Solution manual cost accounting by carter 14e ch17

Responsibility accounting is a program encompassing all operating management for which the accounting, cost, or budget divisions provide technical assistance in the form of daily, weekly

Q17-1 Responsibility accounting is a program

encompassing all operating management for

which the accounting, cost, or budget divisions

provide technical assistance in the form of

daily, weekly, or monthly control reports The

objective of responsibility accounting is to

pro-vide management with a useful cost control

tool To be effective as a control mechanism,

the responsibility accounting system records

and reports costs incurred as a result of each

activity to the individual in the company who is

responsible for controlling the activity.

Q17-2 The emphasis of responsibility accounting is

on internal cost control rather than on

deter-mining product cost This requires a shift in

emphasis from determining the cost of

resources used in manufacturing a product to

determining the amount of control individual

managers have over cost Responsibility

accounting determines the cost incurred by

an activity or group of activities, rather than

the cost incurred to produce a product.

Q17-3 Controllable costs are those that are incurred

as the result of, or for the benefit of, a

busi-ness activity Presumably, such a cost will

increase or decrease as a result of the level of

efficiency with which the activity that

gener-ates the cost is conducted or managed To be

effective, responsibility accounting must hold

a manager responsible for only those costs

that he or she can control.

Q17-4 The organization must be arranged so that

there are no overlapping lines of

responsibil-ity (i.e., no more than one individual should be

responsible for each activity) In addition,

each individual in the organization must have

a clear understanding of his or her

responsi-bilities, and must have sufficient authority to

take the actions necessary to meet those

responsibilities.

Q17-5 The cost of any expenditure classification is

composed of two elements: the unit price and

the quantity of the items used One individual

may have control of price while another

individual has control of quantity Even in

cases where price does not change, the

quan-tity used may not be fully controllable by the individual who oversees the activity that con- sumes the item The quality of the item may affect the quantity used and the quality may be determined by the purchaser, or the efficiency with which the item is used may be affected by decisions made at the executive management level (e.g., personnel changes and machinery acquisitions) Since the accountant cannot always determine absolute control, costs should be assigned on the basis of relative control, and variances should be viewed as questions rather than as answers.

Q17-6 Opinion is divided on this subject Some

believe that for the most effective overhead control, department heads should be charged only for those costs that they incur If they are charged with uncontrollable costs, they could spend significant amounts of time trying to control cost that they have no ability to con- trol, or they may become frustrated and give

up trying to control any costs On the other hand, some believe that department heads should appreciate the fact that many auxiliary costs must be incurred to support their activi- ties; therefore, they should be charged with a fair share of such costs, clearly labeled as uncontrollable.

Q17-7 Total costs of service department overhead

are included in overhead rates in order to charge jobs and products with all overhead incurred in their production Actual service department costs are controlled if they are accumulated in service department accounts where they can be assigned to service department managers If service department costs are charged directly to producing departments, such costs become an indirect, noncontrollable item of the departments receiving the charges.

Q17-8 Service department costs should be charged

to user departments by predetermined billing rates rather than by allocating actual cost at the end of the period The use of predeter- mined rates makes it possible to determine service department efficiency through the

computation of spending and idle capacity

variances In addition, user department

effi-ciency can be evaluated more effectively by

eliminating noncontrollable costs from service

department charges This is particularly

important where user departments have

some control over the amount of the services

used In such cases, users should be held

accountable for their use of services, but the

rates for pricing those services should be

known by the users in advance.

Q17-9 (a) No The charge is an arbitrary allocation

of cost It cannot be influenced directly by

actions of the division management.

(b) Yes and no The amount of computer

service used is within the control of the

division management However, the cost

per unit of service varies with the

effi-ciency of the computer facility and the

amount of use by other divisions.

Consequently, the charge is only partly

controllable by division management.

(c) Yes The charge for goods purchased

from another division is controllable by

the division management, provided that

the quantity of goods purchased is

con-trollable by the division management and

that the price is an externally established

market price.

Q17-10.(a) The higher electric power costs may be

the result of any one or combination of

(3) the acquisition of expensive new capacity, and/or

(4) increased production of electricity required to meet user demand.

