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Chapter 15 Problems

The Nature of Management Accounting

Problem 15-1
Following is a management accounting report for the Anders Ford Company. Contrast this report with a financial accounting report according to the list of differences given in the text.
ANDERS FORD COMPANY Service Department Report November Planned Actual 400 366 740 736

Number of jobs completed Number of employee days Expenses:

Difference * (34) 4

Employee Wages
Parts Used Supplies used Other Expenses Total Expenses Revenue Profit

$ 22,000
16,000 5,000 6,000 49,000 60,000 $ 11, 000

$ 22,772
12,574 4,824 6, 624 46,794 54, 468 $ 7,674

$(772)
3,426 176 (624) 2,206 (5,532) $ (3, 326)

*( ) = unfavorable

Problem 15-1
ANDERS FORD COMPANY Service Department Report November
Planned
Number of jobs completed Number of employee days Expenses: Employee Wages 400 740

MA
Difference * (34) 4

FA
Monetary form

Actual
366 736

Information Content Time orientation Necessity Report Entity Information Precision Users

$ 22,000

$ 22,772

$(772)

nonmonetary information (jobs & number of employees) Has future (planned) information as well as past (actual) Optional Focuses on a segment (service department) Less emphasis on precision (planned numbers are rounded) useful only as manager uses it

Reports financial history

Must be done Describes the organization as a whole Emphasis on precision

Parts Used Supplies used Other Expenses Total Expenses Revenue Profit

16,000 5,000 6,000 49,000 60,000 $ 11, 000

12,574 4,824 6, 624 46,794 54, 468 $ 7,674

3,426 176 (624) 2,206 (5,532) $ (3, 326)

Relatively large groups and mostly unknown to managers

Problem 15-2
As controller of Patriot Steel, you have been asked to provide information to management that would be helpful in answering a variety of questions. Required: a. For each of the questions below, classify the needed information as being an example of either full cost accounting, differential accounting, or responsibility accounting. (1) Should the company own and operate its own iron ore mines or buy the one from another firm? Differential accounting (2) As a result of a new labor contract with the United Steel Workers Union, what will be the profit margin on a ton of steel at current prices? Full-cost accounting (3) Is the supervisor of the maintenance shop doing a good job? Responsibility accounting

Problem 15-2
As controller of Patriot Steel, you have been asked to provide information to management that would be helpful in answering a variety of questions. Required: (4) How much money does the company have invested in finished goods inventory? Full-cost accounting (5) Should the company consider replacing its old open-hearth furnaces with news ones? Differential accounting (6) Which district sales manager is doing the best job? Responsibility accounting b. In addition to management accounting information, what other types of information might be useful in attempting to answer each of the above questions? Nonquantitative, nonaccounting, operating, and financial accounting

Problem 15-3
As controller of the city of Oakly Heights, you have been asked to provide information to the mayor and city council that would be helpful in answering a variety of questions. Required: For each of the questions bellow, classify the needed information as an example of full cost accounting, differential accounting, or responsibility accounting. (1) As a result of a recent wage increase for airport workers, what does it now cost to operate the municipal airport? Full-cost accounting (2) Should the city continue to own and operate its own garbage trucks or contract with a private firm? Differential accounting (3) What does it cost to prepare and mail annual tax notices to property owners? Full-cost accounting

Problem 15-3
As controller of the city of Oakly Heights, you have been asked to provide information to the mayor and city council that would be helpful in answering a variety of questions. Required: For each of the questions bellow, classify the needed information as an example of full cost accounting, differential accounting, or responsibility accounting. (4) Is the new police chief doing a better job than the former one? Responsibility accounting (5) Should the city close its jail and contract with the country for detention of prisoners? Differential accounting (6) Which department head is doing the best job of staying within his or her budget? Responsibility accounting b. In addition to management accounting information, what other types of information might be useful in attempting to answer each of the questions above? Nonquantitative, nonaccounting, operating, and financial accounting.

Problem 15-4
FINEST NATIONAL BANK Eastside Branch Office Report October 1 Number of new accounts opened Number of prospect calls made Increase in deposit volume Increase in loan volume Expenses: Wages and salaries Utilities Rent on building Supplies Advertising Other expenses Total expenses: Revenue from interest and service charges Profit (loss) Planned 225 113 $100,000 $80,000 Actual 180 84 $80,000 $90,000 Difference (45) (29) $(20,000) $10,000

Following is a monthly report for a new branch office that the Finest National Bank recently opened in a rapidly developing section of the city. The branch manager is pleased that the report shows a $1,461 profit instead of the expected loss of $375. Required: What questions can be raised about the performance of the Eastside Branch and its manager based on information in the report?

