e-uipment 7epairs and maintenance,plant &otal indirect manufacturing costs %anufacturing costs incurred during #>>@ Add beginning 'ork.in.process in entory, Canuary ", #>>@ &otal manufacturing costs to account for 4educt ending 'ork.in.process in entory, 4ecember 0", #>>@ /ost of goods manufactured (to Income 5tatement) #. Cansec C "!an1 Inc "e S#a#e"en# 9ear Ended $ece",er 71) 2556 :%n #h (sands;

@B,>>> #A,>>> ? B",>>> #2,>>> "2,>>> @,>>> "",>>> 1,>>> 0@,>>> "02,>>> #",>>> "2A,>>> #>,>>> ?"0A,>>>

7e enues /ost of goods sold3 ;eginning finished goods, Canuary ", #>>@ /ost of goods manufactured /ost of goods a ailable for sale 6nding finished goods, 4ecember 0", #>>@ /ost of goods sold Gross margin !perating costs3 %arketing, distribution, and customer.ser ice costs General and administrati e costs &otal operating costs !perating income 2-7/ La, r c s#) ver#%"e and %dle #%"e2

?0>>,>>> ? "=,>>> "0A,>>> "21,>>> #0,>>> "0",>>> "A@,>>> @0,>>> #@,>>> "##,>>> ? 1B,>>>

".(a) &otal cost of hours 'orked at regular rates 1# hours E "# per hour 1# hours E "# per hour 10 hours E "# per hour 1> hours E "# per hour

? 2>1.>> 2>1.>> 2"A.>> 1=>.>> #,>>1.>>

%inus idle time (2.# hours E ?"# per hour) 4irect manufacturing labor costs

A#.1> ?",@1".A>

(b) Idle time F 2.# hours E "# per hour F (c) ! ertime and holiday premium. <eek "3 ! ertime (1#.1>) hours E Premium, ?A per hour <eek #3 ! ertime (1#.1>) hours EPremium, ?A per hour <eek 03 ! ertime (10.1>) hours E Premium, ?A per hour <eek 13 8oliday = hours E Premium, ?"# per hour &otal o ertime and holiday premium

?A#.1> ? "#.>> "#.>> "=.>> @A.>> ?"0=.>>

(d) &otal earnings in %ay 4irect manufacturing labor costs Idle time ! ertime and holiday premium &otal earnings #.

?",@1".A> A#.1> "0=.>> ?#,"1#.>>

Idle time caused by e-uipment breakdo'ns and scheduling mixups is an indirect cost of the )ob because it is not related to a specific )ob. ! ertime premium caused by the hea y o erall olume of 'ork is also an indirect cost because it is not related to a particular )ob that happened to be 'orked on during the o ertime hours. If, ho'e er, the o ertime is the result of a demanding *rush )ob,+ the o ertime premium is a direct cost of that )ob.

CHAPTER 7 COST-0OLU*E-PRO4IT ANAL9SIS G!&A&I!G H564 IG /8AP&67 0 5!IH&I!G5 5P3 9/H3 /%H3 $/3 &!I3 7-2 ". #. 5elling price 9ariable cost per unit /ontribution margin per unit $ixed costs &arget operating income &he assumptions underlying the /9P analysis outlined in /hapter 0 are /hanges in the le el of re enues and costs arise only because of changes in the number of product (or ser ice) units sold. &otal costs can be separated into a fixed component that does not ary 'ith the units sold and a component that is ariable 'ith respect to the units sold.

0. 1. 7--

<hen represented graphically, the beha ior of total re enues and total costs are linear (represented as a straight line) in relation to units sold 'ithin a rele ant range and time period. &he selling price, ariable cost per unit, and fixed costs are kno'n and constant. &hree methods to express /9P relationships are the e-uation method, the contribution margin method, and the graph method. &he first t'o methods are most useful for analyzing operating income at a fe' specific le els of sales. &he graph method is useful for isualizing the effect of sales on operating income o er a 'ide range of -uantities sold. ;reake en analysis denotes the study of the breake en point, 'hich is often only an incidental part of the relationship bet'een cost, olume, and profit. /ost. olume.profit relationship is a more comprehensi e term than breake en analysis. /9P analysis is al'ays conducted for a specified time horizon. !ne extreme is a ery short.time horizon. $or example, some acation cruises offer deep price discounts for people 'ho offer to take any cruise on a day(s notice. !ne day prior to a cruise, most costs are fixed. &he other extreme is se eral years. 8ere, a much higher percentage of total costs typically is ariable. /9P itself is not made any less rele ant 'hen the time horizon lengthens. <hat happens is that many items classified as fixed in the short run may become ariable costs 'ith a longer time horizon. C0P c "!(#a#% ns2 "a. 5ales (?0> per unit E #>>,>>> units) 9ariable costs (?#2 per unit E #>>,>>> units) /ontribution margin /ontribution margin (from abo e) $ixed costs !perating income 5ales (from abo e) 9ariable costs (?"A per unit E #>>,>>> units) /ontribution margin /ontribution margin $ixed costs !perating income ?A,>>>,>>> 2,>>>,>>> ?",>>>,>>> ?",>>>,>>> =>>,>>> ? #>>,>>> ?A,>>>,>>> 0,#>>,>>> ?#,=>>,>>> ?#,=>>,>>> #,1>>,>>> ? 1>>,>>>

7-/

7-17

7-1<

"b.

#a.

#b.

0. !perating income is expected to increase by ?#>>,>>> if %s. 5choenen(s proposal is accepted. &he management 'ould consider other factors before making the final decision. It is likely that product -uality 'ould impro e as a result of using state of the art e-uipment. 4ue to increased automation, probably many 'orkers 'ill ha e to be laid off. Patel(s management 'ill ha e to consider the impact of such an action on employee morale. In addition, the proposal increases the company(s fixed costs dramatically. &his 'ill increase the company(s operating le erage and risk. 7-75 ". C n#r%,(#% n "ar&%n) dec%s% n "a+%n&2 7e enues 4educt ariable costs3 ?2>>,>>>

/ost of goods sold 5ales commissions !ther operating costs /ontribution margin #. /ontribution margin percentage F 0.

?#>>,>>> 2>,>>> 1>,>>>

?#">,>>> F 1#J ?2>>,>>>

#@>,>>> ?#">,>>>

Incremental re enue (#>J E ?2>>,>>>) F ?">>,>>> Incremental contribution margin (1#J E ?">>,>>>) Incremental fixed costs (ad ertising) Incremental operating income

?1#,>>> ">,>>> ?0#,>>>

If %r. 5chmidt spends ?">,>>> more on ad ertising, the operating income 'ill increase by ?0#,>>>, con erting an operating loss of ?">,>>> to an operating income of ?##,>>>.

Proof (!ptional)3 7e enues ("#>J E ?2>>,>>>) /ost of goods sold (1>J of sales) Gross margin !perating costs3 5alaries and 'ages 5ales commissions (">J of sales) 4epreciation of e-uipment and fixtures 5tore rent Ad ertising !ther operating costs3 9ariable ( $ixed !perating income 7-77 ". C0P anal1s%s) serv%ce '%r". 7e enue per package 9ariable cost per package /ontribution margin per package ?1,>>> 0,A>> ? 1>>
?1>,>>> E ?A>>,>>>) ?2>>,>>>

?A>>,>>> #1>,>>> 0A>,>>> ?"2>,>>> A>,>>> "#,>>> 1=,>>> ">,>>> 1=,>>> ">,>>> 00=,>>> ? ##,>>>

;reake en (units) F $ixed costs K /ontribution margin per package F

?1=>,>>> F ",#>> tour packages ?1>> per package

#.

/ontribution margin ratio F

/ontribution margin per package ?1>> F F ">J 5elling price ?1,>>>

7e enue to achie e target income

F ($ixed costs L target !I) K /ontribution margin ratio

?1=>,>>> + ?">>,>>> F ?2,=>>,>>>, or >.">

Gumber of tour packages to earn ?">>,>>> operating income3 =

?1=>,>>> + ?">>,>>> = ",12> tour packages ?1>>

7e enues to earn ?">>,>>> !I F ",12> tour packages E ?1,>>> F ?2,=>>,>>>. 0. $ixed costs F ?1=>,>>> L ?#1,>>> F ?2>1,>>> ;reake en (units) F
$ixed costs /ontribution margin per unit

/ontribution margin per unit

$ixed costs ;reake en (units) ?2>1,>>> F F ?1#> per tour package ",#>> tour packages

4esired ariable cost per tour package F ?1,>>> M ?1#> F ?0,2=> ;ecause the current ariable cost per unit is ?0,A>>, the unit ariable cost 'ill need to be reduced by ?#> to achie e the breake en point calculated in re-uirement ". Alternate %ethod3 If fixed cost increases by ?#1,>>>, then total ariable costs must be reduced by ?#1,>>> to keep the breake en point of ",#>> tour packages. &herefore, the ariable cost per unit reduction F ?#1,>>> K ",#>> F ?#> per tour package 7-4. ". E#h%cs) C0P anal1s%s2 /ontribution margin percentage F F F ;reake en re enues F F #. 7e enues 9ariable costs 7e enues

?2,>>>,>>> ?0,>>>,>>> ?2,>>>,>>> ?#,>>>,>>> F 1>J ?2,>>>,>>> $ixed costs /ontribution margin percentage

?#,"A>,>>> F ?2,1>>,>>> >.1>

If ariable costs are 2#J of re enues, contribution margin percentage e-uals 1=J (">>J 2#J) ;reake en re enues F F
$ixed costs /ontribution margin percentage

?#,"A>,>>> F ?1,2>>,>>> >.1= ?2,>>>,>>> #,A>>,>>>

0.

7e enues 9ariable costs (>.2# ?2,>>>,>>>)

$ixed costs !perating income 1.

#,"A>,>>> ? #1>,>>>

Incorrect reporting of en ironmental costs 'ith the goal of continuing operations is unethical. In assessing the situation, the specific *5tandards of 6thical /onduct for %anagement Accountants+ (described in 6xhibit ".B) that the management accountant should consider are listed belo'.

Competence /lear reports using rele ant and reliable information should be prepared. Preparing reports on the basis of incorrect en ironmental costs to make the company(s performance look better than it is iolates competence standards. It is unethical for ;ush not to report en ironmental costs to make the plant(s performance look good. Integrity &he management accountant has a responsibility to a oid actual or apparent conflicts of interest and ad ise all appropriate parties of any potential conflict. ;ush may be tempted to report lo'er en ironmental costs to please Iemond and <oodall and sa e the )obs of his colleagues. &his action, ho'e er, iolates the responsibility for integrity. &he 5tandards of 6thical /onduct re-uire the management accountant to communicate fa orable as 'ell as unfa orable information. Credibility &he management accountant(s 5tandards of 6thical /onduct re-uire that information should be fairly and ob)ecti ely communicated and that all rele ant information should be disclosed. $rom a management accountant(s standpoint, underreporting en ironmental costs to make performance look good 'ould iolate the standard of ob)ecti ity. ;ush should indicate to Iemond that estimates of en ironmental costs and liabilities should be included in the analysis. If Iemond still insists on modifying the numbers and reporting lo'er en ironmental costs, ;ush should raise the matter 'ith one of Iemond(s superiors. If after taking all these steps, there is continued pressure to understate en ironmental costs, ;ush should consider resigning from the company and not engage in unethical beha ior.

CHAPTER 15 $ETER*INING HO= COSTS 3EHA0E 15-7 A linear cost function is a cost function 'here, 'ithin the rele ant range, the graph of total costs ersus the le el of a single acti ity related to that cost is a straight line. An example of a linear cost function is a cost function for use of a telephone line 'here the terms are a fixed charge of ?">,>>> per year plus a ?# per minute charge for phone use. A nonlinear cost function is a cost function 'here, 'ithin the rele ant range, the graph of total costs ersus the le el of a single acti ity related to that cost is not a straight line. 6xamples include economies of scale in ad ertising 'here an agency can double the number of ad ertisements for less than t'ice the costs, step.cost functions, and learning.cur e.based costs. $our approaches to estimating a cost function are Industrial engineering method. /onference method. Account analysis method. Nuantitati e analysis of current or past cost relationships.

15-". #. 0. 1.

15-. &he six steps are ". /hoose the dependent ariable (the ariable to be predicted, 'hich is some type of cost). #. Identify the independent ariable or cost dri er. 0. /ollect data on the dependent ariable and the cost dri er. 1. Plot the data. 2. 6stimate the cost function. A. 6 aluate the cost dri er of the estimated cost function. 5tep 0 typically is the most difficult for a cost analyst.

