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Chương 1
2-1 Managers carry out three major activities in an organization: planning, directing and motivating, and
controlling. Planning involves establishing a basic strategy, selecting a course of action, and specifying how
the action will be implemented. Directing and motivating involves mobilizing people to carry out plans and
run routine operations. Controlling involves ensuring that the plan is actually carried out and is
appropriately modified as circumstances change.
2-2 The planning and control cycle involves formulating plans, implementing plans, measuring
performance, and evaluating differences between planned and actual performance.
2-3 In contrast to financial accounting, managerial accounting: (1) focuses on the needs of managers
rather than outsiders; (2) emphasizes decisions affecting the future rather than the financial consequences
of past actions; (3) emphasizes relevance rather than objectivity and verifiability; (4) emphasizes timeliness
rather than precision; (5) emphasizes the segments of an organization rather than summary data
concerning the entire organization; (6) is not governed by GAAP; and (7) is not mandatory.
2-4 The three major elements of product costs in a manufacturing company are direct materials, direct
labor, and manufacturing overhead.
2-5
a. Direct materials are an integral part of a finished product and their costs can be conveniently
traced to it.
b. Indirect materials are generally small items of material such as glue and nails. They may be an
integral part of a finished product but their costs can be traced to the product only at great cost or
inconvenience.
c. Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is
also called “touch labor.”
d. Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other
factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to
support production, but the workers involved do not directly work on the product.
e. Manufacturing overhead includes all manufacturing costs except direct materials and direct labor.
Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other
manufacturing costs.
2-6 A product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured
goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a
cost that is taken directly to the income statement as an expense in the period in which it is incurred.
2-7 The income statement of a manufacturing company differs from the income statement of a
merchandising company in the cost of goods sold section. A merchandising company sells finished goods
that it has purchased from a supplier. These goods are listed as “purchases” in the cost of goods sold
section. Because a manufacturing company produces its goods rather than buying them from a supplier, it
lists “cost of goods manufactured” in place of “purchases.” Also, the manufacturing company identifies its
inventory in this section as Finished Goods inventory, rather than as Merchandise Inventory.
2-8 The schedule of cost of goods manufactured lists the manufacturing costs that have been incurred
during the period. These costs are organized under the three categories of direct materials, direct labor,
and manufacturing overhead. The total costs incurred are adjusted for any change in the Work in Process
inventory to determine the cost of goods manufactured (i.e. finished) during the period.
The schedule of cost of goods manufactured ties into the income statement through the cost of goods
sold section. The cost of goods manufactured is added to the beginning Finished Goods inventory to
determine the goods available for sale. In effect, the cost of goods manufactured takes the place of the
Purchases account in a merchandising firm.
2-9 A manufacturing company usually has three inventory accounts: Raw Materials, Work in Process, and
Finished Goods. A merchandising company may have a single inventory account—Merchandise Inventory.
2-10 Product costs are assigned to units as they are processed and hence are included in inventories. The
flow is from direct materials, direct labor, and manufacturing overhead to Work in Process inventory. As
goods are completed, their cost is removed from Work in Process inventory and transferred to Finished
Goods inventory. As goods are sold, their cost is removed from Finished Goods inventory and transferred to
Cost of Goods Sold. Cost of Goods Sold is an expense on the income statement.
2-11 Yes, costs such as salaries and depreciation can end up as part of assets on the balance sheet if they
are manufacturing costs. Manufacturing costs are inventoried until the associated finished goods are sold.
Thus, if some units are still in inventory, such costs may be part of either Work in Process inventory or
Finished Goods inventory at the end of the period.
2-12 No. A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity.
The variable cost per unit is constant. A fixed cost is fixed in total, but the average cost per unit changes
with the level of activity.
2-13 A differential cost is a cost that differs between alternatives in a decision. An opportunity cost is the
potential benefit that is given up when one alternative is selected over another. A sunk cost is a cost that
has already been incurred and cannot be altered by any decision taken now or in the future.
2-14 No, differential costs can be either variable or fixed. For example, the alternatives might consist of
purchasing one machine rather than another to make a product. The difference between the fixed costs of
purchasing the two machines is a differential cost.
Chương 2
3-1 By definition, manufacturing overhead consists of costs that cannot be practically traced to jobs.
Therefore, if these costs are to be assigned to jobs, they must be allocated rather than traced.