(b) To the extent that any inefficiencies exist in

the power department, the current

allo-cation scheme will pass them on to the

user departments With the kind of

allo-cation used by Emmons Company, it is not

possible to determine what caused the

cost increase A better system of handling

this department’s cost would be to charge

user departments for actual usage on the

basis of a predetermined variable rate, and

for available usage on the basis of the

power department’s ability to provide

serv-ice at maximum capacity Budgeted fixed

cost should be allocated on the basis of ability to provide service, because the Electric Power Department cannot control actual usage This approach would make

it possible to compute spending ances for the Electric Power Department, which are useful in evaluating the depart- ment’s operating efficiency.

vari-Q17-11.(a) Higher total cost incurred by the

Maintenance Department (i.e., increases

in the prices and/or quantities of the various items of cost in the Maintenance Department), fewer total hours of maintenance service provided to all user departments during the period, or a combination of both could result in a higher actual maintenance cost per hour However, such increases in costs should remain in the Maintenance Department and not be charged to the users.

(b) An improved method for distributing Maintenance Department cost would be

to establish a predetermined rate to be charged for each hour of maintenance service provided to users The rate would

be established annually by dividing the budgeted hours of service to be per- formed during the period into budgeted Maintenance Department cost for the same period Using this predetermined rate, each user department’s maintenance cost would depend on the number of hours

of service it received By using the termined rate, the actual cost could be compared with total charges made to users and the difference decomposed into spending and idle capacity variances for the Maintenance Department These vari- ances are useful in evaluating the effi- ciency of Maintenance Department activity.

prede-A further refinement would be to require the Maintenance Department to submit estimates of cost to users before providing services This would not only give the department receiving the service some idea of the cost of the work, but would also restrain the Maintenance Department from spending too much time

on a job.

Q17-12.The flexible budget (a) provides the monthly

budget allowance regardless of the fluctuating monthly volume of production; (b) permits not having to estimate the operating activity of a month in advance of the period for which the

budget is prepared; and (c) recognizes the

fixed and variable nature of costs, which leads

to easy adjustments when evaluating actual

performance.

Q17-13.A spending variance is the difference between

actual cost and the budget allowance (i.e., the

budgeted amount adjusted for the actual level

of activity experienced) It is caused by

differ-ences between the prices and the quantities of

the various items of cost budgeted and actually

incurred To the extent that a manager has

con-trol over either price or quantity, or both, the

manager has control over the amount of the

spending variance However, if the manager

does not have control over both prices and

quantities, the manager has only limited

con-trol over the amount of the spending variance.

Nevertheless, since a manager may have

some control over spending variances, they

are used to evaluate efficiency in responsibility

reporting.

Q17-14.To aid management in evaluating and

control-ling cost, a spending variance for each item or

classification of cost should be reported to

responsible management each period.

Itemized variances tell responsible

manage-ment which item was inefficiently used This

detailed information pinpoints where the

search to identify causes should begin.

Q17-15.An idle capacity variance is the amount of

or underapplied budgeted fixed factory

over-head In responsibility reporting, it is used as a

measure of capacity utilization To the extent

that management can control capacity

utiliza-tion, the idle capacity variance can be

con-trolled However, the amount of capacity

utilized is often a function of forces outside the

control of individual department supervisors.

Q17-16.The two primary purposes of responsibility

reports are:

(a) To motivate individuals to achieve a high

level of performance by reporting

effi-ciencies and ineffieffi-ciencies to responsible

managers and their superiors.

(b) To provide information that will help

responsible managers identify

inefficien-cies so that they can more efficiently

con-trol costs.

Q17-17.Dysfunctional behaviors that can result from

the practice of evaluating managerial

perfor-mance rather than evaluating activities follow:

(a) Managers tend to take actions that are

self serving rather than beneficial to the

company as a whole

(b) Managers concentrate on meeting the budget rather than on obtaining the best level of performance that can be achieved The use of budgets tends to thwart continuous improvement.

(c) Since budgets are based on current ations, managers tend to focus their attention on short-run targets and ignore the long-term needs of the business (d) Managers who are unable to subvert the system sufficiently to get acceptable eval- uations, but who are otherwise competent and efficient, become frustrated, do not get promoted, and often leave the company Q17-18.Responsibility accounting and reporting

oper-should not be abandoned despite the fact that its use in evaluating the performance of man- agers results in dysfunctional behavior To overcome the problem of dysfunctional behavior, responsibility reports should be used to evaluate the performance of business activities, not managers Managers should be evaluated on the basis of multiple activities of which cost control is only one Managers should be encouraged to experiment with new approaches, to improve product quality, to enlist the cooperation of their department workers in improving output, to cooperate with other departments, and to work for the long-term success of the company Using responsibility reports as an aid in evaluating the efficiency of business activities, instead of managers, takes pressure off managers to defend their actions as they relate to cost, and makes it possible for them to pursue other desirable business activities.