15-25 Acc (n# anal1s%s "e#h d2 ". 9ariable costs3 /ar 'ash labor ?#A>,>>> 5oap, cloth, and supplies 1#,>>> <ater 0=,>>> 6lectric po'er to mo e con eyor belt B#,>>> &otal ariable costs ?1"#,>>> $ixed costs3 4epreciation ? A1,>>> 5alaries 1A,>>> &otal fixed costs ?"">,>>> 5ome costs are classified as ariable because the total costs in these categories change in proportion to the number of cars 'ashed in Iorenzo(s operation. 5ome costs are classified as fixed because the total costs in these categories do not ary 'ith the number of cars 'ashed. If the con eyor belt mo es regardless of the number of cars on it, the electricity costs to po'er the con eyor belt 'ould be a fixed cost. #. 9ariable costs per car F

?1"#,>>> F ?2."2 per car =>,>>>

&otal costs estimated for @>,>>> cars F ?"">,>>> L (?2."2 E @>,>>>) F ?2B0,2>> 15-22 Acc (n# anal1s%s "e#h d2 ". %anufacturing cost classification for #>>@3 T #al C s#s :1; > ' T #al C s#s Tha# %s 0ar%a,le 4%@ed 0ar%a,le 9ariable C s#s C s#s C s# !er Un%# :2; :7; ? :1; :2; :4; ? :1; A :7; :-; ? :7; B <-)555

Acc (n#

4irect materials 4irect manufacturing labor Po'er 5uper ision labor %aterials.handling labor %aintenance labor 4epreciation 7ent, property taxes, admin &otal

?0>>,>>> ##2,>>> 0B,2>> 2A,#2> A>,>>> B2,>>> @2,>>> ">>,>>> ?@1=,B2>

">>J ">> ">> #> 2> 1> > >

?0>>,>>> ##2,>>> 0B,2>> "",#2> 0>,>>> 0>,>>> > > ?A00,B2>

> > > 12,>>> 0>,>>> 12,>>> @2,>>> ">>,>>> ?0"2,>>>

?1.>> 0.>> >.2> >."2 >.1> >.1> > > ?=.12

&otal manufacturing cost for #>>@ F ?@1=,B2>

9ariable costs in #>">3 Un%# 0ar%a,le C s# !er Un%# ' r > 2556 Increase :/; :<; Increase %n 0ar%a,le C s# !er Un%# :.; ? :/; :<;

Acc (n#

0ar%a,le C s# !er Un%# T #al 0ar%a,le C s ' r 2515 ' r 2515 :6; ? :/; C :.; :15; ? :6; .5)55

4irect materials 4irect manufacturing labor Po'er 5uper ision labor %aterials.handling labor %aintenance labor 4epreciation 7ent, property taxes, admin. &otal $ixed and total costs in #>">3

?1.>> 0.>> >.2> >."2 >.1> >.1> > > ?=.12

2J "> > > > > > >

?>.#> >.0> > > > > > > ?>.2>

?1.#> 0.0> >.2> >."2 >.1> >.1> > > ?=.@2

?00A,>>> #A1,>>> 1>,>>> "#,>>> 0#,>>> 0#,>>> > > ?B"A,>>>

Acc (n#

$ llar 4%@ed Increase %n 4%@ed C s#s 0ar%a,le C s#s Percen#a&e 4%@ed C s#s ' r 2515 C s#s ' r ' r 2556 Increase :17; ? :14; ? 2515 :11; :12; :1-; :11; :12; :11; C :17;

T #al C s#s :1/; ? :14; C :1-;

4irect materials 4irect manufacturing labor Po'er 5uper ision labor %aterials.handling labor %aintenance labor 4epreciation 7ent, property taxes, admin. &otal

> > > 12,>>> 0>,>>> 12,>>> @2,>>> ">>,>>> ?0"2,>>>

>J > > > > > 2 B

> > > > > > 1,B2> B,>>> ?"",B2>

> > > 12,>>> 0>,>>> 12,>>> @@,B2> ">B,>>> ?0#A,B2>

?00A,>>> #A1,>>> 1>,>>> "#,>>> 0#,>>> 0#,>>> > > ?B"A,>>>

? 00A,>>> #A1,>>> 1>,>>> 2B,>>> A#,>>> BB,>>> @@,B2> ">B,>>> ?",>1#,B2>

&otal manufacturing costs for #>"> F ?",>1#,B2> #. &otal cost per unit, #>>@ &otal cost per unit, #>"> 0.
?@1=,B2> F ?"#.A2 B2,>>> ?",>1#,B2> F F ?"0.>0 =>,>>>

/ost classification into ariable and fixed costs is based on -ualitati e, rather than -uantitati e, analysis. 8o' good the classifications are depends on the kno'ledge of indi idual managers 'ho classify the costs. Go'er may 'ant to undertake -uantitati e analysis of costs, using regression analysis on time.series or cross.sectional data to better estimate the fixed and ariable components of costs. ;etter kno'ledge of fixed and ariable costs 'ill help Go'er to better price his products, to kno' 'hen he is getting a positi e contribution margin, and to better manage costs.

15-27 Es#%"a#%n& a c s# '(nc#% n) h%&h-l 8 "e#h d2 ". &he key point to note is that the problem pro ides high.lo' alues of (annual round trips made by a helicopter) and ! (the operating cost per round trip). <e first need to calculate the annual operating cost ! (as in column (0) belo'), and then use those alues to estimate the function using the high.lo' method. C s# $r%verD Ann(al R (ndTr%!s :X; :1; #,>>> ",>>> ",>>> O!era#%n& C s# !er R (nd-Tr%! :2; ?0>> ?02> Ann(al O!era#%n& C s# :Y; :7; ? :1; :2; ?A>>,>>> ?02>,>>> ?#2>,>>>

8ighest obser ation of cost dri er Io'est obser ation of cost dri er 4ifference

5lope coefficient F ?#2>,>>> ",>>> F ?#2> per round.trip /onstant F ?A>>,>>> M (?#2> #,>>>) F ?">>,>>> &he estimated relationship is ! F ?">>,>>> L ?#2> O 'here ! is the annual operating cost of a helicopter and represents the number of round trips it makes annually. #. &he constant a (estimated as ?">>,>>>) represents the fixed costs of operating a helicopter, irrespecti e of the number of round trips it makes. &his 'ould include items such as insurance, registration, depreciation on the aircraft, and any fixed component of pilot and cre' salaries. &he coefficient b (estimated as ?#2> per round.trip) represents the ariable cost of each round trip, costs that are incurred only 'hen a helicopter actually flies a round trip. &he coefficient b may

include costs such as landing fees, fuel, refreshments, baggage handling, and any regulatory fees paid on a per.flight basis. 0. If each helicopter is, on a erage, expected to make ",#>> round trips a year, 'e can use the estimated relationship to calculate the expected annual operating cost per helicopter3

! F ?">>,>>> L ?#2> F ",#>> ! F ?">>,>>> L ?#2> ",#>> F ?">>,>>> L ?0>>,>>> F ?1>>,>>> <ith "> helicopters in its fleet, 7eisen(s estimated operating budget is "> ?1>>,>>> F ?1,>>>,>>>.

CHAPTER 4 EO3 COSTING 4-2 In a job-costing system" costs are assigned to a distinct unit, batch, or lot of a product or ser ice. In a process-costing system" the cost of a product or ser ice is obtained by using broad a erages to assign costs to masses of identical or similar units. &he se en steps in )ob costing are3 (") identify the )ob that is the chosen cost ob)ect, (#) identify the direct costs of the )ob, (0) select the cost.allocation bases to use for allocating indirect costs to the )ob, (1) identify the indirect costs associated 'ith each cost.allocation base, (2) compute the rate per unit of each cost.allocation base used to allocate indirect costs to the )ob, (A) compute the indirect costs allocated to the )ob, and (B) compute the total cost of the )ob by adding all direct and indirect costs assigned to the )ob. &'o reasons for using an annual budget period are &he numerator reasonMMthe longer the time period, the less the influence of seasonal patterns, and &he denominator reasonMMthe longer the time period, the less the effect of ariations in output le els on the allocation of fixed costs.

4-4

4-. a. b. 4-11

&he statement is false. In a normal costing system, the %anufacturing ! erhead /ontrol account 'ill not, in general, e-ual the amounts in the %anufacturing ! erhead Allocated account. &he %anufacturing ! erhead /ontrol account aggregates the actual o erhead costs incurred 'hile %anufacturing ! erhead Allocated allocates o erhead costs to )obs on the basis of a budgeted rate times the actual -uantity of the cost.allocation base. Hnderallocation or o erallocation of indirect (o erhead) costs can arise because of (a) the Gumerator reasonMMthe actual o erhead costs differ from the budgeted o erhead costs, and (b) the 4enominator reasonMMthe actual -uantity used of the allocation base differs from the budgeted -uantity. 4-16 3(d&e#ed "an('ac#(r%n& verhead ra#e) all ca#ed "an('ac#(r%n& verhead2 F

". ;udgeted manufacturing o erhead rate

;udgeted manufacturing o erhead ;udgeted machine hours ?1, >>>, >>> F ?#> per machine.hour #>>, >>> machine.hours

#.
0.

%anufacturing o erhead allocated F Actual machine.hours E ;udgeted manufacturing o erhead rate

F "@2,>>> E ?#> F ?0,@>>,>>> 5ince manufacturing o erhead allocated is greater than the actual manufacturing o erhead costs, <aheed o erallocated manufacturing o erhead3 ?0,@>>,>>> 0,=A>,>>> ? 1>,>>>

%anufacturing o erhead allocated Actual manufacturing o erhead costs ! erallocated manufacturing o erhead

4-22 ".

Serv%ce %nd(s#r1) #%"e !er% d (sed # c "!(#e %nd%rec# c s# ra#es2 EanA*arch ?1>>,>>> @>J ?0A>,>>> 0>>,>>> ?AA>,>>> "A2J A!r%lAE(ne ?#=>,>>> A>J ?"A=,>>> 0>>,>>> ?1A=,>>> "ABJ E(l1ASe!# ?#2>,>>> A>J ?"2>,>>> 0>>,>>> ?12>,>>> "=>J Oc#A$ec ?#B>,>>> A>J ?"A#,>>> 0>>,>>> ?1A#,>>> "B"J ? =1>,>>> ",#>>,>>> ?#,>1>,>>> "B>J T #al ?",#>>,>>>

4irect labor costs 9ariable o erhead costs as a percentage of direct labor costs 9ariable o erhead costs (Percentage direct labor costs) $ixed o erhead costs &otal o erhead costs &otal o erhead costs as a percentage of direct labor costs

E , 772 4irect materials 4irect labor costs ! erhead allocated ( ariable L fixed) ("A2JO "=>JO "B>J of ?A,>>>) $ull cost of Cob 00# (a) (b)

3(d&e#ed Overhead Ra#e Used EanA*arch E(l1ASe!# Avera&e Ra#e Ra#e 9earl1 Ra#e ?">,>>> ?">,>>> ?">,>>> A,>>> A,>>> A,>>> @,@>> ?#2,@>> ">,=>> ?#A,=>> ">,#>> ?#A,#>>

&he full cost of Cob 00#, using the budgeted o erhead rate of "A2J for CanuaryM%arch, is ?#2,@>>. &he full cost of Cob 00#, using the budgeted o erhead rate of "=>J for CulyM5eptember, is ?#A,=>>.

(c) #.

&he full cost of Cob 00#, using the annual budgeted o erhead rate of "B>J, is ?#A,#>>.

;udgeted fixed o erhead rate based on annual fixed o erhead costs and annual direct labor costs F ?",#>>,>>> ?",#>>,>>> F ">>J E , 772 4irect materials 4irect labor costs 9ariable o erhead allocated (@>JO A>JO of ?A,>>>) $ixed o erhead allocated (">>J of ?A,>>>) $ull cost of Cob 00# 3(d&e#ed 0ar%a,le Overhead Ra#e Used Ean(ar1A*arch E(l1ASe!# ra#e ra#e ?">,>>> ?">,>>> A,>>> A,>>> 2,1>> 0,A>> A,>>> ?#B,1>> A,>>> ?#2,A>>

(a) (b) 0.

&he full cost of Cob 00#, using the budgeted ariable o erhead rate of @>J for CanuaryM%arch and an annual fixed o erhead rate of ">>J, is ?#B,1>>. &he full cost of Cob 00#, using the budgeted ariable o erhead rate of A>J for CulyM5eptember and an annual fixed o erhead rate of ">>J, is ?#2,A>>. If Printers, Inc. sets prices at a markup of costs, then prices based on costs calculated as in 7e-uirement # (rather than as in 7e-uirement ") 'ould be more effecti e in deterring clients from sending in last.minute, congestion.causing orders in the CanuaryM%arch time frame. In this calculation, more ariable manufacturing o erhead costs are allocated to )obs in the first -uarter, reflecting the larger costs of that -uarter caused by higher o ertime and facility and machine maintenance. &his method better captures the cost of congestion during the first -uarter. E , c s#%n&) acc (n#%n& ' r "an('ac#(r%n& verhead) ,(d&e#ed ra#es2 An o er ie' of the )ob.costing system is3
INDIRECT COST POOL

4-71 ".

Machining Department Manufacturing Overhead

Finishing Department Manufacturing Overhead

COST ALLOCATION BASE

} } }

Machine-Hours in Machining Dept.

Direct Manufacturing Labor Costs in Finishing Dept.

COST OBJECT: COST OBJECT: PRODUCT

Indirect Costs Direct Costs

JOB

DIRECT COST

Direct Materials

Direct Manufacturing Labor

#. a.

;udgeted manufacturing o erhead di ided by allocation base3 %achining 4epartment3

?">,>>>,>>> #>>,>>>
b.

F ?2> per machine.hour

$inishing 4epartment3

?=,>>>,>>> ?1,>>>,>>>

F #>>J of direct manufacturing labor costs

0. 1.