3-2 Job-order costing is used in situations where many different products or services are produced each
period. Process costing is used in situations where a single, homogeneous product, such as cement, bricks,
or gasoline, is produced for long periods.
3-3 The job cost sheet is used to record all costs that are assigned to a particular job. These costs include
DM costs traced to the job, DL costs traced to the job, and MOH costs applied to the job. When a job is
completed, the job cost sheet is used to compute the unit product cost.
3-4 A predetermined overhead rate is used to apply overhead cost to jobs. It is computed before a period
begins by dividing the period’s estimated total manufacturing overhead by the period’s estimated total
amount of the allocation base. Thereafter, overhead cost is applied to jobs by multiplying the POHR by the
actual amount of the allocation base that is recorded for each job.
3-5 A sales order is issued after an agreement has been reached with a customer on quantities, prices, and
shipment dates for goods. The sales order forms the basis for the production order. The production order
specifies what is to be produced and forms the basis for the job cost sheet. The job cost sheet, in turn, is
used to summarize the various production costs incurred to complete the job. These costs are entered on
the job cost sheet from materials requisition forms, direct labor time tickets, and by applying overhead.
3-6 Some production costs such as a factory manager’s salary cannot be traced to a particular product or
job, but rather are incurred as a result of overall production activities. In addition, some production costs
such as indirect materials cannot be easily traced to jobs. If these costs are to be assigned to products,
they must be allocated to the products.
3-7 If actual manufacturing overhead cost is applied to jobs, the company must wait until the end of the
accounting period to apply overhead and to cost jobs. If the company computes actual overhead rates
more frequently to get around this problem, the rates may fluctuate widely due to seasonal factors or
variations in output. For this reason, most companies use predetermined overhead rates to apply
manufacturing overhead costs to jobs.
3-8 The measure of activity used as the allocation base should drive the overhead cost; that is, the
allocation base should cause the overhead cost. If the allocation base does not really cause the overhead,
then costs will be incorrectly attributed to products and jobs and product costs will be distorted.
3-9 Assigning manufacturing overhead costs to jobs does not ensure a profit. The units produced may not
be sold and if they are sold, they may not be sold at prices sufficient to cover all costs. It is a myth that
assigning costs to products or jobs ensures that those costs will be recovered. Costs are recovered only by
selling to customers—not by allocating costs.
3-10 The Manufacturing Overhead account is credited when overhead cost is applied to Work in Process.
Generally, the amount of overhead applied will not be the same as the amount of actual cost incurred
because the predetermined overhead rate is based on estimates.
3-11 Underapplied overhead occurs when the actual overhead cost exceeds the amount of overhead cost
applied to Work in Process inventory during the period. Overapplied overhead occurs when the actual
overhead cost is less than the amount of overhead cost applied to Work in Process inventory during the
period. Underapplied or overapplied overhead is disposed of by either closing out the amount to Cost of
Goods Sold or by allocating the amount among Cost of Goods Sold and ending inventories in proportion to
the applied overhead in each account. The adjustment for underapplied overhead increases Cost of Goods
Sold (and inventories) whereas the adjustment for overapplied overhead decreases Cost of Goods Sold
(and inventories).
3-12 Manufacturing overhead may be underapplied for several reasons. Control over overhead spending
may be poor. Or, some of the overhead may be fixed and the actual amount of the allocation base may be
less than estimated at the beginning of the period. In this situation, the amount of overhead applied to
inventory will be less than the actual overhead cost incurred.
3-13 Underapplied overhead implies that not enough overhead was assigned to jobs during the period and
therefore cost of goods sold was understated. Therefore, underapplied overhead is added to cost of goods
sold. On the other hand, overapplied overhead is deducted from cost of goods sold.
3-14 A plantwide overhead rate is a single overhead rate used throughout a plant. In a multiple overhead
rate system, each production department may have its own predetermine overhead rate and its own
allocation base. Some companies use multiple overhead rates rather than plantwide rates to more
appropriately allocate overhead costs among products. Multiple overhead rates should be used, for
example, in situations where one department is machine intensive and another department is labor
intensive.
3-15 When automated equipment replaces direct labor, overhead increases and direct labor decreases.
This results in an increase in the predetermined overhead rate—particularly if it is based on direct labor
Chương 3
3-1 The most common methods of assigning overhead costs to products are plantwide overhead rates, departmental
overhead rates, and activity-based costing.