Q17-19.Some problems that limit the usefulness of

control data reported to managers in a sibility accounting and reporting system are: (a) Most responsibility accounting and reporting systems improperly base allow- able budgets on volume-based measures

respon-of activity that have little to do with cost incurrence (e.g., labor hours, machine hours, etc.) If nonvolume measures (e.g., machine setups, retooling, moving or storing parts or product, etc.) are major cost drivers, activity based costing should

be used as the basis for budgeting and preparing variance reports.

(b) Control data available in a responsibility reporting system are too aggregated to

be useful This criticism stems from an attempt to use responsibility reports for

operating control Even itemized variance

reports may not be sufficient to solve this

problem.

(c) Control data available to managers are

financial and not easily interpreted by

operating level managers, who are not

trained in accounting and finance The

accounting staff should provide

assis-tance, when practical, in training

operat-ing personnel in the use of financial

reports In addition, nonfinancial

mea-sures that can be easily understood by

operating managers should be reported

along with financial data, when practical.

(d) Control data available to managers are

not timely enough to be useful This

criti-cism stems from an attempt to use

finan-cial based responsibility reports for

day-to-day operating control More

fre-quent reporting will not likely solve this

problem, because it still takes days or

weeks to collect the necessary data and

prepare financial reports A better solution

is to use statistical process control and other operating control systems for day-to- day operating control, and to use periodic financial reports to evaluate the financial effectiveness of the business systems and the process control systems used in mon- itoring activity.

Q17-20.Despite the fact that nonfinancial measures of

operating performance are more easily preted and can be made available on a more timely basis than financial data, financial reports generated by a responsibility account- ing system still have value because they pro- vide information about the impact of business systems on income To be effective, manage- ment must not only believe that reducing inventory, spoilage, or rework will improve profitability, but also it must monitor the impact that such efforts have on income The tie between changes in business systems and the effect of those changes on income is pro- vided by financial reports.

inter-EXERCISES E17-1

(1) Maintenance Department cost should be charged to all departments on the basis

of a predetermined charging rate and could be computed as follows:

Fixed cost $ 7,500

Variable cost (15,000 × $8.50) 127,500

Total Maintenance Department cost $135,000

$135,000 15,000 hours = $9 per maintenance hour The actual Maintenance Department cost for November, $132,000 would be charged directly to that department The $9 charging rate is used to charge other departments for Maintenance Department service received The November charges would be

$126,000 (14,000 actual maintenance hours × $9 charging rate).

The same approach would be followed for General Factory cost, except that transfers and charges for such costs would be made to producing departments only The rate would be determined as follows:

Fixed cost $30,000

Variable cost (1,000 × $20) 20,000

Total General Factory cost $50,000

$50,000 1,000 employees = $50 per employee

The actual cost charged to the General Factory in November would be $51,000, and General Factory cost charged to producing departments would be $49,000 (980 actual employees × $50 charging rate).

(1) Billing rates: Carpenter Shop: $20,000

= $10 per hour 2,000 hrs.

Electricians: $30,000 = $12 per hour

*400 × $10 = $4,000; 800 × $10 = $8,000; 450 × $10 = $4,500

** 1,000 × $12 = $12,000; 850 × $12 = $10,200; 550 × $12 = $6,600.

E17-2 (Concluded)

(3) Variances in each service department:

Variable

Actual cost $19,800 Actual cost $28,900

hrs × $3.00) $ 4,950 hrs × $2.40) $ 5,760

Fixed cost 14,000 18,950 Fixed cost 24,000 29,760

E17-3

(1) Billing rate for Maintenance Department:

Fixed rate: $12,800 total fixed cost ÷ 3,200 normal

maintenance hours $ 4.00 per hour Variable rate: Variable rate per maintenance hour

for labor $8.70 Variable rate per maintenance hour for other costs:

Supervision $.50 Tools and supplies 75 Miscellaneous 05 1.30 10.00 Total $14.00 per hour

Billing rate for Payroll Department:

Fixed rate: $12,000 budgeted fixed cost ÷ 1,200

average number of employees $10 per employee Variable rate 2

Total $12 per employee

The billing rate for the Maintenance Department was based on the number of maintenance hours worked, because it was the only variable given on which a measure of operating results could be computed For the Payroll Department, the billing rate was based on the number of employees, because it was an ade- quate measure of operating results for that department.

E17-3 (Concluded)

(2) Maintenance Department:

Actual cost $47,200

Budget allowance based on actual hours:

Variable cost (3,355 hours × $10) $33,550

Fixed cost 12,800 46,350

Spending variance $850 unfav.

Idle capacity variance $ (620) fav.