%achining 4epartment o erhead, ?2> "0> hours $inishing 4epartment o erhead, #>>J of ?",#2> &otal manufacturing o erhead allocated &otal costs of Cob 10"3 4irect costs3 4irect materialsMM%achining 4epartment MM$inishing 4epartment 4irect manufacturing labor ,%achining 4epartment ,$inishing 4epartment Indirect costs3 %achining 4epartment o erhead, ?2> "0> $inishing 4epartment o erhead, #>>J of ?",#2> &otal costs

?A,2>> #,2>> ?@,>>> ?"1,>>> 0,>>> A>> ",#2> ?A,2>> #,2>>

?"=,=2> @,>>> ?#B,=2>

&he per.unit product cost of Cob 10" is ?#B,=2> K #>> units F ?"0@.#2 per unit &he point of this part is (a) to get the definitions straight and (b) to underscore that o erhead is allocated by multiplying the actual amount of the allocation base by the budgeted rate. 2. *ach%n%n& 4%n%sh%n& %anufacturing o erhead incurred (actual) ?"",#>>,>>> ?B,@>>,>>> %anufacturing o erhead allocated ##>,>>> hours ?2> "",>>>,>>> #>>J of ?1,">>,>>> =,#>>,>>> Hnderallocated manufacturing o erhead ? #>>,>>> ! erallocated manufacturing o erhead ? 0>>,>>> &otal o erallocated o erhead F ?0>>,>>> M ?#>>,>>> F ?">>,>>> A. A homogeneous cost pool is one 'here all costs ha e the same or a similar cause.and.effect or benefits.recei ed relationship 'ith the cost.allocation base. 5olomon likely assumes that all its manufacturing o erhead cost items are not homogeneous. 5pecifically, those in the %achining 4epartment ha e a cause.and.effect relationship 'ith machine.hours, 'hile those in the $inishing 4epartment ha e a cause.and.effect relationship 'ith direct manufacturing labor costs. 5olomon belie es that the benefits of using t'o cost pools (more accurate product costs and better ability to manage costs) exceeds the costs of implementing a more complex system.

4-41 E , c s#%n&-serv%ce %nd(s#r1. ". &ours in Process (&IP) Cune 0>, #>>@ *a#er%als La, r 3and :1; :2; (s I )ay Dieing ?#2> ?1>> (sk Me )ater 02> #>> &otal ?A>> ?A>> /ost of /ompleted &ours (//&) in Cune #>>@ 3and #runge $%press Di&&erent Strokes Maybe 'omorrow &otal *a#er%als :1; ? 1>> 1B2 #B2 ?","2> La, r :2; ? B>> B>> 1>> ?",=>> Overhead :7; ? 1-5> F :2; ?A>> 0>> ?@>> Overhead :7; ? 1-5> F :2; ?",>2> ",>2> A>> ?#,B>> T #al :4; ?",#2> =2> ?#,">> T #al :4; ?#,"2> #,##2 ",#B2 ?2,A2>

#.

0. ! erhead allocated F ".2> F ",1>>a F ?#,">> Hnderallocated o erhead F Actual o erhead M Allocated o erhead F ?#,2>> M #,">> F ?1>> underallocated
a

&otal labor in Cune F ?">>L?0>>L?1>>L?#>>L?1>> F ?",1>>

1a. Hnderallocated o erhead is 'ritten off to //& /IP in entory remains unchanged. E(ne 75) 2556 3alance :3e' re Pr ra#% n; :1; ?#,">> 2,A2> ?B,B2> Pr ra#% n ' G455 Underall ca#ed Overhead :2; ? > 1>> ?1>> E(ne 75) 2556 3alance :A'#er Pr ra#% n; :7; ? :1; L :2; ?#,">> A,>2> ?=,"2> E(ne 75) 2556 3alance :A'#er Pr ra#% n; :4; ? :1; L :7; ?#,#>= 2,@1# ?=,"2>

Acc (n# /IP //& 1b.

Hnderallocated o erhead prorated based on ending balances E(ne 75) 2556 3alance :3e' re 3alance as a Pr ra#% n; Percen# ' T #al Acc (n# :1; :2; ? :1; B G<)<-5 &IP ?#,">> >.#B" //& 2,A2> >.B#@ ?B,B2> ".>>>

Pr ra#% n ' G455 Underall ca#ed Overhead :7; ? :2; G455 >.#B" ?1>> F?">= >.B#@ ?1>> F #@# ?1>>

1c.

Hnderallocated o erhead prorated based on Cune o erhead in ending balances

Acc (n# &IP //&

a

E(ne 75) 2556 3alance :3e' re Pr ra#% n; :1; ?#,">> 2,A2> ?B,B2>

Overhead all ca#ed %n E(ne Incl(ded %n E(ne 75) 2556 3alance :2; ? @>>a ",#>>b ?#,">>

Overhead all ca#ed %n E(ne Incl(ded %n E(ne 75) 2556 as a Percen# ' T #al :7; ? :2; B G2)155 >.10 >.2B ".>>

Pr ra#% n ' G455 Underall ca#ed Overhead :4; ? :7; G455 >.10 ?1>> F?"B# >.2B ?1>> F ##= ?1>>

E(ne 75) 2556 3alance :A'#er Pr ra#% n; :-; ? :1; L :4; ?#,#B# 2,=B= ?=,"2>

Cune labor for As I Iay 4ieing and Ask %e Iater E "2>J F (?1>> L ?#>>) E "2>J F ?A>> E "2>J F ?@>> Cune labor for Grunge 6xpress, 4ifferent 5trokes and %aybe &omorro' E "2>J F (?">> L ?0>> L ?1>>) E "2>J F ?=>> E ?"2> F ?",#>> I 'ould choose the method in 1c because this method results in account balances based on actual o erhead allocation rates. &he account balances before proration in &IP and //& are significant and underallocated o erhead is material. $urthermore, the ratio of ending balances in &IP and //& is different from the ratio of o erhead allocated to each of these accounts in Cune.

2.

CHAPTER ACTI0IT9-3ASE$ COSTING AN$ ACTI0IT9-3ASE$ *ANAGE*ENT --2 ! ercosting may result in competitors entering a market and taking market share for products that a company erroneously belie es are lo'.margin or e en unprofitable. Hndercosting may result in companies selling products on 'hich they are in fact losing money, 'hen they erroneously belie e them to be profitable. An acti ity.based approach refines a costing system by focusing on indi idual acti ities as the fundamental cost ob)ects. It uses the cost of these acti ities as the basis for assigning costs to other cost ob)ects such as products or ser ices. An A;/ approach focuses on acti ities as the fundamental cost ob)ects. &he costs of these acti ities are built up to compute the costs of products, and ser ices, and so on. 5imple costing systems ha e one or a fe' indirect cost pools, irrespecti e of the heterogeneity in the facility 'hile A;/ systems ha e multiple indirect cost pools. An A;/ approach attempts to use cost dri ers as the allocation base for indirect costs, 'hereas a simple costing system generally does not. &he A;/ approach classifies as many indirect costs as direct costs as possible. A simple costing system has more indirect costs. &he main costs and limitations of A;/ are the measurements necessary to implement the systems. 6 en basic A;/ systems re-uire many calculations to determine costs of products and ser ices. Acti ity.cost rates often need to be updated regularly. 9ery detailed A;/ systems are costly to operate and difficult to understand. 5ometimes the allocations necessary to calculate acti ity costs often result in acti ity.cost pools and -uantities of cost.allocation bases being measured 'ith error. <hen measurement errors are large, acti ity.cost information can be misleading.

--4

--<

--11

--1-

&he controller faces a difficult challenge. &he benefits of a better accounting system sho' up in impro ed decisions by managers. It is important that the controller ha e the support of these managers 'hen seeking increased in estments in accounting systems. 5tatements by these managers sho'ing ho' their decisions 'ill be impro ed by a better accounting system are the controller(s best arguments 'hen seeking increased funding. $or example, the ne' system 'ill result in more accurate product costs 'hich 'ill influence pricing and product mix decisions. &he ne' system can also be used to reduce product costs 'hich 'ill lo'er selling prices. As a result, the customer 'ill benefit from the ne' system.

--16 Plan#8%de) de!ar#"en# and A3C %nd%rec# c s# ra#es2 ". Actual plant.'ide ariable %!8 rate based on machine hours, ?0>=,A>> 1,>>> ?BB."2 per machine hour Un%#ed * # rs 9ariable manufacturing o erhead, allocated based on machine hours (?BB."2 "#>O ?BB."2 #,=>>O ?BB."2 ",>=>) #. $e!ar#"en# 4esign Production 6ngineering 0ar%a,le *OH %n 255< ?0@,>>> #@,A>> #1>,>>> T #al $r%ver Un%#s 0@> 0B> 1,>>> Ra#e ?">> ? => ? A> Un%#ed * # rs 4esign.related o erhead, allocated on /A4.design hours (""> ?">>O #>> ?">>O => ?">>) Production.related o erhead, allocated on engineering hours (B> ?=>O A> ?=>O #1> ?=>) 6ngineering.related o erhead, allocated on machine hours ("#> ?A>O #,=>> ?A>O ",>=> ?A>) &otal 0. Un%#ed * # rs a. 4epartment rates (7e-uirement #) b. Plant'ide rate (7e-uirement ") 7atio of (a) K (b) ?#0,=>> ? @,#2= #.2B H lden * # rs ?"@#,=>> ?#"A,>#> >.=@ Leland 0eh%cle ?@#,>>> ?=0,0## "."> ?"",>> > 2,A>> B,#> > ?#0,=> > H lden * # rs Leland 0eh%cle T #al

?@,#2=

?#"A,>#>

?=0,0##

?0>=,A>>

per /A4.design hour per engineering hour per machine hour H lden * # rs ? #>,>>> 1,=>> "A=,>> > ?"@#,=> > Leland 0eh%cle T #al

? =,>>> ? 0@,>>> "@,#>> #@,A>>

A1,=> > #1>,>>> ?@#,>> > ?0>=,A>>

&he ariable manufacturing o erhead allocated to Hnited %otors increases by "2BJ under the department rates, the o erhead allocated to 8olden decreases by about ""J and the o erhead allocated to Ieland increases by about ">J. &he three contracts differ sizably in the 'ay they use the resources of the three departments. &he percentage of total dri er units in each department used by the companies is3 C s# Un%#ed H lden Leland $r%ver * # rs * # rs 0eh%cle $e!ar#"en# 4esign /A4.design hours #=J 2"J #"J 6ngineering 6ngineering hours "@ "A A2 Production %achine hours 0 B> #B &he Hnited %otors contract uses only 0J of total machines hours in #>>1, yet uses #=J of /A4 design.hours and "@J of engineering hours. &he result is that the plant'ide rate, based on machine hours, 'ill greatly underestimate the cost of resources used on the Hnited %otors contract. &his explains the "2BJ increase in indirect costs assigned to the Hnited %otors contract 'hen department rates are used. In contrast, the 8olden %otors contract uses less of design (2"J) and engineering ("AJ) than of machine.hours (B>J). 8ence, the use of department rates 'ill report lo'er indirect costs for 8olden %otors than does a plant'ide rate. 8olden %otors 'as probably complaining under the use of the simple system because its contract 'as being o ercosted relati e to its consumption of %!8 resources. Hnited, on the other hand 'as ha ing its contract undercosted and underpriced by the simple system. Assuming that AP is an efficient and competiti e supplier, if the ne' department.based rates are used to price contracts, Hnited 'ill be unhappy. AP should explain to Hnited ho' the calculation 'as done, and point out Hnited(s high use of design and engineering resources relati e to production machine hours. 4iscuss 'ays of reducing the consumption of those resources, if possible, and sho' 'illingness to partner 'ith them to do so. If the price rise is going to be steep, perhaps offer to phase in the ne' prices. 1. !ther than for pricing, AP can also use the information from the department.based system to examine and streamline its o'n operations so that there is maximum alue.added from all indirect resources. It might set targets o er time to reduce both the consumption of each indirect resource and the unit costs of the resources. &he department.based system gi es AP more opportunities for targeted cost management. It 'ould not be 'orth'hile to further refine the cost system into an A;/ system if there 'asn(t much ariation among contracts in the consumption of acti ities 'ithin a department. If, for example, most acti ities 'ithin the design department 'ere, in fact, dri en by /A4.design hours, then the more refined system 'ould be more costly and no more accurate than the department. based cost system. 6 en if there 'as sufficient ariation, considering the relati e sizes of the 0 department cost pools, it may only be cost.effecti e to further analyze the engineering cost pool, 'hich consumes B=J (?#1>,>>> ?0>=,A>>) of the manufacturing o erhead.

2.

--7< Un(sed ca!ac%#1) ac#%v%#1-,ased c s#%n&) ac#%v%#1-,ased "ana&e"en# . ". 3as+e#,alls Gumber of batches %achine.hours 0>> "",>>> 0 lle1,alls 1>> "#,2>> T #al B>> #0,2>>

5etup cost per batch F ?"10,2>> K B>> batches F ?#>2 per batch.

6-uipment and maintenance F ?">@,@>> K #0,2>> machine.hours F ?1.ABAA per machine.hour.

Iease rent, insurance, utilities F ?#"A,>>> K "#,>>> s-. ft. of capacity F ?"= per s-. ft.

#. Hnused capacity = &otal capacity

/apacity used for basketball production = "#,>>> 0, 0A> 2, >1> = 0,A>> s-. ft.