3-2 The last few decades have witnessed dramatic changes that have made conventional costing systems obsolete in
many organizations. Automation has decreased the amount of direct labor, overhead costs have increased, and
companies now handle many more products that differ substantially in volume, lot size, and complexity. The
assumption, implicit in conventional costing systems, that overhead cost is proportional to direct labor, is being
increasingly questioned. Activity-based costing is an attempt to more accurately assign overhead costs to products
based on the activities required to make products and the resources consumed by those activities.
3-3 The departmental approach to assigning overhead cost to products usually relies on some measure of volume as
an assignment base. This approach assumes that overhead costs are proportional to volume. However, overhead
costs are often driven by other factors, including the number of batches run and product complexity, that are only
loosely related, if at all, to volume. Activity-based costing attempts to more accurately assign overhead costs to
products based on the activities that they cause rather than just on the number of units produced or direct laborhours required.
3-4 The hierarchical levels are:
1. Unit-level activities, which are performed each time a unit is produced.
2. Batch-level activities, which are performed each time a batch of goods is handled or processed.
3. Product-level activities, which are performed as needed to support specific products.
4. Facility-level activities, which sustain an organization’s general capabilities.
3-5 Activity-based costing involves two stages of overhead cost assignments. In the first stage, costs are assigned to
activity cost pools. In the second stage, costs are allocated from the activity cost pools to products.
3-6 In a conventional costing system, overhead costs are allocated to products using some measure of volume such
as direct labor-hours or machine-hours. Consequently, the high-volume products, which have the largest amount of
direct labor-hours or machine-hours, are allocated most of the overhead cost. In activity-based costing, some of the
overhead costs are typically allocated using batch-level or product-level allocation bases. For example, if each product
is allocated a total of $10,000 in product-level cost irrespective of its volume, then a high-volume product will be
allocated exactly the same total overhead as a low-volume product. In contrast, if a measure of volume like direct
labor-hours or machine-hours were used to allocate this cost, the high-volume product would be allocated a larger
total sum than the low-volume product.
3-7 Activity-based costing improves the accuracy of product costs in three ways. First, activity-based costing
increases the number of cost pools used to accumulate overhead costs. Rather than accumulating all overhead costs
in a single, plantwide pool, or accumulating them in departmental pools, costs are accumulated for each major
activity. Second, the activity cost pools are more homogeneous than departmental cost pools. In principle, all of the
costs in an activity cost pool pertain to a single activity. In contrast, departmental cost pools contain the costs of
many different activities carried out in the department. Third, activity-based costing changes the bases used to assign
overhead costs to products. Rather than assigning costs on the basis of direct labor or some other measure of
volume, costs are assigned on the basis of activity measures that gauge how much of the overhead resource has been
consumed by a particular activity.
3-8 While the product costs computed using activity-based costing are almost certainly more accurate than those
computed using more conventional costing methods, activity-based costing nevertheless rests on some questionable
assumptions about cost behavior. In particular, activity-based costing assumes that costs are proportional to activity.
In reality, costs appear to increase less than in proportion to increases in activity. This implies that activity-based
product costs will be overstated for purposes of making decisions. (The same criticism can be leveled at conventional
product costs.) Second, the costs of implementing and maintaining an activity-based costing system can be high and
the benefits may not justify this cost.
Chương 4
4-1 A process costing system should be used in situations where a homogeneous product is produced on a
continuous basis.
4-2 Job-order and processing costing are similar in the following ways:
1. Job-order costing and process costing have the same basic purposes—to assign materials, labor, and overhead
cost to products and to provide a mechanism for computing unit product costs.
2. Both systems use the same basic manufacturing accounts.
3. Costs flow through the accounts in basically the same way in both systems.
4-3 Cost accumulation is simpler under process costing because costs only need to be assigned to departments—
not individual jobs. A company usually has a small number of processing departments, whereas a job-order costing
system often must keep track of the costs of hundreds or even thousands of jobs.
4-4 In a process costing system, a Work in Process account is maintained for each processing department.
4-5 The journal entry to record the transfer of work in process from the Mixing Department to the Firing
Department is:
Work in Process, Firing
XXXX
Work in Process, Mixing
XXXX
4-6 The costs that might be added in the Firing Department include: (1) costs transferred in from the Mixing
Department; (2) materials costs added in the Firing Department; (3) labor costs added in the Firing Department; and
(4) overhead costs added in the Firing Department.
4-7 Under the weighted-average method, equivalent units of production consist of units transferred to the next
department (or to finished goods) during the period plus the equivalent units in the department’s ending work in
process inventory.