$15,000
1,450 3,675 225 450 75 20,875 20,500 $(375)

$12,800
1,420 3,675 230 338 76 18,539 20,000 $1,461

$2,200
30 0 (5) 112 (1) 2,336 (500) $1,836

*( ) = unfavorable

Problem 15-4
Number of new accounts opened Number of prospect calls made Increase in deposit volume Increase in loan volume Expenses: Wages and salaries Utilities Rent on building Supplies Advertising Other expenses Total expenses: Revenue from interest and service charges Profit (loss) FINEST NATIONAL BANK Eastside Branch Office Report October 1 Planned Actual 225 180 113 $100,000 $80,000 $15,000 1,450 3,675 225 450 75 20,875 20,500 $(375) 84 $80,000 $90,000 $12,800 1,420 3,675 230 338 76 18,539 20,000 $1,461

1. Why did the manager fail to make the

planned number of prospect calls?


Difference (45) (29) $(20,000) $10,000 $2,200 30 0 (5) 112 (1) 2,336 (500) $1,836

2. Was this the reason for the failure to obtain the planned number of new accounts and increase in deposit volume? 3. Could the savings in advertising expense have contributed to the failure to achieve the planned growth in new accounts and deposit volume? 4. Was the $2,200 savings in wages and salaries the result of operating with one employee less than needed? If so, could this have helped prevent the manager from making the planned number of prospect calls? 5. Why was revenue lower than planned? Did the manager emphasize loans more than deposits?

*( ) = unfavorable

Chapter 16 Problems
The Behavior of Costs

Problem 16-1
The following graphs relate to the behavior of certain costs involved in the operation of a mechanical arts course offered by a local corporation in a program of adult education.
Required: a. Title each graph to show the type of cost it describes (fixed, variable, semivariable, etc.) b. From the list of costs on the next page, select those that each graph describes. Costs 1. Cost of raw materials used by students. 2. Depreciation of machinery and equipment used. 3. Cost of blueprints and manuals. Extra copies must be acquired for every 6 students who enroll over the minimum number of 24. 4. Utilities and maintenance. Utilities remain constant each month, but maintenance tends to vary with the usage of machinery and equipment. Variable cost
1. Cost of raw materials used by students.

2. Depreciation of machinery and equipment used.

Fixed cost

Semivariable cost
4. Utilities and maintenance. Utilities remain constant each month, but maintenance tends to vary with the usage of machinery and equipment.

Semivariable cost

3. Cost of blueprints and manuals. Extra copies must be acquired for every 6 students who enroll over the minimum number of 24.

Problem 16-2
Doyle's Candy Company is a wholesale distributor of candy. The company services groceries, convenience stores, drugstores in a large metropolitan area. Small but steady growth in sales has been achieved over the past few years while candy prices have been increasing. The company is formulating its plan for the coming fiscal year. Presented below are the data used to project the current year's after-tax net income of $264,960.

Manufacturers of candy have announced that they will increase prices of their products an average 15 percent in the coming year due to increases in raw materials (sugar, cocoa, peanuts, etc.) and labor costs. Doyle's Candy Company expects that all other costs will remain at the same rates or levels as the current year.

Problem 16-2
Required: a. What is Doyle's Candy Company's break-even point in boxes of candy for the current year? Break-even volume = Fixed costs / Unit contribution = $1,056,000 / $9.60 - $5.76 = $1,056,000 / $3.84 = 275,000 boxes b. What selling price per box must Doyle's Candy Company charge to cover the 15 percent increase in variable production costs of candy and still maintain the current contribution margin percentage?
Current contribution margin percentage = $3.84 / $9.60 = 40%.

UR UVC CMP UR
Solving for UR (Selling Price):

With a l5% increase in variable production costs (to $5.52, giving total UVC of $6.48), the selling price per box is:

UR

UVC 1 CMP

UR

$6.48 $6.48 $10.80 1 .40 .60

Problem 16-2
c. What volume of sales in dollars must Doyle's Candy Company achieve in the coming year to maintain the same net income after taxes as projected for the current year if the selling price of candy remains at $9.60 per box and the variable production costs of candy increase 15 percent?