Budget allowance based on actual number

of employees $14,330

Idle capacity variance $ 350 unfav E17-4

A B X Y Fixed cost* $1,200 $2,400 $1,440 $ 960 $ 6,000

E17-4 (Concluded)

(2) The two general principles for the allocation of service department costs

appli-cable under the circumstances are (a) distribution on the basis of service or efit received for the variable cost; and (b) distribution on the basis of readiness

ben-to serve or capacity that must be maintained for the fixed cost.

This solution distributes all variable costs incurred A predetermined able cost rate should be calculated, so that the efficiency of the power plant could be judged The present $.20 rate is based on the actual monthly con-

vari-sumption and cost.

E17-5

E17-5 (Concluded)

Benefiting Department

First Quarter Billing:

Actual cost $15,450 $16,200 $15,900 $15,400 $ 62,950 Less budget allowance:

E17-6 UNIVERSITY MOTOR POOL

Budget Report for March

Cost per mile $.1819 $.1760 $.0059

Supporting calculations for monthly budget amounts:

16 miles per gal.

Oil, minor repairs, parts,

Annual cost for 21 autos: 21 × $300 = $6,300 Monthly cost: $6,300 ÷ 12 = $525

$30,000 annual cost = $2,500 per month

12 months

$26,400 ÷ 20 autos = $1,320 Annual depreciation for 21 autos:

$1,320 per auto × 21 = $27,720 Monthly depreciation: $27,720 ÷ 12 = $2,310

CLAYTON COMPANY Assembly Department Flexible Budget—90% Level Direct materials (90% × $20,000) $18,000

E17-8 ONE MONTH FLEXIBLE BUDGET FOR FINISHING DEPARTMENT

Employee pension costs 1,200.00 1,200.00 1,200.00 1,200.00

Employee health plan 1,800.00 1,800.00 1,800.00 1,800.00

Spending

Budget Allowance Cost Unfav.(Fav.) Capacity hours 8,000 8,800 8,800

Variable costs:

Supplies $ 2,000 $ 2,200 $ 2,300 $100

Indirect labor 4,000 4,400 4,300 (100) Power and light 1,200 1,320 1,400 80 Heat 400 440 500 60 Subtotal $ 8,400 $ 9,240 $ 9,400

Idle capacity variance $(360) fav.

Actual factory overhead $13,060

Applied factory overhead 13,200

Overapplied factory overhead $ (140)

Spending variance $ 220 unfav.

Idle capacity variance (360) fav.

Overapplied factory overhead $ (140)

Spending

Budget Allowance Cost Unfav.(Fav.) Direct labor hours 10,000 9,600 9,600

Variable costs:

Indirect labor $ 70,000 $ 67,200 $ 70,000 $2,800 Payroll taxes 61,500 59,040 60,000 960 Factory supplies 27,000 25,920 28,000 2,080 Electric utility 12,000 11,520 12,000 480 Gas utility 6,000 5,760 6,100 340 Water utility 1,500 1,440 1,500 60

Electric utility 15,000 15,000 15,000 0 Gas utility 9,000 9,000 9,000 0 Water utility 5,000 5,000 5,000 0 Maintenance 23,000 23,000 23,000 0

Building rent 15,000 15,000 15,000 0 Property taxes 12,000 12,000 13,000 1,000

Subtotal $307,000 $307,000 $309,000

Total costs $525,000 $516,280 $520,600 $4,320 Applied factory overhead 504,000 unfav Idle capacity variance $ 12,280 unfav.

Actual factory overhead $520,600

Applied factory overhead 504,000

Underapplied factory overhead $ 16,600

Spending variance $4,320 unfav.

Idle capacity variance 12,280 unfav.

Underapplied factory overhead $ 16,600

PROBLEMS P17-1

(1) Factory overhead applied for each producing department:

Proration of service departments:

Repairs and maintenance

Total actual department factory

overhead $88,207 $95,885 $73,200

(Over-) or underapplied factory

overhead $ 2,191 unfav $ 3,350 unfav $ (2,175)fav.

* 39,300 × $.35 = $13,755

** 20,480 × $.90 = 18,432

(3) Total variance for each service department:

Repairs and Maintenance Utilities Actual cost before allocation of Utilities

Utilities Department cost allocation

$62,953 Services allocated (sold) to other departments:

(Over) or underallocated service department

costs $(434) fav $952 unfav.

(1) Maintenance Department:

Total estimated maintenance hours 3,500

Direct labor hours 12,000 7,500

Overhead rate per dlh $ 3.825 $ 4