4-8 The company will want to distinguish between the costs of the metals used to make the medallions, but the
medals are otherwise identical and go through the same production processes. Thus, operation costing is ideally
suited for the company’s needs.
Chương 5
5-1
a. Variable cost: A variable cost remains con-stant on a per unit basis, but changes in total in direct relation to
changes in volume.
b. Fixed cost: A fixed cost remains constant in total amount. The average fixed cost per unit varies inversely with
changes in volume.
c. Mixed cost: A mixed cost contains both vari-able and fixed cost elements.
5-2
a. Unit fixed costs decrease as volume increas-es.
b. Unit variable costs remain constant as vol-ume increases.
c. Total fixed costs remain constant as volume increases.
d. Total variable costs increase as volume in-creases.
5-3
a. Cost behavior: Cost behavior refers to the way in which costs change in response to changes in a measure of
activity such as sales volume, production volume, or orders processed.
b. Relevant range: The relevant range is the range of activity within which assumptions about variable and fixed
cost behavior are valid.
5-4 An activity base is a measure of what-ever causes the incurrence of a variable cost. Examples of activity bases
include units produced, units sold, letters typed, beds in a hospital, meals served in a cafe, service calls made, etc.
5-5
a. Variable cost: A variable cost remains con-stant on a per unit basis, but increases or decreases in total in direct
relation to changes in activity.
b. Mixed cost: A mixed cost is a cost that con-tains both variable and fixed cost elements.
c. Step-variable cost: A step-variable cost is a cost that is incurred in large chunks, and which increases or
decreases only in re-sponse to fairly wide changes in activity.
5-6 The linear assumption is reasonably valid providing that the cost formula is used only within the relevant range.
5-7 A discretionary fixed cost has a fairly short planning horizon—usually a year. Such costs arise from annual
decisions by management to spend on certain fixed cost items, such as advertising, research, and management development. A committed fixed cost has a long planning horizon—generally many years. Such costs relate to a
company’s investment in facili-ties, equipment, and basic organization. Once such costs have been incurred, they are
“locked in” for many years.
5-8
a. Committed
d.
Committed
b. Discretionary
e.
Committed
c. Discretionary
f.
Discretionary
5-9 Yes. As the anticipated level of activity changes, the level of fixed costs needed to sup-port operations may also
change. Most fixed costs are adjusted upward and downward in large steps, rather than being absolutely fixed at one
level for all ranges of activity.
5-10 The high-low method uses only two points to determine a cost formula. These two points are likely to be less
than typical since they represent extremes of activity.
5-11 The formula for a mixed cost is Y = a + bX. In cost analysis, the “a” term represents the fixed cost, and the “b”
term represents the vari-able cost per unit of activity.
5-12 The term “least-squares regression” means that the sum of the squares of the devia-tions from the plotted
points on a graph to the regression line is smaller than could be obtained from any other line that could be fitted to
the data.
5-13 Ordinary single least-squares regression analysis is used when a variable cost is a function of only a single factor.
If a cost is a function of more than one factor, multiple regression analysis should be used to analyze the behavior of
the cost.
5-14 The contribution approach income statement organizes costs by behavior, first de-ducting variable expenses to
obtain contribution margin, and then deducting fixed expenses to obtain net operating income. The traditional approach organizes costs by function, such as pro-duction, selling, and administration. Within a functional area, fixed
and variable costs are in-termingled.
5-15 The contribution margin is total sales revenue less total variable expenses
Chương 6
6-1 The contribution margin (CM) ratio is the ratio of the total contribution margin to total sales revenue. It can be
used in a variety of ways. For example, the change in total contribution margin from a given change in total sales
revenue can be estimated by multiplying the change in total sales revenue by the CM ratio. If fixed costs do not
change, then a dollar increase in contribution margin results in a dollar increase in net operating income. The CM
ratio can also be used in target profit and break-even analysis.
6-2 Incremental analysis focuses on the changes in revenues and costs that will result from a particular action.
6-3 All other things equal, Company B, with its higher fixed costs and lower variable costs, will have a higher
contribution margin ratio than Company A. Therefore, it will tend to realize a larger increase in contribution margin
and in profits when sales increase.
6-4 Operating leverage measures the impact on net operating income of a given percentage change in sales. The
degree of operating leverage at a given level of sales is computed by dividing the contribution margin at that level of
sales by the net operating income at that level of sales.