/apacity used for olleyball production

/ost of unused capacity F ?"= per s-. ft E 0,A>> s-. ft. F ?A1,=>> 0. 3as+e#,alls 0 lle1,alls 4irect materials ?#>@,B2> ?02=,#@> 4irect manufacturing labor ">B,000 ">#,@A@ 5etup (?#>2 E 0>>O 1>>) A",2>> =#,>>> 6-uipment and maintenance (?1.ABAA E "",>>>O "#,2>>) 2",11# 2=,12= Iease rent, etc. (?"= E 0,0A>O 2,>1>) A>,1=> @>,B#> ?1@>,2>2 ;udgeted total costs ?A@#,10B K AA,>>> K Gumber of units K">>,>>> ? B.10 ;udgeted cost per unit ? A.@#

T #al ? 2A=,>1> #">,0># "10,2>> ">@,@>> "2",#>> ?","=#,@1#

1. /urrently, Gi ag only utilizes B>J of its a ailable capacity. %anagers should consider 'hether the excess capacity is sufficient to produce footballs. !ther issues to consider include demand for the proposed product, the competition, capital in estment needed to start and support this product line, and the a ailability of skilled and unskilled labor needed to manufacture footballs. --7. Ac#%v%#1-,ased H , c s#%n&) (n%#-c s# c "!ar%s ns2

An o er ie' of the product.costing system is3

INDIRECT COST POOL

Materials Handling

Lathe Work

Milling

Grinding

Testing

COST ALLOCATION BASE

} } }

Number of Parts

Number of Turns

Number of Machine-Hours

Number of Parts

Number of Units Tested

COST OBJECT: COMPONENTS

Indirect Costs Direct Costs

DIRECT COST

Direct Materials

Direct Manufacturing Labor

". Cob !rder 1"> 4irect manufacturing cost 4irect materials 4irect manufacturing labor ?0> #2O ?0> 0B2 Indirect manufacturing cost ?""2 #2O ?""2 0B2 &otal manufacturing cost Gumber of units %anufacturing cost per unit #. 4irect manufacturing cost 4irect materials 4irect manufacturing labor ?0> #2O ?0> 0B2 Indirect manufacturing cost %aterials handling ?>.1> 2>>O ?>.1> #,>>> Iathe 'ork ?>.#> #>,>>>O ?>.#> A>,>>> %illing ?#>.>> "2>O ?#>.>> ",>2> Grinding ?>.=> 2>>O ?>.=> #,>>> &esting ?"2.>> ">O ?"2.>> #>> &otal manufacturing cost Gumber of units %anufacturing cost per unit 0. Gumber of units in )ob /osts per unit 'ith prior costing system /osts per unit 'ith acti ity.based costing ?@,B>> B2> ?">,12> #,=B2 ?"0,0#2 K "> ? ",00#.2> E , Order 411 ?2@,@>> "",#2> ? B","2> 10,"#2 ?""1,#B2 K #>> ? 2B".0B2

E , Order 415 ?@,B>> B2> #>> 1,>>> 0,>>> 1>> "2> B,B2> ?"=,#>> K "> ? ",=#> ?">,12>

E , Order 411 ?2@,@>> "",#2> =>> "#,>>> #",>>> ",A>> 0,>>> 0=,1>> ?">@,22> K #>> ? 21B.B2 ? B","2>

E , Order 415 "> ?",00#.2> ",=#>.>>

E , Order 411 #>> ?2B".0B2 21B.B2>

Cob order 1"> has an increase in reported unit cost of 0A.AJ P(?",=#> M ?",00#.2>) K ?",00#.2>Q, 'hile )ob order 1"" has a decrease in reported unit cost of 1."J P(?21B.B2 M ?2B".0B2) K ?2B".0B2Q. A common finding 'hen acti ity.based costing is implemented is that lo'. olume products ha e increases in their reported costs 'hile high. olume products ha e decreases in their reported cost. &his result is also found in re-uirements " and # of this problem. /osts such as materials. handling costs ary 'ith the number of parts handled (a function of batches and complexity of products) rather than 'ith direct manufacturing labor.hours, an output.unit le el cost dri er, 'hich 'as the only cost dri er in the pre ious )ob.costing system. &he product cost figures computed in re-uirements " and # differ because

a. b.

the )ob orders differ in the 'ay they use each of fi e acti ity areas, and the acti ity areas differ in their indirect cost allocation bases (specifically, each area does not use the direct manufacturing labor.hours indirect cost allocation base).

&he follo'ing table documents ho' the t'o )ob orders differ in the 'ay they use each of the fi e acti ity areas included in indirect manufacturing costs3 Usa&e 3ased n Anal1s%s ' Usa&e Ass("ed 8%#h $%rec# *an('2 Ac#%v%#1 Area C s# $r%vers La, r-H (rs as A!!l%ca#% n 3ase E , Order E , Order E , Order 415 E , Order Ac#%v%#1 Area 415 411 411 %aterials handling #>.>J =>.>J A.#2J @0.B2J Iathe 'ork #2.> B2.> A.#2 @0.B2 %illing "#.2 =B.2 A.#2 @0.B2 Grinding #>.> =>.> A.#2 @0.B2 &esting 1.= @2.# A.#2 @0.B2 &he differences in product cost figures might be important to &racy /orporation for product pricing and product emphasis decisions. &he acti ity.based accounting approach indicates that )ob order 1"> is being undercosted 'hile )ob order 1"" is being o ercosted. &racy /orporation may erroneously push )ob order 1"> and deemphasize )ob order 1"". %oreo er, by its actions, &racy /orporation may encourage a competitor to enter the market for )ob order 1"" and take market share a'ay from it. 1. a. Information from the A;/ system can also help &racy manage its business better in se eral 'ays. *roduct design. Product designers at &racy /orporation likely 'ill find the numbers in the acti ity.based costing approach more belie able and credible than those in the simple system. In a machine.paced manufacturing en ironment, it is unlikely that direct labor.hours 'ould be the ma)or cost dri er. Acti ity.based costing pro ides more credible signals to product designers about the 'ays the costs of a product can be reducedMMfor example, use fe'er parts, re-uire fe'er turns on the lathe, and reduce the number of machine.hours in the milling area. Cost management. &racy can reduce the cost of )obs both by making process impro ements that reduce the acti ities that need to be done to complete )obs and by reducing the costs of doing the acti ities. Cost planning+ A;/ pro ides a more refined model to forecast costs and to explain 'hy actual costs differ from budgeted costs.

b. c.

CHAPTER 1< PROCESS COSTING 1<-2 Process costing systems separate costs into cost categories according to the timing of 'hen costs are introduced into the process. !ften, only t'o cost classifications, direct materials and con ersion costs, are necessary. 4irect materials are fre-uently added at one point in time, often the start or the end of the process, and all con ersion costs are added at about the same time, but in a pattern different from direct materials costs.

1<-5tep "3 5tep #3 5tep 03 5tep 13 5tep 23 1<-/

&he fi e key steps in process costing follo'3 5ummarize the flo' of physical units of output. /ompute output in terms of e-ui alent units. 5ummarize total costs to account for. /ompute cost per e-ui alent unit. Assign total costs to units completed and to units in ending 'ork in process. &hree in entory methods associated 'ith process costing are3 <eighted a erage. $irst.in, first.out. 5tandard costing.

1<-1- %aterials are only one cost item. !ther items (often included in a con ersion costs pool) include labor, energy, and maintenance. If the costs of these items ary o er time, this ariability can cause a difference in cost of goods sold and in entory amounts 'hen the 'eighted.a erage or $I$! methods are used. A second factor is the amount of in entory on hand at the beginning or end of an accounting period. &he smaller the amount of production held in beginning or ending in entory relati e to the total number of units transferred out, the smaller the effect on operating income, cost of goods sold, or in entory amounts from the use of 'eighted.a erage or $I$! methods. 1<-1/ EI(%valen# (n%#s) Jer ,e&%nn%n& %nven# r12 ". 4irect materials cost per unit (?B2>,>>> K ">,>>>) /on ersion cost per unit (?B@=,>>> K ">,>>>) Assembly 4epartment cost per unit ? B2.>> B@.=> ?"21.=>

#a.

5olution 6xhibit "B."AA calculates the e-ui alent units of direct materials and con ersion costs in the Assembly 4epartment of Gihon, Inc. in $ebruary #>>@. 5olution 6xhibit "B."A; computes e-ui alent unit costs. #b. 4irect materials cost per unit /on ersion cost per unit Assembly 4epartment cost per unit 0. ? B2 =1 ?"2@

&he difference in the Assembly 4epartment cost per unit calculated in re-uirements " and # arises because the costs incurred in Canuary and $ebruary are the same but fe'er e-ui alent units of 'ork are done in $ebruary relati e to Canuary. In Canuary, all ">,>>> units introduced are fully completed resulting in ">,>>> e-ui alent units of 'ork done 'ith respect to direct materials and con ersion costs. In $ebruary, of the ">,>>> units introduced, ">,>>> e-ui alent units of 'ork is done 'ith respect to direct materials but only @,2>> e-ui alent units of 'ork is done 'ith respect to con ersion costs. &he Assembly 4epartment cost per unit is, therefore, higher.

5!IH&I!G 6R8I;I& "B."AA 5teps " and #3 5ummarize !utput in Physical Hnits and /ompute !utput in 6-ui alent HnitsO Assembly 4epartment of Gihon, Inc. for $ebruary #>>@. :S#e! 1; Ph1s%cal Un%#s > ">,>>> ">,>>> @,>>> ",>>> ">,>>> ">,>>> @,2>> :S#e! 2; EI(%valen# Un%#s $%rec# C nvers% n *a#er%als C s#s

4l 8 ' Pr d(c#% n <ork in process, beginning (gi en) 5tarted during current period (gi en) &o account for /ompleted and transferred out during current period <ork in process, endingS (gi en) ",>>> ">>JO ",>>> 2>J Accounted for <ork done in current period

@,>>> ",>>>

@,>>> 2>>

S4egree of completion in this department3 direct materials, ">>JO con ersion costs, 2>J. 5!IH&I!G 6R8I;I& "B."A; /ompute /ost per 6-ui alent Hnit, Assembly 4epartment of Gihon, Inc. for $ebruary #>>@. T #al Pr d(c#% n C s#s ?",21=,>>> $%rec# *a#er%als ?B2>,>>> ">,>>> ? B2 /on ersion C s#s ?B@=,>>> @,2>> ? =1

(S#e! 7) /osts added during $ebruary 4i ide by e-ui alent units of 'ork done in current period (5olution 6xhibit "B.lAA) /ost per e-ui alent unit 1<226 S#andard-c s#%n& "e#h d2 ".

5ince there 'as no additional 'ork needed on the beginning in entory 'ith respect to materials, the initial mulch must ha e been ">>J complete 'ith respect to materials. $or con ersion costs, the 'ork done to complete the opening in entory 'as 101,#2> K @A2,>>> F 12J. &herefore, the unfinished mulch in opening in entory must ha e been 22J complete 'ith respect to con ersion costs. It is clear that the ending <IP is also ">>J complete 'ith respect to direct materials (",="B,>>> K ",="B,>>>), and it is A>J (F ",>@>,#>> K ",="B,>>>) complete 'ith regard to con ersion costs. <e can first obtain the total standard costs per unit. &he number of units started and completed during August is =12,>>>, and a total cost of ?A,B"B,B2> is attached to them. &he per unit standard cost is therefore (?A,B"B,B2> K =12,>>>) F ?B.@2. If x and y represent the per unit cost for direct materials and con ersion costs, respecti ely, 'e therefore kno' that3 x L y F B.@2

#. 0.

<e also kno' that the ending in entory is costed at ?"#,"@#,>B> and contains ",="B,>>> e-ui alent units of materials and ",>@>,#>> e-ui alent units of con ersion costs. &his pro ides a second e-uation3 ",="B,>>> x L ",>@>,#>> y F "#,"@#,>B>. 5ol ing these e-uations re eals that the direct materials cost per unit, x, is ?1.=2, 'hile con ersion cost per unit, y, is ?0.">. 1. the

$inally, the opening <IP contained @A2,>>> e-ui alent units of materials and (@A2,>>>.101,#2>) F 20>,B2> e-ui alent units of con ersion costs. Applying the standard costs computed in step (0), the cost of the opening in entory must ha e been3 @A2,>>> E ?1.=2 L 20>,B2> E ?0."> F ?A,0#2,2B2.

1<-75 <eighted.a erage method. ". 5ince direct materials are added at the beginning of the assembly process, the units in this department must be ">>J complete 'ith respect to direct materials. 5olution 6xhibit "B.0>A sho's e-ui alent units of 'ork done to date3 #2,>>> e-ui alent units #1,#2> e-ui alent units

4irect materials /on ersion costs

#. D 0. 5olution 6xhibit "B.0>; summarizes the total Assembly 4epartment costs for !ctober #>>@, calculates cost per e-ui alent unit of 'ork done to date, and assigns these costs to units completed (and transferred out) and to units in ending 'ork in process using the 'eighted. a erage method. 5!IH&I!G 6R8I;I& "B.0>A 5teps " and #3 5ummarize !utput in Physical Hnits and /ompute !utput in 6-ui alent HnitsO <eighted. A erage %ethod of Process /osting, Assembly 4epartment of Iarsen /ompany, for !ctober #>>@. :S#e! 1; :S#e! 2; EI(%valen# Un%#s Ph1s%cal $%rec# C nvers% n 4l 8 ' Pr d(c#% n Un%#s *a#er%als C s#s <ork in process, beginning (gi en) 2,>>> 5tarted during current period (gi en) #>,>>> &o account for #2,>>> /ompleted and transferred out during current period ##,2>> ##,2>> ##,2>> <ork in process, endingS (gi en) #,2>> #,2>> ">>JO #,2>> B>J #,2>> ",B2> Accounted for #2,>>> <ork done to date #2,>>> #1,#2> S4egree of completion in this department3 direct materials, ">>JO con ersion costs, B>J.

