Solution manual for managerial accounting an introduction to concepts methods and uses 11th edition by maher

1.3 The two major uses of managerial accounting information are 1 information for managerial decision making for example, make-or-buy decisions, store closure decisions, capital investme

CHAPTER 1

FUNDAMENTAL CONCEPTS

Questions, Exercises, Problems, and Cases: Answers and Solutions

1.1 The first question at the end of each chapter requires the student to review

the important concepts or terms discussed in the chapter In addition to the definitions or descriptions in the chapter, the end of the book has a glossary

1.2 People whose titles are Controller, Vice-President of Finance, or Chief

Financial Officer

1.3 The two major uses of managerial accounting information are (1)

information for managerial decision making (for example, make-or-buy decisions, store closure decisions, capital investment decisions), and (2) information for managerial control and performance evaluation (for example, budgeting, comparing actual performance with norms or standards) The first use, which is the focus of Part II of this book, usually requires special purpose reports that estimate how revenues, costs, and investments will differ among the alternatives being considered The second use, which is the focus of Part III of this book, usually involves routine monthly, quarterly, and annual performance reports Information for planning requires estimates of future costs, revenues, and other data, while information for performance evaluation is generally based on data about the past

1.4 Total Quality Management (TQM) means the organization is managed to

excel on all dimensions and quality is ultimately defined by the customer

Under total quality management, performance measures are likely to include things such as product reliability and service delivery, as well as traditional measures like product profitability

1.5 The purchasing employee subjected himself or herself to real, or perceived,

conflicts of interest by taking gifts from people with whom the employee conducts business It is very important for buyers to maintain an objective relationship with their suppliers so purchases are “arms-length”

transactions

The steps that the accounting employee should take would be to speak with his, or her, superior in an attempt to stop the violation The employee should move up the management ladder until a satisfactory resolution is reached The Institute of Management Accountants has an 800 number

1.6 d All of the above (decision making, planning, and control).

1.7 c Providing accounting information to managers

1.8 Opportunity Costs = $25,000

1.9 A cost is a sacrifice of resources An expense is a cost that is matched with

revenue earned during a particular accounting period A cost is not necessarily an expense when the cost is incurred (e.g., the cost of a building

to be used as a retail store is incurred when the building is purchased, but the expense is recorded as the building is depreciated)

1.10 Cost behavior is the concept used to describe the way costs vary with

activity, for example, production volume This concept is important because by dividing costs into "variable" and "fixed," a managerial accountant can gauge which costs will change if the company makes a decision to change its level of activity

1.11 Yes, in general Understanding the uses of accounting should help

management accountants design useful and efficient accounting systems

Understanding accounting helps users communicate their needs and helps them give realistic, credible input for accounting system design

1.12 No An accounting system that provides managers with all of the

information they could use may not be efficient from a cost/benefit perspective

1.13 Southwest Airlines' decision to have rapid turnaround times was a tactical

decision Their decision to fly point to point was strategic, and the rapid turnaround allows them to offer more flights within that strategy

1.14 d b, (being held responsible for financial performance) and

c, (compensation based on sales performance)

1.15 Managerial accounting is used in any organization in which financial

decisions are made or financial planning, control, and internal performance evaluations are made The objectives in nonprofit organizations may be different from those in profit-making organizations Nevertheless, cost control, providing the most services for the dollar expended, charging users

to cover costs, financial planning, and comparing actual costs against those budgeted are a few examples of many situations requiring managerial accounting

1.16 Accounting information is used in marketing decisions such as pricing,

distribution systems, and establishing incentives for salespeople

Information must be used in the appropriate manner in order for marketing decisions to be effective Therefore, it is important to know how the

1.17 This statement is ambiguous because $3,000 could be the cash outflows for

the airline ticket, hotel room, and related costs This dollar amount could also include all expenditures made during the holiday It might or might not include the opportunity cost of lost wages

1.18 Variable costs include the cost of food items, packaging, liquid for drinks and

food preparation labor (except managers’ salaries) Fixed costs include managerial salaries, rent or depreciation on the building, and a portion of the utilities

1.19 This statement confuses total costs with unit costs Fixed costs per unit

decrease as volume increases because total fixed costs remain constant

1.20 (Cliff Lawrence; opportunity cost analysis.)

Cliff would lose the business of an average of 10 skaters who pay an average of $10 per hour He would save $100 in the cost of attendants

The $2,000 fixed costs are not affected So the opportunity cost is:

(10 skaters X 9 hours X $10) – $100 = $800

Financially, Cliff is better off to take the hockey team’s offer However, he should also consider the loss in customer satisfaction and possible loss in future business if the facility is not open on Sunday

1.21 (Susan Ortiz; opportunity cost analysis.)

The cost of the two attendants, utilities and other fixed costs are not affected On football weekends, the opportunity cost is:

100 spots for cars X 6 hours X $6.00 = $3,600

In the short run, Susan is indifferent between the Sheraton’s offer and the normal football crowd However, she should consider the potential customer dissatisfaction and loss of future business if the facility is not available on a busy football weekend

1.22 (Intel; fixed and variable costs.)