6-5 The break-even point is the level of sales at which profits are zero.
6-6 (a) If the selling price decreased, then the total revenue line would rise less steeply, and the break-even point
would occur at a higher unit volume. (b) If the fixed cost increased, then both the fixed cost line and the total cost
line would shift upward and the breakeven point would occur at a higher unit volume. (c) If the variable cost
increased, then the total cost line would rise more steeply and the breakeven point would occur at a higher unit
volume.
6-7 The margin of safety is the excess of budgeted (or actual) sales over the break-even volume of sales. It states the
amount by which sales can drop before losses begin to be incurred.
6-8 The sales mix is the relative proportions in which a company’s products are sold. The usual assumption in costvolume-profit analysis is that the sales mix will not change.
6-9 A higher break-even point and a lower net operating income could result if the sales mix shifted from high
contribution margin products to low contribution margin products. Such a shift would cause the average contribution
margin ratio in the company to decline, resulting in less total contribution margin for a given amount of sales. Thus,
net operating income would decline. With a lower contribution margin ratio, the break-even point would be higher
because more sales would be required to cover the same amount of fixed costs.
Chapter 7
7-1 A budget is a detailed quantitative plan for the acquisition and use of financial and other resources over a given
time period. Budgetary control involves using budgets to increase the likelihood that all parts of an organization are
working together to achieve the goals set down in the planning stage.
7-2 1. Budgets communicate management’s plans throughout the organization. 2. Budgets force managers to think
about and plan for the future. In the absence of the necessity to prepare a budget, many managers would spend all
of their time dealing with dayto-day emergencies. 3. The budgeting process provides a means of allocating resources
to those parts of the organization where they can be used most effectively. 4. The budgeting process can uncover
potential bottlenecks before they occur. 5. Budgets coordinate the activities of the entire organization by integrating
the plans of its various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same
direction. 6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent
performance.
7-3 Responsibility accounting is a system in which a manager is held responsible for those items of revenues and
costs—and only those items—that the manager can control to a significant extent. Each line item in the budget is
made the responsibility of a manager who is then held responsible for differences between budgeted and actual
results.
7-4 A master budget represents a summary of all of management’s plans and goals for the
future, and outlines the way in which these plans are to be accomplished. The master budget is composed of a
number of smaller, specific budgets encompassing sales, production, raw materials, direct labor, manufacturing
overhead, selling and administrative expenses, and inventories. The master budget usually also contains a budgeted
income statement, budgeted balance sheet, and cash budget.
7-5 The level of sales impacts virtually every other aspect of the firm’s activities. It determines the production
budget, cash collections, cash disbursements, and selling and administrative budget that in turn determine the cash
budget and budgeted income statement and balance sheet.
7-6 No. Planning and control are different, although related, concepts. Planning involves developing goals and
developing budgets to achieve those goals. Control, by contrast, involves the means by which management attempts
to ensure that the goals set down at the planning stage are attained
7-7 The flow of budgeting information moves in two directions—upward and downward. The initial flow
should be from the bottom of the organization upward. Each person having responsibility over revenues or
costs should prepare the budget data against which his or her subsequent performance will be measured.
As the budget data are communicated upward, higher-level managers should review the budgets for
consistency with the overall goals of the organization and the plans of other units in the organization. Any
issues should be resolved in discussions between the individuals who prepared the budgets and their
managers.
All levels of an organization should participate in the budgeting process—not just top management or the
accounting department. Generally, the lower levels will be more familiar with detailed, day-to-day operating
data, and for this reason will have primary responsibility for developing the specifics in the budget. Top
levels of management should have a better perspective concerning the company's strategy.
7-8 A self-imposed budget is one in which persons with responsibility over cost control prepare their own budgets.
This is in contrast to a budget that is imposed from above. The major advantages of a self-imposed budget are: (1)
Individuals at all levels of the organization are recognized as members of the team whose views and judgments are
valued. (2) Budget estimates prepared by front-line managers are often more accurate and reliable than estimates
prepared by top managers who have less intimate knowledge of markets and day-to-day operations. (3) Motivation
is generally higher when individuals participate in setting their own goals than when the goals are imposed from
above. Self-imposed budgets create commitment. (4) A manager who is not able to meet a budget that has been
imposed from above can always say that the budget was unrealistic and impossible to meet. With a selfimposed
budget, this excuse is not available. Self-imposed budgets do carry with them the risk of budgetary slack. The
budgets prepared by lower-level managers should be carefully reviewed to prevent too much slack.