5!IH&I!G 6R8I;I& "B.0>; 5teps 0, 1, and 23 5ummarize &otal /osts to Account $or, /ompute /ost per 6-ui alent Hnit, and Assign &otal /osts to Hnits /ompleted and to Hnits in 6nding <ork in ProcessO <eighted.A erage %ethod of Process /osting, Assembly 4epartment of Iarsen /ompany, for !ctober #>>@. T #al Pr d(c#% n C s#s ?",A2#,B2> A,=0B,2>> ?=,1@>,#2> $%rec# *a#er%als ?",#2>,>>> 1,2>>,>>> ?2,B2>,>>> ?2,B2>,>>> ? #2,>>> #0> C nvers% n C s#s ? 1>#,B2> #,00B,2>> ?#,B1>,#2> ?#,B1>,#2> ? #1,#2> ""0

:S#e! 7) <ork in process, beginning (gi en) /osts added in current period (gi en) &otal costs to account for (S#e! 4) /osts incurred to date 4i ide by e-ui alent units of 'ork done to date (5olution 6xhibit "B.0>A) /ost per e-ui alent unit of 'ork done to date

(S#e! -) Assignment of costs3 /ompleted and transferred out (##,2>> units) ?B,B"B,2>> (##,2>>S ?#0>) L (##,2>>S ?""0) <ork in process, ending (#,2>> units) BB#,B2> (#,2>>T ?#0>) L (",B2>T ?""0) &otal costs accounted for ?=,1@>,#2> ?A,"2>,>>> L ?#,A"@,>>>
S T

6-ui alent units completed and transferred out from 5olution 6xhibit "B.0>A, 5tep #. 6-ui alent units in 'ork in process, ending from 5olution 6xhibit "B.0>A, 5tep #.

1<-7- =e%&h#ed-avera&e "e#h d2 5olution 6xhibit "B.02A sho's e-ui alent units of 'ork done to date of3 4irect materials /on ersion costs A#2 e-ui alent units 2#2 e-ui alent units

Gote that direct materials are added 'hen the Assembly 4epartment process is ">J complete. ;oth the beginning and ending 'ork in process are more than ">J complete and hence are ">>J complete 'ith respect to direct materials. 5olution 6xhibit "B.02; summarizes the total Assembly 4epartment costs for April #>>@, calculates cost per e-ui alent unit of 'ork done to date for direct materials and con ersion costs, and assigns these costs to units completed (and transferred out), and to units in ending 'ork in process using the 'eighted.a erage method.

5!IH&I!G 6R8I;I& "B.02A 5teps " and #3 5ummarize !utput in Physical Hnits and /ompute !utput in 6-ui alent HnitsO <eighted.A erage %ethod of Process /osting, Assembly 4epartment of Porter 8andcraft for April #>>@. :S#e! 1; Ph1s%cal 4l 8 ' Pr d(c#% n <ork in process, beginning (gi en) 5tarted during current period (gi en) &o account for /ompleted and transferred out during current period <ork in process, endingS (gi en) "#2 ">>JO "#2 #>J Accounted for <ork done to date
S

:S#e! 2; 6-ui alent Hnits $%rec# Un%#s B2 22> A#2 2>> "#2 A#2 A#2 2#2 C nvers% n *a#er%als

C s#s

2>> "#2

2>> #2

4egree of completion in this department3 direct materials, ">>JO con ersion costs, #>J.

5!IH&I!G 6R8I;I& "B.02; 5teps 0, 1, and 23 5ummarize &otal /osts to Account $or, /ompute /ost per 6-ui alent Hnit, and Assign &otal /osts to Hnits /ompleted and to Hnits in 6nding <ork in ProcessO <eighted.A erage %ethod of Process /osting, Assembly 4epartment of Porter, April #>>@. T #al Pr d(c#% n C s#s ? ",@"> #=,1@> ?0>,1>> $%rec# *a#er%als ? ",BB2 "B,A>> ?"@,0B2 C nvers% n C s#s ? "02 ">,=@> ?"",>#2

:S#e! 7)

<ork in process, beginning (gi en)

/osts added in current period (gi en) &otal costs to account for

(S#e! 4)

/osts incurred to date

?"@,0B2 ? A#2 0"

?"",>#2 ? 2#2 #"

4i ide by e-ui alent units of 'ork done to date (5olution 6xhibit "B.02A) /ost per e-ui alent unit of 'ork done to date

(S#e! -) Assignment of costs3 /ompleted and transferred out (2>> units) <ork in process, ending ("#2 units) &otal costs accounted for
S T

?#A,>>> 1,1>> ?0>,1>>

(2>>S ?0") L (2>>S ?#") ("#2T ?0") L (#2T ?#") ?"@,0B2 L ?"",>#2

6-ui alent units completed and transferred out from 5olution 6xhibit "B.02A, 5tep #. 6-ui alent units in ending 'ork in process from 5olution 6xhibit "B.02A, 5tep #.

CHAPTER 1. SPOILAGE) RE=ORK) AN$ SCRAP 1.-2 5poilage,units of production that do not meet the standards re-uired by customers for good units and that are discarded or sold at reduced prices. 7e'ork,units of production that do not meet the specifications re-uired by customers but 'hich are subse-uently repaired and sold as good finished units. 5crap,residual material that results from manufacturing a product. It has lo' total sales alue compared to the total sales alue of the product.

1.-15 Go. If abnormal spoilage is detected at a different point in the production cycle than normal spoilage, then unit costs 'ould differ. If, ho'e er normal and abnormal spoilage are detected at the same point in the production cycle, their unit costs 'ould be the same. 1.-11 Go. 5poilage may be considered a normal characteristic of a gi en production cycle. &he costs of normal spoilage caused by a random malfunction of a machine 'ould be charged as a part of the manufacturing o erhead allocated to all )obs. Gormal spoilage attributable to a specific )ob is charged to that )ob. 1.-12 Go. Hnless there are special reasons for charging normal re'ork to )obs that contained the bad units, the costs of extra materials, labor, and so on are usually charged to manufacturing o erhead and allocated to all )obs. 1.-14 A company is )ustified in in entorying scrap 'hen its estimated net realizable alue is significant and the time bet'een storing it and selling or reusing it is -uite long. 1.-24 =e%&h#ed-avera&e "e#h d) s! %la&e2 ". 5olution 6xhibit "=.#1, Panel A, calculates the e-ui alent units of 'ork done to date for each cost category in 5eptember #>>=. #. 5olution 6xhibit "=.#1, Panel ;, summarizes total costs to account for, calculates the costs per e-ui alent unit for each cost category, and assigns total costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending 'ork in process using the 'eighted.a erage method.

5!IH&I!G 6R8I;I& "=.#1 <eighted.A erage %ethod of Process /osting 'ith 5poilageO /hipcity, 5eptember #>>=. PAG6I A3 5teps " and #,5ummarize !utput in Physical Hnits and /ompute !utput in 6-ui alent Hnits :S#e! 1; 4l 8 ' Pr d(c#% n <ork in process, beginning (gi en) 5tarted during current period (gi en) &o account for Good units completed and transferred out during current period3 Gormal spoilageS 0"2 ">>JO 0"2 ">>J Abnormal spoilageT #=2 ">>JO #=2 ">>J <ork in process, endingU (gi en) 12> ">>JO 12> 1>J Accounted for <ork done to date Ph1s%cal Un%#s A>> #,22> 0,"2> #,">> 0"2 #=2 #=2 12> 12> 0,"2> 0,"2> #,==> "=> #=2 :S#e! 2; EI(%valen# Un%#s $%rec# C nvers% n *a#er%als C s#s

#,">> 0"2

#,">> 0"2

SGormal spoilage is "2J of good units transferred out3 "2J #,">> F 0"2 units. 4egree of completion of normal spoilage in this department3 direct materials, ">>JO con ersion costs, ">>J. T &otal spoilage F A>> L #,22> M #,">> M 12> F A>> unitsO Abnormal spoilage F &otal spoilage Gormal spoilage F A>> 0"2 F #=2 units. 4egree of completion of abnormal spoilage in this department3 direct materials, ">>JO con ersion costs, ">>J. U 4egree of completion in this department3 direct materials, ">>JO con ersion costs, 1>J.

5!IH&I!G 6R8I;I& "=.#1 PANEL 3D S#e!s 7) 4) and -L S(""ar%Je T #al C s#s # Acc (n# 4 r) C "!(#e C s# !er EI(%valen# Un%#) and Ass%&n T #al C s#s # Un%#s C "!le#ed) # S! %led Un%#s) and # Un%#s %n End%n& = r+ %n Pr cess T #al Pr d(c#% n C s#s ?""",0>> B@B,1>> ?@>=,B>> $%rec# *a#er%als ? @A,>>> 2AB,>>> ?AA0,>>> ?AA0,>>> 0,"2> ?#">.1BA C nvers% n C s#s ? "2,0>> #0>,1>> ?#12,B>> ?#12,B>> #,==> ?=2.0"#2

:S#e! 7;

<ork in process, beginning (gi en) /osts added in current period (gi en) &otal costs to account for :S#e! 4; /osts incurred to date 4i ided by e-ui alent units of 'ork done to date /ost per e-ui alent unit Assignment of costs Good units completed and transferred out (#,">>

:S#e! -;

units) /osts before adding normal spoilage Gormal spoilage (0"2 units) (A) &otal cost of good units completed and transferred out (;) Abnormal spoilage (#=2 units) (/) <ork.in.process, ending (12> units)

?A#","2A @0,"B0 B"1,0#@ =1,0>> "">,>B"

(#,">>V?#">.1BA) L (#,">>V?=2.0"#2) (0"2V ?#">.1BA) L (0"2V ?=2.0"#2)

(#=2V ?#">.1BA) L (#=2V ?=2.0"#2) (12>V ?#">.1BA) L ("=>V ?=2.0"#2) (A)L(;)L(/) &otal costs accounted for ?@>=,B>> ?AA0,>>> ?#12,B>> V 6-ui alent units of direct materials and con ersion costs calculated in 5tep # in Panel A. 1.-2< S! %la&e and H , c s#%n&2 ". /ash Ioss from Abnormal 5poilage <ork.in.Process /ontrol Ioss F (?A.>> #>>) M ?#>> F ?",>>> #>> ",>>> ",#>>

7emaining cases cost F ?A.>> per case. &he cost of these cases is unaffected by the loss from abnormal spoilage.

#.

a. /ash <ork.in.Process /ontrol

1>> 1>>

&he cost of the remaining good cases F P(?A.>> #,2>>) M ?1>>Q F ?"1,A>> &he unit cost of a good case no' becomes ?"1,A>> #,0>> F ?A.01B= b./ash %anufacturing 4epartment ! erhead /ontrol <ork.in.Process /ontrol &he unit cost of a good case remains at ?A.>>. c. &he unit costs in #a and #b are different because in #a the normal spoilage cost is charged as a cost of the )ob 'hich has exacting )ob specifications. In #b ho'e er, normal spoilage is due to the production process, not the particular attributes of this specific )ob. &hese costs are, therefore, charged as part of manufacturing o erhead and the manufacturing o erhead cost of ?" per case already includes a pro ision for normal spoilage. a. <ork.in.Process /ontrol %aterials /ontrol, <ages Payable /ontrol, %anufacturing ! erhead Allocated &he cost of the good cases F P(?A.>> #,2>>) L ?#>>Q F ?"2,#>> &he unit cost of a good case is ?"2,#>> #,2>> F ?A.>= b.%anufacturing 4epartment ! erhead /ontrol %aterials /ontrol, <ages Payable /ontrol, %anufacturing ! erhead Allocated &he unit cost of a good case F ?A.>> per case c. #>> #>> #>> #>> 1>> =>> ",#>>

0.

&he unit costs in 0a and 0b are different because in 0a the normal re'ork cost is charged as a cost of the )ob 'hich has exacting )ob specifications. In 0b ho'e er, normal re'ork is due to the production process, not the particular attributes of this specific )ob. &hese costs are, therefore, charged as part of manufacturing o erhead and the manufacturing o erhead cost of ?" per case already includes a pro ision for this normal re'ork.

1.-72 =e%&h#ed-avera&e "e#h d) Pac+a&%n& $e!ar#"en# :c n#%n(a#% n ' 1.-75;2 $or the Packaging 4epartment, 5olution 6xhibit "=.0# summarizes total costs to account for, calculates the e-ui alent units of 'ork done to date for each cost category, and assigns costs to units completed (including normal spoilage), to abnormal spoilage, and to units in ending 'ork in process using the 'eighted.a erage method.

5!IH&I!G 6R8I;I& "=.0# <eighted.A erage %ethod of Process /osting 'ith 5poilageO Packaging 4epartment of the ;oston /ompany for %ay. PAG6I A3 5teps " and #,5ummarize !utput in Physical Hnits and /ompute !utput in 6-ui alent Hnits :S#e! 1; 4l 8 ' Pr d(c#% n <ork in process, beginning (gi en) 5tarted during current period (gi en) &o account for Good units completed and transferred out during current period3 Gormal spoilageS B2> ">>JO B2> ">>JO B2> ">>J Abnormal spoilageT #2> ">>JO #2> ">>J, #2> ">>J <ork in process, endingU (gi en) ">,>>> ">>JO ">,>>>>JO ">,>>>#2J Accounted for <ork done to date Ph1s%cal Un%#s B,2>> "=,2>> #A,>>> "2,>>> B2> #2> #2> ">,>>> ">,>>> #A,>>> #A,>>> > WWWWWW "A,>>> #,2>> WWWWW "=,2>> #2> #2> :S#e! 2; EI(%valen# Un%#s Trans'erred$%rec# C nvers% n %n C s#s *a#er%als C s#s

"2,>>> B2>

"2,>>> B2>

"2,>>> B2>

SGormal spoilage is 2J of good units transferred out3 2J "2,>>> F B2> units. 4egree of completion of normal spoilage in this department3 transferred.in costs, ">>JO direct materials, ">>JO con ersion costs, ">>J. T &otal spoilage FB,2>> L "=,2>> M "2,>>> M ">,>>> F ",>>> units. Abnormal spoilage F ",>>> M B2> F #2> units. 4egree of completion of abnormal spoilage in this department3 transferred.in costs, ">>JO direct materials, ">>JO con ersion costs, ">>J. U 4egree of completion in this department3 transferred.in costs, ">>JO direct materials, >JO con ersion costs, #2J.

