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Solution Manual02

Solution Manual02

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Published by Hakim Jan

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Published by: Hakim Jan on Jun 19, 2010
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02/17/2014

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CHAPTER 2 
Basic Cost Management Concepts andAccounting for Mass Customization Operations
ANSWERS TO REVIEW QUESTIONS
2-1Product costs are costs that are associated withmanufactured goods until the time period during whichthe products are sold, when the product costs becomeexpenses. Period costs are expensed during the timeperiod in which they are incurred.2-2The most important difference between a manufacturingfirm and a service industry firm, with regard to theclassification of costs, is that the goods produced by amanufacturing firm are inventoried, whereas the servicesproduced by a service industry firm are consumed as theyare produced. Thus, the costs incurred in manufacturingproducts are treated as product costs until the periodduring which the goods are sold. Most of the costsincurred in a service industry firm to produce services areoperating expenses that are treated as period costs.2-3Product costs are also called inventoriable costs becausethey are assigned to manufactured goods that areinventoried until a later period, when the products aresold. The product costs remain in the Finished-GoodsInventory account until the time period when the goodsare sold.2.4The five types of production processes are as follows:
 Job shop: Low production volume; littlestandardization; one-of-a-kind products. Examplesinclude custom home construction, feature filmproduction, and ship building.
Batch: Multiple products; low volume. Examplesinclude construction equipment, tractor trailers, andyachts.
McGraw-Hill/Irwin
 
© 
2002 The McGraw-Hill Companies,Inc.
Managerial Accounting, 5/e 2-
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Assembly line: A few major products; highervolume. Examples include kitchen appliances andautomobile assembly.
Mass customization: High production volume; manystandardized components; customized combinationof components. An example is the computerindustry.
Continuous flow: High production volume; highlystandardized commodity products. Examples includefood processing, textiles, lumber, and chemicals.2-5The term mass customization is used to describe anindustry such as the computer industry, where largenumbers of identical components are mass produced, andthen these are components are combined in a customizedway to customer specifications. For example, when acustomer places an order for a Dell computer on line, thecompany assembles just the components requested bythe customer, loads the requested software, and ships thecustomized computer system. Viewed in this light, theterm mass customization is not internally inconsistent.2-6The cost of idle time is treated as manufacturingoverhead because it is a normal cost of the manufacturingoperation that should be spread out among all of themanufactured products. The alternative to this treatmentwould be to charge the cost of idle time to a particular jobthat happens to be in process when the idle time occurs.Idle time often results from a random event, such as apower outage. Charging the cost of the idle time resultingfrom such a random event to only the job that happenedto be in process at the time would overstate the cost of that job.2-7Overtime premium is included in manufacturing overheadin order to spread the extra cost of the overtime over allof the products produced, since overtime often is anormal cost of the manufacturing operation. Thealternative would be to charge the overtime premium tothe particular job in process during overtime. In mostcases, such treatment would overstate the cost of that
McGraw-Hill/Irwin
 
© 
2002 The McGraw-Hill Companies,Inc.
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Solutions Manual
 
 job, since it is only coincidental that a particular jobhappened to be done on overtime. The need for overtimeto complete a particular job results from the fact thatother jobs were completed during regular hours.2-8The phrase “different costs for different purposes” refersto the fact that the word “costcan have differentmeanings depending on the context in which it is used.Cost data that are classified and recorded in a particularway for one purpose may be inappropriate for anotheruse.2-9The city of Tampa would use cost information for planningwhen it developed a budget for its operations during thenext year. Included in that budget would be projectedcosts for police and fire protection, street maintenance,and city administration. At the end of the year this budgetwould be used for cost control. The actual costs incurredwould be compared to projected costs in the budget. Cityadministrators would also use cost data in makingdecisions, such as where to locate a new fire station.2-10Fixed costs remain constant in total across changes inactivity, whereas variable costs change in proportion tothe level of activity.2-11The fixed cost per unit declines as the level of activity (orcost driver) increases. The cost per unit is reducedbecause the total fixed cost, which does not change asactivity changes, is spread over a larger number of activity units.2-12The variable cost per unit remains constant as the level of activity (or cost driver) changes. Total variable costschange in proportion to activity, and the additionalvariable cost when one unit of activity is added is thevariable cost per unit.2-13A volume-based cost driver, such as the number of passengers, causes costs to be incurred because of thequantity of service offered by the airline. An operations-based cost driver, such as hub domination, affects costsbecause of the basic way in which the airline conducts itsoperations. Greater control over a hub airport's facilities
McGraw-Hill/Irwin
 
© 
2002 The McGraw-Hill Companies,Inc.
Managerial Accounting, 5/e 2-
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