The balance sheet will show significant investments in property, plant, and equipment The cost associated with obtaining or leasing these items is typically a fixed cost Variable costs include materials, purchased parts, and some labor costs that are included in “Cost of sales’ on the income statement Some of the marketing expenses that are driven by sales are variable

1.23 (Starbucks; direct and indirect costs.)

Direct costs include the manager’s salary and workers’ wages for a particular store The cost of materials (coffee, milk, etc.), building rent, and equipment are also direct costs Indirect costs include support services at the corporate level such as advertising, payroll, and training

1.24 (Ford; just-in-time production.)

The focus should include reducing inventory amounts on the balance sheet, which in turn reduces the costs of financing, insuring and storing inventory

1.25 (Sustainable Products; value chain and strategic cost analysis.)

Revenue, if timber were sold in the market $ 2,100,000 $ 105 Operating costs, excluding depreciation (1,500,000) (75) Depreciation, computed as the decline in

economic value of the timber assets ($5.1 mill – $4.8 mill.) (300,000) (15) Cost of capital, using a 10-percent rate

(10 percent X $4,950,000b) (495,000) (24.75) Economic loss from timber $ (195,000) $ (9.75)

Revenue, if paper were sold in the market $ 12,000,000 $ 600 Operating costs, excluding depreciation (9,000,000) (450) Depreciation, computed as the decline in

economic value of the paper processing assets ($15 Mill – $13 Mill.) (2,000,000) (100) Cost of capital, using a 10-percent rate

(10 percent X $14,000,000b) (1,400,000) (70) Economic loss from paper processing $ (400,000) $ (20)

Revenue $ 16,000,000 $ 800 Cost of goods sold (from Paper Processing) (12,000,000) (600) Operating costs, including depreciation (2,700,000) (135) Cost of capital ($50 X 20,000 tons) (1,000,000) (50) Economic profit to the distributor $ 300,000 $ 15

1.25a continued.

Revenue $ 17,000,000 $ 850 Cost of goods sold (from Distributor) (16,000,000) (800) Operating costs, including depreciation (500,000) (25) Cost of capital ($18 X 20,000 tons) (360,000) (18) Economic profit to the retailer $ 140,000 $ 7

aBased on 20,000 tons

bThese amounts are the average assets during the year

$4,950,000 = ($5,100,000 + $4,800,000)/2

$14,000,000 = ($15,000,000 + $13,000,000)/2

b Answers should discuss the economic losses within the timber and paper processing segments of the value chain, and the economic profits

at the distributor and retailer parts of the value chain

1.26 (Wheelworks, Inc.; value chain and strategic cost analysis.)

Revenue, if parts were sold in the market $ 300,000 $ 30.00 Operating costs, excluding depreciation (100,000) (10.00) Depreciation, computed as the decline in

economic value of the production assets ($1,025,000 – $975,000) (50,000) (5.00) Cost of capital, using a 12-percent rate

(12 percent X $1,000,000b) (120,000) (12.00) Economic profit from production $ 30,000 $ 3.00

Revenue, if bikes were sold in the market $ 1,500,000 $ 150 Operating costs, excluding depreciation (1,250,000) (125) Depreciation, computed as the decline in

economic value of the bike assembly assets (200,000) (20) Cost of capital, using a 12-percent rate

(12 percent X $500,000b) (60,000) (6) Economic loss from bike assembly $ (10,000) $ (1)

Revenue $ 1,750,000 $ 175 Cost of goods sold (1,500,000) (150) Operating costs, including depreciation (50,000) (5) Cost of capital, (given) (120,000) (12) Economic profit to the distributor $ 80,000 $ 8

1.26a continued.

Revenue $ 2,500,000 $ 250 Cost of goods sold (1,750,000) (175) Operating costs, including depreciation (330,000) (33) Cost of capital, (given) (40,000) (4) Economic profit to the retailer $ 380,000 $ 38

aBased on 10,000 units

bThese amounts are the average assets during the year

$1,000,000 = ($1,025,000 + $975,000)/2

$500,000 = ($600,000 + $400,000)/2

b Answers should discuss the economic loss within the parts production and bike assembly segments of the value chain, and the economic profits at all other parts of the value chain

1.27 (QT Investments; ethics and altering the books.)

a The unofficial CMA answer comments specifically on competence, confidentiality, integrity, and objectivity with respect to the Standards

of Ethical Conduct for Management Accountants Basically, Bob has a responsibility to perform professional duties in accordance with relevant laws, standards, and GAAP Bob must communicate both favorable as well as unfavorable information Bob must communicate information fairly and objectively He must disclose all relevant information that could influence the users’ understanding of the reports

b Bob should first follow QT’s established policy on the resolution of ethical conflict (Assuming there is one!) If there isn’t an established policy Bob should confront the next higher level of management that he believes is not involved in the altering of figures This person could be the Chairman of the Board of Directors If the matter remains unresolved, he should take the issue to the Audit Committee of the Board of Directors Perhaps Bob should have a confidential discussion with an objective advisor When all levels of internal review have been exhausted without satisfactory results, Bob should resign and submit

an informative memorandum to the Chairman of the Board of Directors

1.28 (HP Computer Company; value chain.)