5!IH&I!G 6R8I;I& "=.0# PANEL 3D S#e!s 7) 4) and -L S(""ar%Je T #al C s#s # Acc (n# 4 r) C "!(#e C s# !er EI(%valen# Un%#) and Ass%&n T #al C s#s # Un%#s C "!le#ed) # S! %led Un%#s) and # Un%#s %n End%n& = r+ %n Pr cess T #al Pr d(c#% Trans'erred$%rec# C nvers% n n %n c s#s *a#er%als C s#s C s#s ? > :S#e! 7; <ork in process, beginning (gi en) ?##,#2> ?"A,"#2 ",A>> ? A,"#2 /osts added in current period (gi en) 21,AB2 1>,B>>S ?",A>> "#,0B2 &otal costs to account for ?BA,@#2 ?2A,=#2 ?"=,2>> ",A>> :S#e! 4; /osts incurred to date 2A,=#2 "=,2>> "A,>>> 4i ided by e-ui alent units of 'ork done to #A,>>> "=,2>> ? >."> date ?#."=2A ? " /ost per e-ui alent unit :S#e! -; Assignment of costs Good units completed and transferred out ("2,>>> units) /osts before adding normal spoilage Gormal spoilage (B2> units) (A) &otal cost of good units completed and transferred out (;) Abnormal spoilage (#2> units) (/) <ork in process, ending (">,>>> units) (A)L(;)L(/)&otal costs accounted for

?1@,#=1 "2,>>>V (?#."=2A L ?>."> L ?") #,1A1 B2>V (?#."=2A L ?>."> L ?") 2",B1= =#" #2>V (?#."=2A L ?>."> L ?") #1,02A (">,>>>V ?#."=2A)L(>V ?>.">)L(#,2>>V ?BA,@#2 ?") ?2A,=#2 L ?",A>> L ?"=,2>>

S&otal costs of good units completed and transferred out in Panel ; (5tep 2) of 5olution 6xhibit "=.0>. V 6-ui alent units of direct materials and con ersion costs calculated in 5tep # in Panel A abo e.

CHAPTER / *ASTER 3U$GET AN$ RESPONSI3ILIT9 ACCOUNTING /-1 &he budgeting cycle includes the follo'ing elements3

a. b. c. d.

Planning the performance of the company as a 'hole as 'ell as planning the performance of its subunits. %anagement agrees on 'hat is expected. Pro iding a frame of reference, a set of specific expectations against 'hich actual results can be compared. In estigating ariations from plans. If necessary, correcti e action follo's in estigation. Planning again, in light of feedback and changed conditions.

/-4

<e agree that budgeted performance is a better criterion than past performance for )udging managers, because inefficiencies included in past results can be detected and eliminated in budgeting. Also, future conditions may be expected to differ from the past, and these can also be factored into budgets. Production and marketing traditionally ha e operated as relati ely independent business functions. ;udgets can assist in reducing conflicts bet'een these t'o functions in t'o 'ays. /onsider a be erage company such as /oca./ola or Pepsi./ola3 /ommunication. %arketing could share information about seasonal demand 'ith production. /oordination. Production could ensure that output is sufficient to meet, for example, high seasonal demand in the summer. &he steps in preparing an operating budget are as follo's3 Prepare the re enues budget Prepare the production budget (in units) Prepare the direct material usage budget and direct material purchases budget Prepare the direct manufacturing labor budget Prepare the manufacturing o erhead budget Prepare the ending in entories budget Prepare the cost of goods sold budget Prepare the nonmanufacturing costs budget Prepare the budgeted income statement &he choice of the type of responsibility center determines 'hat the manager is accountable for and thereby affects the manager(s beha ior. $or example, if a re enue center is chosen, the manager 'ill focus on re enues, not on costs or in estments. &he choice of a responsibility center type guides the ariables to be included in the budgeting exercise. Reven(es) !r d(c#% n) and !(rchases ,(d&e#2 @>>,>>> motorcycles 1>>,>>> yen F 0A>,>>>,>>>,>>> yen ;udgeted sales (motorcycles) Add target ending finished goods in entory &otal re-uirements 4educt beginning finished goods in entory Hnits to be produced 4irect materials to be used in production, ==>,>>> E # ('heels) Add target ending direct materials in entory &otal re-uirements @>>,>>> =>,>>> @=>,>>> ">>,>>> ==>,>>> ",BA>,>>> A>,>>> ",=#>,>>>

/-

/2.
". #. 0. 1. 2. A. B. =. @.

/-17

/-22 ". #.

0.

4educt beginning direct materials in entory 4irect materials to be purchased ('heels) /ost per 'heel in yen 4irect materials purchase cost in yen

2>,>>> ",BB>,>>> "A,>>> #=,0#>,>>>,>>>

Gote the relati ely small in entory of 'heels. In Capan, suppliers tend to be located ery close to the ma)or manufacturer. In entories are controlled by )ust.in.time and similar systems. Indeed, some direct materials in entories are almost nonexistent. /-77 ". Reven(e 3(d&e# 4 r #he * n#h ' A!r%l Un%#s Sell%n& Pr%ce T #al Reven(es 2>> ?"A> ? =>,>>> 0>> #2> B2,>>> ?"22,>>> Pr d(c#% n 3(d&e# 4 r #he * n#h ' A!r%l Pr d(c# Ca#-allac $ &-er%''%c 2>> 0>> 02 202 "2 2#> "2 0"2 0> #=2 C "!rehens%ve !r ,le" 8%#h A3C c s#%n&

/at.allac 4og.eriffic &otal #.

;udgeted unit sales Add target ending finished goods in entory &otal re-uired units 4educt beginning finished goods in entory Hnits of finished goods to be produced 0a.

$%rec# *a#er%al Usa&e 3(d&e# %n M(an#%#1 and $ llars 4 r #he * n#h ' A!r%l *a#er%al Plas#%c *e#al Ph1s%cal Un%#s 3(d&e# 4irect materials re-uired for /at.allac (2#> units E 1 lbs. and >.2 lb.) 4og.errific (#=2 units E A lbs. and " lb.) &otal -uantity of direct material to be used C s# 3(d&e# A ailable from beginning direct materials in entory (under a $I$! cost.flo' assumption) #,>=> lbs. ",B"> lbs. 0,B@> lbs. #A> lbs. #=2 lbs. 212 lbs. T #al

Plastic3 #2> lbs. E ?0.=> per lb. %etal3 A> lbs. E ?0 per lb. &o be purchased this period Plastic3 (0,B@> M #2>) lbs. ?1 per lb. %etal3 (212 M A>) lbs. ?0 per lb. 4irect materials to be used this period

? @2> ? "=> . "1,"A> WW WWWW ?"2,""> ",122 ? ",A02 ?"A,B12

$%rec# *a#er%al P(rchases 3(d&e# 4 r #he * n#h ' A!r%l *a#er%al Plas#%c *e#al Ph1s%cal Un%#s 3(d&e# &o be used in production (re-uirement 0) Add target ending in entory &otal re-uirements 4educt beginning in entory Purchases to be made C s# 3(d&e# Plastic3 0,@#> lbs. ?1 %etal3 21> lbs. ?0 Purchases 1. $%rec# *an('ac#(r%n& La, r C s#s 3(d&e# 4 r #he * n#h ' A!r%l O(#!(# Un%#s Pr d(ced :reI(%re"en# 2; 2#> #=2 $*LH !er Un%# 0 2 T #al H (rs ",2A> ",1#2 H (rl1 =a&e Ra#e ?"> "> 0,B@> lbs. 0=> lbs. 1,"B> lbs. #2> lbs. 0,@#> lbs. ?"2,A=> WWWWWW ?"2,A=> 212 lbs. 22 lbs. A>> lbs. A> lbs. 21> lbs.

T #al

? ",A#> ? ",A#>

? "B,0>>

/at.allac 4og.errific &otal

T #al ?"2,A>> "1,#2> ?#@,=2> T #al

2. *ach%ne Se#(! Overhead Hnits to be produced Hnits per batch Gumber of batches 5etup time per batch &otal setup time ;udgeted machine setup costs Pr cess%n& Overhead ;udgeted machine.hours (%8) ;udgeted processing costs Ins!ec#% n Overhead ;udgeted inspection.hours ;udgeted inspection costs Ca#-allac 2#> K #> #A ".2 hrs. 0@ hrs. $ &-err%'%c #=2 K"2 "@ ".B2 hrs. 00.#2 hrs.

B#.#2 hrs.

F ?">> per setup hour B#.#2 hours F ?B,##2 F ("> %8 per unit E 2#> units) L ("= %8 per unit E #=2 units) F 2,#>> %8 L 2,"0> %8 F ">,00> %8 F ?2 per %8 E ">,00> %8 F ?2",A2> F (>.2 #A batches) L (>.A "@ batches) F "0 L "".1 F #1.1 inspection hrs. F ?"A per inspection hr. #1.1 inspection hours F ?0@>.1>

*an('ac#(r%n& Overhead 3(d&e# 4 r #he * n#h ' A!r%l %achine setup costs ? B,##2 Processing costs 2",A2> Inspection costs 0@> &otal costs ?2@,#A2 A. Un%# C s#s ' End%n& 4%n%shed G A!r%l 75) 25@@ ds Inven# r1 Pr d(c# Ca#-allac $ &-err%'%c C s# !er In!(# !er In!(# !er Un%# ' Un%# ' In!(# O(#!(# T #al Un%# ' O(#!(# T #al Plastic ? 1 1 lbs. ? "A.>> A lbs. ? #1.>> %etal 0 >.2 lbs. ".2> " lb. 0.>> 4irect manufacturing labor "> 0 hrs. 0>.>> 2 hrs. 2>.>> %achine setup ">> >.>B2 hrs. " B.2> >.""AB hr" "".AB Processing 2 "> %8 2>.>> "= %8 @>.>> Inspection "A >.>#2 hr# >.1> >.>1 hr.# >.A1 &otal ?">2.1> ?"B@.0"
" #

0@ setup.hours K 2#> units F >.>B2 hours per unitO 00.#2 setup.hours K #=2 units F >.""AB hours per unit "0 inspection hours K 2#> units F >.>#2 hours per unitO "".1 inspection hours K #=2 units F >.>1 hours per unit End%n& Inven# r%es 3(d&e# A!r%l 75) 25@@ M(an#%#1 C s# !er (n%# 0=> 22 02 "2 ?1 0 ?">2.1> "B@.0" ?",2#> "A2 ?0,A=@ #,A@> T #al ?",A=2

4irect %aterials Plastic %etals $inished goods /at.allac 4og.errific &otal ending in entory B.

A,0B@ ?=,>A1

C s# ' G ds S ld 3(d&e# 4 r #he * n#h ' A!r%l) 25@@ ;eginning finished goods in entory, April, " (?",2>> L ?2,2=>) 4irect materials used (re-uirement 0) 4irect manufacturing labor (re-uirement 1) %anufacturing o erhead (re-uirement 2) /ost of goods manufactured /ost of goods a ailable for sale 4educt3 6nding finished goods in entory, April 0> (re-mt. A)

? B,>=> ?"A,B12 #@,=2> 2@,#A2 ">2,=A> ""#,@1> A,0B@

/ost of goods sold

?">A,2A"

=. N n"an('ac#(r%n& C s#s 3(d&e# 4 r #he * n#h ' A!r%l) 25@@ 5alaries (?0A,>>> K # ".>2) !ther fixed costs (?0A,>>> K #) 5ales commissions (?"22,>>> "J) &otal nonmanufacturing costs @. 3(d&e#ed Inc "e S#a#e"en# 4 r #he * n#h ' A!r%l) 25@@ 7e enues /ost of goods sold Gross margin !perating (nonmanufacturing) costs !perating income /-76 3(d&e#%n& and e#h%cs2 ". &he standards proposed by <ert are not challenging. In fact, he set the target at the le el his department currently achie es. 4% #.@2 lbs. ">> units F #@2 lbs. 4I "@.# min. ">> units F ",@#> min K A> F 0# hrs. %& @.@ min. ">> units F @@> min. K A> F "A.2 hrs. #. <ert probably chose these standards so that his department 'ould be able to make the goal and recei e any resulting re'ard. <ith a little effort, his department can likely beat these goals. 0. As discussed in the chapter, benchmarking might be used to highlight the easy targets set by <ert. Perhaps the organization has multiple plant locations that could be used as comparisons. Alternati ely, management could use industry a erages. Also, management should 'ork 'ith <ert to better understand his department and encourage him to set more realistic targets. $inally, the re'ard structure should be designed to encourage increasing producti ity, not beating the budget. ?"22,>>> ">A,2A" 1=,10@ 0=,12> ? @,@=@ ?"=,@>> "=,>>> ",22> ?0=,12>

CHAPTER < 4LENI3LE 3U$GETS) $IRECT-COST 0ARIANCES) AN$ *ANAGE*ENT CONTROL

<22

&'o sources of information about budgeted amounts are (a) past amounts and (b) detailed engineering studies.

<-< (i) (ii) (iii) (i ) <-11

$our reasons for using standard costs are3 cost management, pricing decisions, budgetary planning and control, and financial statement preparation. 9ariance analysis, by pro iding information about actual performance relati e to standards, can form the basis of continuous operational impro ement. &he underlying causes of unfa orable ariances are identified, and correcti e action taken 'here possible. $a orable ariances can also pro ide information if the organization can identify 'hy a fa orable ariance occurred. 5teps can often be taken to replicate those conditions more often. As the easier changes are made, and perhaps some standards tightened, the harder issues 'ill be re ealed for the organization to act on ,this is continuous impro ement. 6 idence on the costs of other companies is one input managers can use in setting the performance measure for next year. 8o'e er, caution should be taken before choosing such an amount as next yearXs performance measure. It is important to understand 'hy cost differences across companies exist and 'hether these differences can be eliminated. It is also important to examine 'hen planned changes (in, say, technology) next year make e en the current lo'.cost producer not a demanding enough hurdle. Pr%ce and e''%c%enc1 var%ances2 &he key information items are3 Ac#(al A>,=>> "A,>>> ? >.=# 3(d&e#ed A>,>>> "2,>>> ? >.=@

<217

<-21 ".