7-9 The direct labor budget and other budgets can be used to forecast workforce staffing needs. Careful planning can
help a company avoid erratic hiring and laying off of employees.
7-10 The principal purpose of the cash budget is NOT to see how much cash the company will have in the bank at the
end of the year. Although this is one of the purposes of the cash budget, the principal purpose is to provide
information on probable cash needs during the budget period, so that bank loans and other sources of financing can
be anticipated and arranged well in advance.
Chapter 8
10-1 The planning budget is prepared for the planned level of activity. It is static because it is not adjusted even if the
level of activity subsequently changes.
10-2 A flexible budget can be adjusted to reflect any level of activity—including the actual level of activity. By
contrast, a static planning budget is prepared for a single level of activity and is not subsequently adjusted.
10-3 Actual results can differ from the budget for many reasons. Very broadly speaking, the differences are usually
due to a change in the level of activity, changes in prices, and changes in how effectively resources are managed.
10-4 As noted above, a difference between the budget and actual results can be due to many factors. Most
importantly, the level of activity can have a very big impact on costs. From a manager’s perspective, a variance that is
due to a change in activity is very different from a variance that is due to changes in prices and changes in how
effectively resources are managed. A variance of the first kind requires very different actions from a variance of the
second kind. Consequently, these two kinds of variances should be clearly separated from each other. When the
budget is directly compared to the actual results, these two kinds of variances are lumped together.
10-5 An activity variance is the difference between a revenue or cost item in the static planning budget and the same
item in the flexible budget. An activity variance is due solely to the difference in the level of activity assumed in the
planning budget and the actual level of activity used in the flexible budget. Caution should be exercised in
interpreting an activity variance. The “favorable” and “unfavorable” labels are perhaps misleading for activity
variances that involve costs. A “favorable” activity variance for a cost occurs because the cost has some variable
component and the actual level of activity is less than the planned level of activity. An “unfavorable” activity variance
for a cost occurs because the cost has some variable component and the actual level of activity is greater than the
planned level of activity.
10-6 A revenue variance is the difference between how much the revenue should have been, given the actual level of
activity, and the actual revenue for the period. A revenue variance is easy to interpret. A favorable revenue variance
occurs because the revenue is greater than expected for the actual level of activity. An unfavorable revenue variance
occurs because the revenue is less than expected for the actual level of activity.
10-7 A spending variance is the difference between how much a cost should have been, given the actual level of
activity, and the actual amount of the cost. Like the revenue variance, the interpretation of a spending variance is
straight-forward. A favorable spending variance occurs because the cost is lower than expected for the actual level of
activity. An unfavorable spending variance occurs because the cost is higher than expected for the actual level of
activity.
10-8 In a flexible budget performance report, the static planning budget is not directly compared to actual results.
The flexible budget is interposed between the static planning budget and actual results. The differences between the
static planning budget and the flexible budget are activity variances. The differences between the flexible budget and
the actual results are the revenue and spending variances. The flexible budget performance report cleanly separates
the differences between the static planning budget and the actual results that are due to changes in activity (the
activity variances) from the differences that are due to changes in prices and the effectiveness with which resources
are managed (the revenue and spending variances).
10-9 The only difference between a flexible budget based on a single cost driver and one based on two cost drivers is
the cost formulas. When there are two cost drivers, some costs may be a function of the first cost driver, some costs
may be a function of the second cost driver, and some costs may be a function of both cost drivers.
10-10 When the static planning budget is directly compared to actual results, it is implicitly assumed that costs (and
revenues) should not change with a change in the level of activity. This assumption is valid only for fixed costs.
However, it is unlikely that all costs are fixed. Some are likely to be variable or mixed.
10-11 When the static planning budget is adjusted proportionately for a change in activity and then directly
compared to actual results, it is implicitly assumed that costs should change in proportion to a change in the level of
activity. This assumption is valid only for strictly variable costs. However, it is unlikely that all costs are strictly
variable. Some are likely to be fixed or mixed.
Chapter 9
1. A quantity standard is the amount of materials that should be used in the production of a single unit. Price
standard is the price that should be paid for materials at a given level of activity
2.
3.
4.Separating price and quantity variances gives insight into what causes variances to be favorable or unfavorable,
and is a tool useful for seeing if costs were too high or if too much material was used.