Problem 16-3: Mike Solids Pizzeria


Mike Solid started a pizzeria in 1999. For this purpose he rented a building for $1,800 per month. Two persons were hired to work full-time at the restaurant and six college students were hired to work 30 hours per week delivering pizza. An outside accountant was hired for tax and bookkeeping purposes at a cost of $900 per month. The necessary restaurant equipment and delivery cars were purchased with cash. Mr. Solid has noticed that expenses for utilities and supplies have been rather constant. Mr. Solid increased his business between 1999 and 2001. Profits have more than doubled since 1999. Mr. Solid does not understand why his profits have increased faster than his volume. A projected income statement for 2002 has been prepared by the accountant and is shown below:
Projected Income Statement For the Year Ended Dec.31, 2002 Sales Cost of goods sold Wages and fringe benefits of restaurant help Wages and fringe benefits of delivery persons Rent Accounting Services Depreciation of delivery equipment Depreciation of restaurant equipment $308,000 $92,400 26,650 54,100 15,500 10,900 16,000 8,000

Utilities 7,165 Supplies (soap, floor wax, etc.) 10,645 Income before taxes Income taxes Net Income

241,360 66,640 19,992 $ 45,648

Note: The average pizza sells for $8.50. Assume that Mr. Solid pays out 30 percent of his income in income taxes.

Problem 16-3: Mike Solids Pizzeria


Required:

a. What is the break-even point in number of pizzas that must be sold?

Breakeven sales volume *$308,000 / $8.50 = 36,235 pizzas Variable Cost / Pizza: $92,400 / 36,235 = $2.55.

Problem 16-3: Mike Solids Pizzeria


b. What is the cash flow break-even point in number of pizzas that must be sold?

Cash Breakeven Point = (fixed costs - depreciation) / contribution margin per unit
Cash fixed costs = total fixed costs depreciation = $148,960 - ($16,000 + $8,000) = $148,960 - ($24,000) = $124,960 depreciation tax shield ($24,000 x 30%) = $7,200 Therefore, Net Cash Fixed Cost = $124,960 - ($7,200)= $117,760. So, Break-even volume = $117,760 $5.95 =

19,792 pizzas

Problem 16-3: Mike Solids Pizzeria


c. If Mr. Solid withdraws $14,400 for personal use, how much cash will be left from the 2002 income-producing activities? Cash generated by operations = net income + noncash expenses = $46,648 + $24,000 = $70,648

$70,648 - $14,400 =

$56,248

Problem 16-3: Mike Solids Pizzeria


d. Mr. Solid would like an after-tax net income of $60,000, what volume must be reached in number of pizzas in order to obtain the desired income?
The easiest way to approach this question is to treat the target pretax income as a fixed cost.

target pretax income = $60,000 70% = $85,713


dollar sales at target pretax income $85,713 + $148,960 fixed costs = $234,673 So required volume = (dollar sales at target pretax income) / (unit contribution margin) = $234,673 / $5.95 =

39,441 pizzas.

Problem 16-3: Mike Solids Pizzeria


e. Briefly explain to Mr. Solid why his profits have increased at a faster rate Projected Income Statement than his sales.
For the Year Ended Dec.31, 2002

Most of the expenses are fixed. Therefore a large volume of sales is required before any profit is made. Once this point is reached (break-even), each sale contributes $5.95 to profits, a larger change in profits since profits begin at zero at this point while the $8.50 change in sales is a smaller proportion of sales because of the large amount of sales required to reach the breakeven point.
$5.95 Unit contribution margin (SC-VC)

Sales Cost of goods sold $92,400 Wages and fringe benefits of 26,650 restaurant help Wages and fringe benefits of 54,100 delivery persons Rent 15,500 Accounting Services 10,900 Depreciation of delivery equipment 16,000 Depreciation of restaurant equipment Utilities Supplies (soap, floor wax, etc.) Income before taxes Income taxes Net Income 8,000 7,165 10,645

$308,000

241,360 66,640 19,992 $ 45,648

Note: The average pizza sells for $8.50. Assume that Mr. Solid pays out 30 percent of his income in income taxes.

Problem 16-3: Mike Solids Pizzeria


f. Briefly explain to Mr. Solid why his cash flow for 2002 will exceed his profits.
Projected Income Statement For the Year Ended Dec.31, 2002 Sales Cost of goods sold Wages and fringe benefits of restaurant help Wages and fringe benefits of delivery persons Rent Accounting Services $308,000 $92,400 26,650 54,100 15,500 10,900

The cash flow from operations will exceed his profits because $24,000 of the expense (depreciation) is not a current cash-consuming cost.

Depreciation of delivery equipment Depreciation of restaurant equipment


Utilities Supplies (soap, floor wax, etc.) Income before taxes Income taxes Net Income

16,000 8,000
7,165 10,645

241,360 66,640 19,992 $ 45,648

END