!utput units (scones) Input units (pounds of pumpkin) /ost per input unit

Peterson budgets to obtain 1 pumpkin scones from each pound of pumpkin. &he flexible.budget ariance is ?1>= $. Ac#(al Res(l#s :1; ?"0,"#>a 4le@%,le3(d&e# 0ar%ance :2; ? :1; A :7; ?1>= $ 4le@%,le 3(d&e# :7; ?"0,2#=b Sales-0 l("e 0ar%ance :4; ? :7; A :-; ?"B= H S#a#%c 3(d&e# :-; ?"0,02>c

Pumpkin costs
a b

"A,>>> E ?>.=# F ?"0,"#> A>,=>> E >.#2 E ?>.=@ F ?"0,2#= c A>,>>> E >.#2 E ?>.=@ F ?"0,02>

#. Ac#(al C s#s Inc(rred :Ac#(al In!(# M#12 F Ac#(al Pr%ce; ?"0,"#>a ?","#> $ Price ariance ?1>= $
a

Ac#(al In!(# M#12 F 3(d&e#ed Pr%ce ?"1,#1>b ?B"# H 6fficiency ariance

4le@%,le 3(d&e# :3(d&e#ed In!(# M#12 All 8ed ' r Ac#(al O(#!(# F 3(d&e#ed Pr%ce; ?"0,2#=c

$lexible.budget ariance "A,>>> E ?>.=# F ?"0,"#> b "A,>>> E ?>.=@ F ?"1,#1> c A>,=>> E >.#2 E ?>.=@ F ?"0,2#= 0. (a) (b) &he fa orable flexible.budget ariance of ?1>= has t'o offsetting components3 fa orable price ariance of ?","#>MMreflects the ?>.=# actual purchase cost being lo'er than the ?>.=@ budgeted purchase cost per pound. unfa orable efficiency ariance of ?B"#MMreflects the actual materials yield of 0.=> scones per pound of pumpkin (A>,=>> K "A,>>> F 0.=>) being less than the budgeted yield of 1.>> (A>,>>> K "2,>>> F 1.>>). &he company used more pumpkins (materials) to make the scones than 'as budgeted.

!ne explanation may be that Peterson purchased lo'er -uality pumpkins at a lo'er cost per pound. <-22 *a#er%als and "an('ac#(r%n& la, r var%ances2 Ac#(al C s#s Inc(rred :Ac#(al In!(# M#12 F Ac#(al Pr%ce; 4irect %aterials ?#>>,>>> 4le@%,le 3(d&e# :3(d&e#ed In!(# M#12 All 8ed ' r Ac#(al O(#!(# F 3(d&e#ed Pr%ce; ?##2,>>>

Ac#(al In!(# M#12 F 3(d&e#ed Pr%ce ?#"1,>>>

?"1,>>> $ Price ariance

?"",>>> $ 6fficiency ariance ?#2,>>> $ $lexible.budget ?@>,>>> ?=A,>>>

ariance ?=>,>>>

4irect %fg. Iabor Price ariance

?1,>>> H ?A,>>> H 6fficiency ariance ?">,>>> H $lexible.budget ariance

<-74 ".

*a#er%al c s# var%ances) (se ' var%ances ' r !er' r"ance eval(a#% n %aterials 9ariances Ac#(al C s#s Inc(rred :Ac#(al In!(# M#12 E Ac#(al Pr%ce; 4le@%,le 3(d&e# :3(d&e#ed In!(# M#12 All 8ed ' r Ac#(al O(#!(# E 3(d&e#ed Pr%ce; (2>> E = E ?#>) (1,>>> E ?#>) ?=>,>>>

4irect %aterials

(A,>>> E ?"=a) ?">=,>>>

Ac#(al In!(# M#12 E 3(d&e#ed Pr%ce Purchases Hsage (A,>>> E ?#>) (2,>>> E ?#>) ?"#>,>>> ?">>,>>> ?#>,>>> H 6fficiency ariance

?"#,>>> $ Price ariance

a

?">=,>>> K A,>>> F ?"= &he fa orable price ariance is due to the ?# difference (?#> . ?"=) bet'een the standard price based on the pre ious suppliers and the actual price paid through the on.line marketplace. &he unfa orable efficiency ariance could be due to se eral factors including inexperienced 'orkers and machine malfunctions. ;ut the likely cause here is that the lo'er.priced titanium 'as lo'er -uality or less refined, 'hich led to more 'aste. &he labor efficiency ariance could be affected if the lo'er -uality titanium caused the 'orkers to use more time. 5'itching suppliers 'as not a good idea. &he ?"#,>>> sa ings in the cost of titanium 'as out'eighed by the ?#>,>>> extra material usage. In addition, the ?#>,>>>H efficiency ariance does not recognize the total impact of the lo'er -uality titanium because, of the A,>>> pounds purchased, only 2,>>> pounds 'ere used. If the -uantity of materials used in production is relati ely the same, ;etter ;ikes could expect the remaining ",>>> lbs to produce ">> more units. At standard, ">> more units should take ">> E = F =>> lbs. &here could be an additional unfa orable efficiency ariance of (">>> ?#>) ?#>,>>> ?1,>>>H (">> E = E ?#>) ?"A,>>>

#.

0.

1.

&he purchasing manager(s performance e aluation should not be based solely on the price ariance. &he short.run reduction in purchase costs 'as more than offset by higher usage rates. 8is e aluation should be based on the total costs of the company as a 'hole. In addition, the production manager(s performance e aluation should not be based solely on the efficiency ariances. In this case, the production manager 'as not responsible for the purchase of the lo'er. -uality titanium, 'hich led to the unfa orable efficiency scores. In general, it is important for 5tanley to understand that not all fa orable material price ariances are *good ne's,+ because of the negati e effects that can arise in the production process from the purchase of inferior inputs. &hey can lead to unfa orable efficiency ariances for both materials and labor. 5tanley should also that understand efficiency ariances may arise for many different reasons and she needs to kno' these reasons before e aluating performance.

2.

9ariances should be used to help ;etter ;ikes understand 'hat led to the current set of financial results, as 'ell as ho' to perform better in the future. &hey are a 'ay to facilitate the continuous impro ement efforts of the company. 7ather than focusing solely on the price of titanium, 5cott can balance price and -uality in future purchase decisions. $uture problems can arise in the supply chain. 5cott may need to go back to the pre ious suppliers. ;ut ;etter ;ikes( relationship 'ith them may ha e been damaged and they may no' be selling all their a ailable titanium to other manufacturers. Io'er -uality bicycles could also affect ;etter ;ikes( reputation 'ith the distributors, the bike shops and customers, leading to higher 'arranty claims and customer dissatisfaction, and decreased sales in the future. $%rec# "a#er%als and "an('ac#(r%n& la, r var%ances) s lv%n& (n+n 8ns2 All gi en items are designated by an asterisk. Ac#(al C s#s Inc(rred :Ac#(al In!(# M#12 E Ac#(al Pr%ce; 4le@%,le 3(d&e# :3(d&e#ed In!(# M#12 All 8ed ' r Ac#(al O(#!(# E 3(d&e#ed Pr%ce; (1,>>>S E >.2S E ?#>S) ?1>,>>>

A.

<-7/

Ac#(al In!(# M#12 E 3(d&e#ed Pr%ce (",@>> E ?#>S) ?0=,>>> ?#,>>> $S 6fficiency ariance

4irect %anufacturing Iabor

(",@>> E ?#") ?0@,@>>

?",@>> HS Price ariance Purchases 4irect ("0,>>> E ?2.#2) %aterials ?A=,#2>S ?0,#2> HS Price ariance ". 1,>>> units E >.2 hours:unit F #,>>> hours

Hsage ("0,>>> E ?2S) ?A2,>>>

("#,2>> E ?2S) ?A#,2>> ?#,2>> HS

(1,>>>S E 0S E ?2S) ?A>,>>>

6fficiency ariance

#. $lexible budget M 6fficiency ariance F ?1>,>>> M ?#,>>> F ?0=,>>> Actual dir. manuf. labor hours F ?0=,>>> K ;udgeted price of ?#>:hour F ",@>> hours 0. ?0=,>>> L Price ariance, ?",@>> F ?0@,@>>, the actual direct manuf. labor cost Actual rate F Actual cost K Actual hours F ?0@,>>> K ",@>> hours F ?#":hour (rounded) 1. 5tandard -ty. of direct materials F 1,>>> units E 0 pounds:unit F "#,>>> pounds

2. $lexible budget L 4ir. matls. effcy. ar. F ?A>,>>> L ?#,2>> F ?A#,2>> Actual -uantity of dir. matls. used F ?A#,2>> K ;udgeted price per lb F ?A#,2>> K ?2:lb F "#,2>> lbs

A. Actual cost of direct materials, ?A=,#2> M Price ariance, ?0,#2> F ?A2,>>> Actual -ty. of direct materials purchased F ?A2,>>> K ;udgeted price, ?2:lb F "0,>>> lbs. B. Actual direct materials price F ?A=,#2> K "0,>>> lbs F ?2.#2 per lb. <-47 Pr%ce and e''%c%enc1 var%ances) !r ,le"s %n s#andard-se##%n&) ,ench"ar+%n&2

". ;udgeted direct materials input per shirt F A>> rolls K A,>>> shirtsF >."> roll of cloth ;udgeted direct manufacturing. labor.hours per shirt (",2>> hours K A,>>> shirts) F >.#2 hours ;udgeted direct materials cost (?0>,>>> K A>>) F ?2> per roll ;udgeted direct manufacturing labor cost per hour (?#B,>>> K ",2>>) F ?"= per hour Actual output achie ed F A,B0# shirts 4le@%,le 3(d&e# Ac#(al C s#s :3(d&e#ed In!(# Inc(rred M#12 All 8ed ' r :Ac#(al In!(# M#12 Ac#(al In!(# M#12 Ac#(al O(#!(# F Ac#(al Pr%ce; F 3(d&e#ed Pr%ce F 3(d&e#ed Pr%ce; 4irect (A"# E ?2>) (A,B0# E >."> E ?2>) %aterials ?0>,#@1 ?0>,A>> ?00,AA> ?0>A $ Price ariance 4irect %anufacturing Iabor ?0,>A> $ 6fficiency ariance (",20> E ?"=) ?#B,21> ?#,B21 $ 6fficiency ariance (A,B0# E >.#2 E ?"=) ?0>,#@1

?#B,A@0 ?"20 H Price ariance

#. Actions employees may ha e taken include3 (a) Adding steps that are not necessary in 'orking on a shirt. (b) &aking more time on each step than is necessary. (c) /reating problem situations so that the budgeted amount of a erage do'ntime 'ill be o erstated. (d) /reating defects in shirts so that the budgeted amount of a erage re'ork 'ill be o erstated. 6mployees may take these actions for se eral possible reasons. (a) &hey may be paid on a piece.rate basis 'ith incenti es for production le els abo e budget. (b) &hey may 'ant to create a relaxed 'ork atmosphere, and a less demanding standard can reduce stress. (c) &hey ha e a *them s. us+ mentality rather than a partnership perspecti e. (d) &hey may 'ant to gain all the benefits that ensue from superior performance ()ob security, 'age rate increases) 'ithout putting in the extra effort re-uired. &his beha ior is unethical if it is deliberately designed to undermine the credibility of the standards used at Ge' $ashions.

0.

If Corgenson does nothing about standard costs, his beha ior 'ill iolate the *5tandards of 6thical /onduct for Practitioners of %anagement Accounting.+ In particular, he 'ould iolate the (a) standards of competence, by not performing professional duties in accordance 'ith rele ant standardsO (b) standards of integrity, by passi ely sub erting the attainment of the organization(s ob)ecti e to control costsO and (c) standards of credibility, by not communicating information fairly and not disclosing all rele ant cost information. 1. Corgenson should discuss the situation 'ith $enton and point out that the standards are lax and that this practice is unethical. If $enton does not agree to change, Corgenson should escalate the issue up the hierarchy in order to effect change. If organizational change is not forthcoming, Corgenson should be prepared to resign rather than compromise his professional ethics.

2. %ain pros of using ;enchmarking /learing 8ouse information to compute ariances are3 (a) 8ighlights to Ge' $ashions in a direct 'ay ho' it may or may not be cost.competiti e. (b) Pro ides a *reality check+ to many internal positions about efficiency or effecti eness. %ain cons are3 (a) Ge' $ashions may not be comparable to companies in the database. (b) /ost data about other companies may not be reliable. (c) /ost of ;enchmarking /learing 8ouse reports.

CHAPTER . 4LENI3LE 3U$GETS) O0ERHEA$ COST 0ARIANCES) AN$ *ANAGE*ENT CONTROL .-4 ". #. 3. 4. .-< 5teps in de eloping a budgeted ariable.o erhead cost rate are3 /hoose the period to be used for the budget, 5elect the cost.allocation bases to use in allocating ariable o erhead costs to the output produced, Identify the ariable o erhead costs associated 'ith each cost.allocation base, and /ompute the rate per unit of each cost.allocation base used to allocate ariable o erhead costs to output produced. A direct materials efficiency ariance indicates 'hether more or less direct materials 'ere used than 'as budgeted for the actual output achie ed. A ariable manufacturing o erhead efficiency ariance indicates 'hether more or less of the chosen allocation base 'as used than 'as budgeted for the actual output achie ed. 5teps in de eloping a budgeted fixed.o erhead rate are /hoose the period to use for the budget, 5elect the cost.allocation base to use in allocating fixed o erhead costs to output produced, Identify the fixed.o erhead costs associated 'ith each cost.allocation base, and /ompute the rate per unit of each cost.allocation base used to allocate fixed o erhead costs to output produced.