5.The materials price variance is usually the responsibility of the purchasing manager. The materials quantity and
labor efficiency variances are usually the responsibility of production managers and supervisors.
6.The materials price variance can be computed either when materials are purchased or when they are
placed into production. It is usually better to compute the variance when materials are purchased because
that is when the purchasing manager, who has responsibility for this variance, has completed his or her
work. In addition, recognizing the price variance when materials are purchased allows the company to carry
its raw materials in the inventory accounts at standard cost, which greatly simplifies bookkeeping.
7.This combination of variances may indicate that inferior quality materials were purchased at a discounted price,
but the low-quality materials created production problems
8.If standards are used to find who to blame for problems, they can breed resentment and undermine morale.
Standards should not be used to find someone to blame for problems
9. Several factors other than the contractual rate paid to workers can cause a labor rate variance. For
example, skilled workers with high hourly rates of pay can be given duties that require little skill and that call
for low hourly rates of pay, resulting in an unfavorable rate variance. Or unskilled or untrained workers can
be assigned to tasks that should be filled by more skilled workers with higher rates of pay, resulting in a
favorable rate variance. Unfavorable rate variances can also arise from overtime work at premium rates
10. If poor quality materials create production problems, a result could be excessive labor time and therefore an
unfavorable labor efficiency variance. Poor quality materials would not ordinarily affect the labor rate variance.
11.If overhead is applied on the basis of direct labor-hours, then the variable overhead efficiency variance
and the direct labor efficiency variance will always be favorable or unfavorable together. Both variances are
computed by comparing the number of direct labor-hours actually worked to the standard hours allowed.
That is, in each case the formula is:
Efficiency variance = SR(AH - SH)
Only the "SR" part of the formula, the standard rate, differs between the two variances
12.
13. If labor is a fixed cost and standards are tight, then the only way to generate favorable labor efficiency
variances is for every workstation to produce at capacity. However, the output of the entire system is limited
by the capacity of the bottleneck. If workstations before the bottleneck in the production process produce at
capacity, the bottleneck will be unable to process all of the work in process. In general, if every workstation
is attempting to produce at capacity, then work in process inventory will build up in front of the workstations
with the least capacity
Chapter 10
12-1 In a decentralized organization, decision-making authority isn’t confined to a few top executives, but rather is
spread throughout the organization with lower-level managers and other employees empowered to make decisions.
12-2 The benefits of decentralization include: (1) by delegating day-to-day problem solving to lower-level managers,
top management can concentrate on bigger issues such as overall strategy; (2) empowering lower-level managers to
make decisions puts decision-making authority in the hands of those who tend to have the most detailed and up-todate information about day-to-day operations; (3) by eliminating layers of decision-making and approvals,
organizations can respond more quickly to customers and to changes in the operating environment; (4) granting
decision-making authority helps train lower-level managers for higher-level positions; and (5) empowering lowerlevel managers to make decisions can increase their motivation and job satisfaction.
12-3 The manager of a cost center has control over cost, but not revenue or the use of investment funds. A profit
center manager has control over both cost and revenue. An investment center manager has control over
cost and revenue and the use of investment funds.
12-4 A segment is any part or activity of an organization about which a manager seeks cost, revenue, or profit data.
Examples of segments include departments, operations, sales territories, divisions, and product lines.
12-5 Under the contribution approach, costs are assigned to a segment if and only if the costs are traceable to the
segment (i.e., could be avoided if the segment were eliminated). Common costs are not allocated to segments under
the contribution approach.
12-6 A traceable cost of a segment is a cost that arises specifically because of the existence of that segment. If the
segment were eliminated, the cost would disappear. A common cost, by contrast, is a cost that supports more than
one segment, but is not traceable in whole or in part to any one of the segments. If the departments of a company
are treated as segments, then examples of the traceable costs of a department would include the salary of the
department’s supervisor, depreciation of machines used exclusively by the department, and the costs of supplies
used by the department. Examples of common costs would include the salary of the general counsel of the entire
company, the lease cost of the headquarters building, corporate image advertising, and periodic depreciation of
machines shared by several departments.
12-7 The contribution margin is the difference between sales revenue and variable expenses. The segment margin is
the amount remaining after deducting traceable fixed expenses from the contribution margin. The contribution
margin is useful as a planning tool for many decisions, particularly those in which fixed costs don’t change. The
segment margin is useful in assessing the overall profitability of a segment.