a Distribution

b Production

1.28 continued.

d Marketing

e Not specifically in value chain, but could be anywhere (or everywhere)

f Marketing

1.29 (Schering Pharmaceuticals; value chain.)

a Design

b Marketing

c Research and development

d Not specifically in value chain but could be in any part

e Distribution

1.30 (Growth Chemicals, Inc.; responsibility for ethical action [CMA adapted].)

a As a management accountant, Emily has a responsibility to perform her professional duties with competence in accordance with relevant laws and regulations Clearly, dumping toxic waste is a violation of the law As such, Emily might have a legal responsibility to take some action As a professional, she must communicate both favorable and unfavorable information in an objective and fair manner Thus, she cannot simply ignore the fact that the company is involved in illegal toxic dumping

b The first possible course of action is to discuss the situation with the controller This is an appropriate approach to the problem If the controller is aware of the situation and indicates that Emily should not worry about it, then Emily should take the matter up with the controller’s superior She should move up the layers of management, until someone is concerned and will deal with the problem

Emily should report the problem to her friend on the Board of Directors only after exhausting possibilities of discussing the matter with internal management Emily should certainly leave the company

if it is involved in widespread illegal activities, not only for ethical reasons but also to protect herself from being implicated in illegal activities

The proper authorities should be notified by someone in the company

1.31 (Heart Scientific; ethics and inventory obsolescence [CMA adapted].)

a The controller has a responsibility to perform duties in a competent manner, one that is in accordance with relevant laws, regulations, technical standards, and generally accepted accounting principles The controller’s lack of action regarding the overstatement of inventory is a violation of professional responsibilities

b Tino should first follow Heart Scientific’s established policy on the resolution of ethical conflict If there isn’t an established policy, Tino should indicate to the controller the fact that he believes both the CFO and the external auditors are unaware of the inventory overvaluation

If he is uncomfortable mentioning this to the controller, he should talk directly to the CFO instead If the situation is still unresolved, then Tino should bring it to the attention of the Audit Committee and the Board of Directors Perhaps Tino should seek confidential discussion with an objective advisor to clarify the issues and possible courses of action

When all levels of internal review have been exhausted without satisfactory results, Tino should resign and submit an informative memorandum to the chairman of the Board of Directors

1.32 (How these women dealt with ethical conflicts.)

Answers will vary, of course We encourage students to think about ethical conflicts which could range from problems on the job to observations of cheating, child or spousal abuse, and sexual harassment We ask them whether people stood up to the wrong-doers as Watkins and Cooper did

1.33 (Value-added and nonvalue-added activities.)

Value-added examples: Purchase of raw materials and hiring employees

Production Shipping

Nonvalue-added examples: Storage before and after production Security and maintenance for storage facilities Transport from storage to production Inspections

1.34 (Value of information—nonbusiness setting.)

This problem is a good introduction to the economics of information It is based upon an article by R L Weil and L W Coppleson, "Are All Those Lab Tests Really Worth the Cost?" that appeared in Prism (American Medical Association), Vol 1, No 4

1.34 continued.

a Zero; action is independent of information, therefore the information is valueless

b Generally accepted medical principles may require it; the risk of loss in subsequent malpractice suits may be increased if the doctor does not go through the procedures of generally accepted medical practice, regardless of their value

1.35 Answers will vary, but should reflect the format used in the chapter

example

1.36 (Responsibility for unethical action)

Charles impressed our MBA students because his career was similar to the one that they expected, at least until the commission of the fraud Charles’

boss received a jail sentence of several years and a large fine

Charles did several months in jail, plus a year of home confinement plus

a fine that wiped out his savings and retirement accounts Even more, he has found it difficult to get work in any field Employers shy away from prospective employees who answer ‘yes’ to the ‘have you ever been convicted of a felony’ question

a No One can sympathize with him for being in a bad job, but that is no justification for what he did

b According to Charles, he should have talked to someone early in the game, such as his wife and the former CFO Also, he should have had sufficient savings to quit his job when his boss began demanding that he find ways to manipulate the records Charles thought he was trapped

He did not want to give up his high paying job, especially to look for work in another city If he had saved enough resources, he could have walked from the job and taken a job in a different line of work or moved

to another city Either choice would have a better outcome than doing jail time, losing what savings and retirement funds that he did have and losing the prospects of employment because he was a convicted felon

1.36 continued.

c During a period in which Charles’ boss was hospitalized for heart problems, Charles had to make a financial presentation to the board of directors During the presentation, he confessed to the financial fraud

The board called in corporate counsel (who turned out to be of no help to Charles) The SEC was notified by somebody (We could not tell who contacted the SEC based on our review of documents and interview with Charles.) Charles mistakenly believed that he would not get in trouble with the authorities because he was just following his boss’s orders Charles told us that the federal prosecutor assigned to the case said that he always liked to catch at least two fish, so the prosecutor went after both Charles and his boss