.-. ". #. 0. 1.

.-12

A strong case can be made for 'riting off an unfa orable production. olume ariance to cost of goods sold. &he alternati e is prorating it among in entories and cost of goods sold, but this 'ould *penalize+ the units produced (and in in entory) for the cost of unused capacity, i.e., for the units not produced. ;ut, if 'e take the ie' that the denominator le el is a *soft+ number, i.e., it is only an estimate, and it is ne er expected to be reached exactly, then it makes more sense to prorate the production olume ariance,'hether fa orable or not,among the in entory stock and cost of goods sold. Prorating a fa orable ariance is also more conser ati e3 it results in a lo'er operating income than if the fa orable ariance had all been 'ritten off to cost of goods sold. $inally, prorating also dampens the efficacy of any steps taken by company management to manage operating income through manipulation of the production olume ariance. In sum, a production. olume ariance need not al'ays be 'ritten off to cost of goods sold.

.-17 &he four ariances are3 9ariable manufacturing o erhead costs spending ariance efficiency ariance $ixed manufacturing o erhead costs spending ariance production. olume ariance .-22 ". S#ra%&h#' r8ard 4-var%ance verhead anal1s%s2 &he budget for fixed manufacturing o erhead is 1,>>> units E A machine.hours E ?"2 machine. hours:unit F ?0A>,>>>.

An o er ie' of the 1. ariance analysis is3 4-0ar%ance Anal1s%s 9ariable %anufacturing ! erhead $ixed %anufacturing ! erhead S!end%n& 0ar%ance ?"B,=>> H E''%c%enc1 0ar%ance ?"A,>>> H Pr d(c#% n0 l("e 0ar%ance Ge er a 9ariance

?"0,>>> H

Ge er a 9ariance

?0A,>>> $

5olution 6xhibit =.## has details of these ariances. A detailed comparison of actual and flexible budgeted amounts is3 !utput units (auto parts) Allocation base (machine.hours) Allocation base per output unit 9ariable %!8 9ariable %!8 per hour $ixed %!8 $ixed %!8 per hour Ac#(al 1,1>> #=,1>> A.12b ?#12,>>> ?=.A0d ?0B0,>>> ?"0."0f 4le@%,le 3(d&e# 1,1>> #A,1>>a A.>> ?#"",#>>c ?=.>> ?0A>,>>>e M

1,1>> units E A.>> machine.hours:unit F #A,1>> machine.hours #=,1>> K 1,1>> F A.12 machine.hours per unit c 1,1>> units E A.>> machine.hours per unit E ?=.>> per machine.hour F ?#"",#>> d ?#12,>>> K #=,1>> F ?=.A0 e 1,>>> units E A.>> machine.hours per unit E ?"2 per machine.hour F ?0A>,>>> f ?0B0,>>> K #=,1>> F ?"0."0
b

#.

9ariable %anufacturing ! erhead /ontrol Accounts Payable /ontrol and other accounts <ork.in.Process /ontrol 9ariable %anufacturing ! erhead Allocated 9ariable %anufacturing ! erhead Allocated 9ariable %anufacturing ! erhead 5pending 9ariance 9ariable %anufacturing ! erhead 6fficiency 9ariance 9ariable %anufacturing ! erhead /ontrol $ixed %anufacturing ! erhead /ontrol <ages Payable /ontrol, Accumulated 4epreciation /ontrol, etc. <ork.in.Process /ontrol $ixed %anufacturing ! erhead Allocated $ixed %anufacturing ! erhead Allocated $ixed %anufacturing ! erhead 5pending 9ariance $ixed %anufacturing ! erhead Production.9olume 9ariance $ixed %anufacturing ! erhead /ontrol

#12,>>> #12,>>> #"",#>> #"",#>> #"",#>> "B,=>> "A,>>> #12,>>> 0B0,>>> 0B0,>>> 0@A,>>> 0@A,>>> 0@A,>>> "0,>>> 0A,>>> 0B0,>>>

0.

Indi idual fixed manufacturing o erhead items are not usually affected ery much by day.to.day control. Instead, they are controlled periodically through planning decisions and budgeting procedures that may sometimes ha e horizons co ering six months or a year (for example, management salaries) and sometimes co ering many years (for example, long.term leases and depreciation on plant and e-uipment). &he fixed o erhead spending ariance is caused by the actual realization of fixed costs differing from the budgeted amounts. 5ome fixed costs are kno'n because they are contractually specified, such as rent or insurance, although if the rental or insurance contract expires during the year, the fixed amount can change. !ther fixed costs are estimated, such as the cost of managerial salaries 'hich may depend on bonuses and other payments not kno'n at the beginning of the period. In this example, the spending ariance is unfa orable, so actual $!8 is greater than the budgeted amount of $!8. &he fixed o erhead production olume ariance is caused by production being o er or under expected capacity. You may be under capacity 'hen demand drops from expected le els, or if there are problems 'ith production. ! er capacity is usually dri en by fa orable demand shocks or a desire to increase in entories. &he fact that there is a fa orable olume ariance indicates that production exceeded the expected le el of output (1,1>> units actual relati e to a denominator le el of 1,>>> output units).

1.

SOLUTION ENHI3IT .-22 4le@%,le 3(d&e#D 3(d&e#ed In!(# All 8ed ' r Ac#(al O(#!(# F 3(d&e#ed Ra#e :7; (1,1>> E A E ?=) ?#"",#>> All ca#edD 3(d&e#ed In!(# All 8ed ' r Ac#(al O(#!(# E 3(d&e#ed Ra#e :4; (1,1>> E A E ?=) ?#"",#>>

Ac#(al C s#s Inc(rred :1; 9ariable %!8 ?#12,>>>

Ac#(al In!(# F 3(d&e#ed Ra#e :2; (#=,1>> E ?=) ?##B,#>>

$17,800 U

$16,000 U

Spending variance Efficiency variance Never a variance $33,800 U Flexible-budge variance $33,800 U Never a variance

Underall!ca ed variable !ver"ead #$! al variable !ver"ead variance% 4le@%,le 3(d&e#D 5ame ;udgeted 5ame ;udgeted Iump 5um Iump 5um :as %n S#a#%c 3(d&e#; :as %n S#a#%c 3(d&e#; Re&ardless ' Re&ardless ' O(#!(# Level O(#!(# Level :2; :7; (1,>>> E A E ?"2) (1,>>> E A E ?"2) ?0A>,>>> ?0A>,>>> All ca#edD 3(d&e#ed In!(# All 8ed ' r Ac#(al O(#!(# F 3(d&e#ed Ra#e :4; (1,1>> E A E ?"2) ?0@A,>>>

Ac#(al C s#s Inc(rred :1; $ixed %!8 ?0B0,>>>

$13,000 U Spending variance Never a variance

$36,000 F Production. olume ariance $36,000 F

$13,000 U

Flexible-budge variance $&3,000 FProduction. olume ariance 'verall!ca ed fixed !ver"ead #$! al fixed !ver"ead variance% .-26 ". C "!rehens%ve var%ance anal1s%s2 ;udgeted number of machine.hours planned can be calculated by multiplying the number of units planned (budgeted) by the number of machine.hours allocated per unit3 === units # machine.hours per unit F ",BBA machine.hours.

#.

;udgeted fixed %!8 costs per machine.hour can be computed by di iding the flexible budget amount for fixed %!8 ('hich is the same as the static budget) by the number of machine.hours planned (calculated in (a.))3 ?01=,>@A K ",BBA machine.hours F ?"@A.>> per machine.hour

0.

;udgeted ariable %!8 costs per machine.hour are calculated as budgeted ariable costs di ided by the budgeted number of machine.hours planned3 ?B",>1> K ",BBA machine.hours F ?1>.>> per machine.hour.

%!8

".

;udgeted number of machine.hours allo'ed for actual output achie ed can be calculated by di iding the flexible.budget amount for ariable %!8 by budgeted ariable %!8 costs per machine.hour3 ?BA,=>> K ?1>.>> per machine.hourF ",@#> machine.hours allo'ed

#.

&he actual number of output units is the budgeted number of machine.hours allo'ed for actual output achie ed di ided by the planned allocation rate of machine hours per unit3 ",@#> machine.hours K # machine.hours per unit F @A> units.

0.

&he actual number of machine.hours used per output unit is the actual number of machine hours used (gi en) di ided by the actual number of units manufactured3 ",=#1 machine.hours K @A> units F ".@ machine.hours used per output unit.

.-7/ ".

Ac#%v%#1-,ased c s#%n&) ,a#ch-level var%ance anal1s%s 5tatic budget number of crates F ;udgeted pairs shipped : ;udgeted pairs per crate F #1>,>>>:"# F #>,>>> crates $lexible budget number of crates F Actual pairs shipped : ;udgeted pairs per crate F "=>,>>>:"# F "2,>>> crates Actual number of crates shipped F Actual pairs shipped : Actual pairs per box F "=>,>>>:"> F "=,>>> crates 5tatic budget number of hours F 5tatic budget number of crates E budgeted hours per box F #>,>>> E ".# F #1,>>> hours $ixed o erhead rate F 5tatic budget fixed o erhead : static budget number of hours F A>,>>>:#1,>>> F ?#.2> per hour

#.

0.

1.

2.

9ariable ! erhead 9ariance Analysis for 7ica(s $leet $eet Inc. for #>>= Ac#(al 0ar%a,le Overhead ("=,>>> E "." E ?#") ?1"2,=>> Ac#(al h (rs @ 3(d&e#ed ra#e ("=,>>> E "." E ?#>) ?0@A,>>> 3(d&e#ed h (rs all 8ed ' r Ac#(al (#!(# @ 3(d&e#ed ra#e ("2,>>> E ".# E ?#>) ?0A>,>>>

?"@,=>> H S!end%n& var%ance A.

?0A,>>> H E''%c%enc1 var%ance

$ixed ! erhead 9ariance Analysis for 7ica(s $leet $eet Inc. for #>>= Ac#(al 4%@ed Overhead ?22,>>> ?2,>>> $ S!end%n& var%ance S#a#%c 3(d&e# 4%@ed Overhead ?A>,>>> 3(d&e#ed h (rs all 8ed ' r Ac#(al (#!(# F 3(d&e#ed Ra#e ("2,>>> E ".# E?#.2) ?12,>>>

?"2,>>> H Pr d(c#% n v l("e var%ance

.-47 ".

Overhead var%ances) e#h%cs2 a. &otal budgeted o erhead ;udgeted ariable o erhead (?"> budgeted rate per machine.hour E #,2>>,>>> budgeted machine.hours) ;udgeted fixed o erhead ?0",#2>,>>>

#2,>>>,>>> ? A,#2>,>>>

=
;udgeted fixed !8 rate ,2

?A,#2>,>>> budgeted amount F ?#.2> per machine.hour #,2>>,>>> budgeted machine.hours

4%@ed verhead s!end%n& var%ance ? Ac#(al c s#s %nc(rred A 3(d&e#ed a" (n#2 3eca(se '%@ed verhead s!end%n& var%ance %s (n'av ra,le) #he a" (n# ' ac#(al c s#s %s h%&her #han #he ,(d&e#ed a" (n#2 F ?A,#2>,>>> L ?",2>>,>>> F ?B,B2>,>>>

Actual cost

c.

Production. olume ariance F ;udgeted fixed o erhead M

F F F

?A,#2>,>>> M (?#.2> per machine.hour E # machine.hours per unit S E ",#12,>>> units) ?A,#2>,>>> M ?A,##2,>>> ?#2,>>> H

;udgeted ariable o erhead per unit F ?#> ;udgeted ariable o erhead rate F ?"> per machine.hour &herefore, budgeted machine hours allo'ed per unit F ?#>:?"> F # machine.hours

#. 9ariable o erhead spending ariance3

Actual ariable ;udgeted ariable o erhead cost M o erhead cost per unit of cost per unit of allocation base cost.allocation base
Actual -uantity of ariable o erhead cost.allocation base used for actual output

?#2,#>>,>>> budget amount = ?"> per machine.hour #, 1>>, >>> machine.hours #,1>>,>>> actual machine.hours
F F (?">.2> M ?">) E #,1>>,>>> ?",#>>,>>> H

9ariable o erhead efficiency ariance3 Actual units of ariable o erhead cost.allocation base used for actual output F F F 0. ;udgeted units of ariable o erhead cost.allocation base allo'ed for actual output ;udgeted ariable o erhead rate

(#,1>>,>>> M (# E ",#12,>>>)) E ?"> (#,1>>,>>> M #,1@>,>>>) E ?"> ?@>>,>>> $ ;y manipulating, 7emich has created a sizable unfa orable fixed o erhead spending ariance or, at least, has increased its magnitude. Cack 7emich(s action is clearly unethical. 9ariances dra' attention to the areas that need management attention. If the top management relies on 7emich, due to his expertise, to interpret and explain the reasons for the unfa orable ariance, it is likely that his report 'ill be biased and misleading to the top management. &he top management may erroneously conclude that %onroe is not able to manage his fixed o erhead costs effecti ely. Another probable ad erse outcome of 7emich(s actions 'ill be that %onroe 'ill ha e e en less confidence in the usefulness of accounting reports. &his, of course, defeats the purpose of preparing the reports. In summary, 7emich(s unethical actions 'ill 'aste top management(s time and may lead to 'rong decisions