12-8 If common costs were allocated to segments, then the costs of segments would be overstated and their margins
would be understated. As a consequence, some segments may appear to be unprofitable and managers may be
tempted to eliminate them. If a segment were eliminated because of the existence of arbitrarily allocated common
costs, the overall profit of the company would decline and the common cost that had been allocated to the segment
would be reallocated to the remaining segments—making them appear less profitable.
12-9 There are often limits to how far down an organization a cost can be traced. Therefore, costs that are traceable
to a segment may become common as that segment is divided into smaller segment units. For example, the costs of
national TV and print advertising might be traceable to a specific product line, but be a common cost of the
geographic sales territories in which that product line is sold.
12-10 Margin refers to the ratio of net operating income to total sales. Turnover refers to the ratio of total sales to
average operating assets. The product of the two numbers is the ROI.
12-11 Residual income is the net operating income an investment center earns above the company’s minimum
required rate of return on operating assets.
12-12 If ROI is used to evaluate performance, a manager of an investment center may reject a profitable investment
opportunity whose rate of return exceeds the company’s required rate of return but whose rate of return is less than
the investment center’s current ROI. The residual income approach overcomes this problem because any project
whose rate of return exceeds the company’s minimum required rate of return will result in an increase in residual
income.
12-13 A company’s balanced scorecard should be derived from and support its strategy. Because different
companies have different strategies, their balanced scorecards should be different.
12-14 The balanced scorecard is constructed to support the company’s strategy, which is a theory about what
actions will further the company’s goals. Assuming that the company has financial goals, measures of financial
performance must be included in the balanced scorecard as a check on the reality of the theory. If the internal
business processes improve, but the financial outcomes do not improve, the theory may be flawed and the strategy
should be changed.
Chapter 11
13-1 A relevant cost is a cost that differs in total between the alternatives in a decision.
13-2 An incremental cost (or benefit) is the change in cost (or benefit) that will result from some proposed action. An
opportunity cost is the benefit that is lost or sacrificed when rejecting some course of action. A sunk cost is a cost
that has already been incurred and that cannot be changed by any future decision.
13-3 No. Variable costs are relevant costs only if they differ in total between the alternatives under consideration.
13-4 No. Not all fixed costs are sunk—only those for which the cost has already been irrevocably incurred. A variable
cost can be a sunk cost, if it has already been incurred.
13-5 No. A variable cost is a cost that varies in total amount in direct proportion to changes in the level of activity. A
differential cost is the difference in cost between two alternatives. If the level of activity is the same for the two
alternatives, a variable cost will not be affected and it will be irrelevant.
13-6 No. Only those future costs that differ between the alternatives under consideration are relevant.
13-7 Only those costs that would be avoided as a result of dropping the product line are relevant in the decision.
Costs that will not differ regardless of whether the product line is retained or discontinued are irrelevant
13-8 Not necessarily. An apparent loss may be the result of allocated common costs or of sunk costs that cannot be
avoided if the product line is dropped. A product line should be discontinued only if the contribution margin that will
be lost as a result of dropping the line is less than the fixed costs that would be avoided. Even in that situation the
product line may be retained if it promotes the sale of other products.
13-9 Allocations of common fixed costs can make a product line (or other segment) appear to be unprofitable,
whereas in fact it may be profitable.
13-10 If a company decides to make a part internally rather than to buy it from an outside supplier, then a portion of
the company’s facilities have to be used to make the part. The company’s opportunity cost is measured by the
benefits that could be derived from the best alternative use of the facilities
13-11 Any resource that is required to make products and get them into the hands of customers could be a
constraint. Some examples are machine time, direct labor time, floor space, raw materials, investment capital,
supervisory time, and storage space. While not covered in the text, constraints can also be intangible and often take
the form of a formal or informal policy that prevents the organization from furthering its goals
13-12 Assuming that fixed costs are not affected, profits are maximized when the total contribution margin is
maximized. A company can maximize its total contribution margin by focusing on the products with the greatest
amount of contribution margin per unit of the constrained resource.
13-13 Most costs of a flight are either sunk costs, or costs that do not depend on the number of passengers on the
flight. Depreciation of the aircraft, salaries of personnel on the ground and in the air, and fuel costs, for example, are
the same whether the flight is full or almost empty. Therefore, adding more passengers at reduced fares at certain
times of the week when seats would otherwise be empty does little to increase the total costs of operating the flight,
but increases the total contribution and total profit
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