Soln311-Cost Accounting

Solutions for Homework ** Accounting 311 Cost **
CHAPTER 1
1-1 Management accounting measures, analyzes and reports financial and nonfinancial
information that helps managers make decisions to fulfill the goals of an organization. t focuses on
internal reporting and is not restricted !y generally accepted accounting principles "#AA$%.
Financial accounting focuses on reporting to e&ternal parties such as in'estors, go'ernment
agencies, and !anks. t measures and records !usiness transactions and pro'ides financial statements
that are !ased on generally accepted accounting principles "#AA$%.
(ther differences include "1% management accounting emphasizes the future "not the past%,
and ")% management accounting influences the !eha'ior of managers and other employees "rather
than primarily reporting economic e'ents%.
1-2 *inancial accounting is constrained !y generally accepted accounting principles.
+anagement accounting is not restricted to these principles. ,he result is that-
management accounting allows managers to charge interest on owners. capital to help
/udge a di'ision.s performance, e'en though such a charge is not allowed under #AA$,
management accounting can include assets or lia!ilities "such as 0!rand names1 de'eloped
internally% not recognized under #AA$, and
management accounting can use asset or lia!ility measurement rules "such as present
'alues or resale prices% not permitted under #AA$.
1-5 Supply chain descri!es the flow of goods, ser'ices, and information from the initial sources
of materials and ser'ices to the deli'ery of products to consumers, regardless of whether those
acti'ities occur in the same organization or in other organizations.
Cost management is most effecti'e when it integrates and coordinates acti'ities across all
companies in the supply chain as well as across each !usiness function in an indi'idual company.s
'alue chain. Attempts are made to restructure all cost areas to !e more cost2effecti'e.
1-14 ,he nstitute of +anagement Accountants "+A% sets standards of ethical conduct for
management accountants in the following areas-
Competence
Confidentiality
ntegrity
Credi!ility
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1
1-29 "33453 min.% Professional ethics and end-of-year actions.
1. ,he possi!le moti'ations for the snack foods di'ision wanting to take end2of2year actions
include-
"a% +anagement incenti'es. #ourmet *oods may ha'e a di'ision !onus scheme !ased on
one2year reported di'ision earnings. 6fforts to front2end re'enue into the current year or
transfer costs into the ne&t year can increase this !onus.
"!% $romotion opportunities and /o! security. ,op management of #ourmet *oods likely will
'iew those di'ision managers that deli'er high reported earnings growth rates as !eing
the !est prospects for promotion. 7i'ision managers who deli'er 0unwelcome surprises1
may !e 'iewed as less capa!le.
"c% 8etain di'ision autonomy. f top management of #ourmet *oods adopts a 0management
!y e&ception1 approach, di'isions that report sharp reductions in their earnings growth
rates may attract a siza!le increase in top management super'ision.
). ,he 0Standards of 6thical Conduct . . . 1 re9uire management accountants to
$erform professional duties in accordance with rele'ant laws, regulations, and technical
standards.
8efrain from engaging in any conduct that would pre/udice carrying out duties ethically.
Communicate information fairly and o!/ecti'ely.
Se'eral of the 0end2of2year actions1 clearly are in conflict with these re9uirements and should !e
'iewed as unaccepta!le !y ,aylor.
"!% ,he fiscal year2end should !e closed on midnight of 7ecem!er 31. 06&tending1 the close
falsely reports ne&t year.s sales as this year.s sales.
"c% Altering shipping dates is falsification of the accounting reports.
"f% Ad'ertisements run in 7ecem!er should !e charged to the current year. ,he ad'ertising
agency is facilitating falsification of the accounting records.
,he other 0end2of2year actions1 occur in many organizations and fall into the 0gray1 to 0accepta!le1
area. Howe'er, much depends on the circumstances surrounding each one, such as the following-
"a% f the independent contractor does not do maintenance work in 7ecem!er, there is no
transaction regarding maintenance to record. ,he responsi!ility for ensuring that
packaging e9uipment is well maintained is that of the plant manager. ,he di'ision
controller pro!a!ly can do little more than o!ser'e the a!sence of a 7ecem!er
maintenance charge.
"d% n many organizations, sales are hea'ily concentrated in the final weeks of the fiscal year2
end. f the dou!le !onus is appro'ed !y the di'ision marketing manager, the di'ision
controller can do little more than o!ser'e the e&tra !onus paid in 7ecem!er.
"e% f ,: spots are reduced in 7ecem!er, the ad'ertising cost in 7ecem!er will !e reduced.
,here is no record falsification here.
"g% +uch depends on the means of 0persuading1 carriers to accept the merchandise. *or
e&ample, if an under2the2ta!le payment is in'ol'ed, or if carriers are pressured to accept
merchandise, it is clearly unethical. f, howe'er, the carrier recei'es no e&tra
consideration and willingly agrees to accept the assignment !ecause it sees potential sales
opportunities in 7ecem!er, the transaction appears ethical.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions )
6ach of the "a%, "d%, "e%, and "g% 0end2of2year actions1 may well disad'antage #ourmet *oods in the
long run. *or e&ample, lack of routine maintenance may lead to su!se9uent e9uipment failure. ,he
di'isional controller is well ad'ised to raise such issues in meetings with the di'ision president.
Howe'er, if #ourmet *oods has a rigid set of line;staff distinctions, the di'ision president is the one
who !ears primary responsi!ility for /ustifying di'ision actions to senior corporate officers.
3. f ,aylor !elie'es that 8yan wants her to engage in unethical !eha'ior, she should first
directly raise her concerns with 8yan. f 8yan is unwilling to change his re9uest, ,aylor should
discuss her concerns with the Corporate Controller of #ourmet *oods. She could also initiate a
confidential discussion with an +A 6thics Counselor, other impartial ad'iser, or her own attorney.
,aylor also may well ask for a transfer from the snack foods di'ision if she percei'es 8yan is
unwilling to listen to pressure !rought !y the Corporate Controller, C*(, or e'en $resident of
#ourmet *oods. n the e&treme, she may want to resign if the corporate culture of #ourmet *oods is
to reward di'ision managers who take 0end2of2year actions1 that ,aylor 'iews as unethical and
possi!ly illegal. t was precisely actions along the lines of "!%, "c%, and "f% that caused <etty :inson,
an accountant at =orldCom to !e indicted for falsifying =orldCom.s !ooks and misleading
in'estors.
CHAPTER 2
2.4 *actors affecting the classification of a cost as direct or indirect include
the materiality of the cost in 9uestion,
a'aila!le information2gathering technology,
design of operations
2.10 +anufacturing companies typically ha'e one or more of the following three types of
in'entory-
1. Direct materials inventory. 7irect materials in stock and awaiting use in the
manufacturing process.
). Work-in-process inventory. #oods partially worked on !ut not yet completed. Also called
work in progress.
3. Finished goods inventory. #oods completed !ut not yet sold.
2-20 "1>4)3 min.% Classification of costs, an!fact!rin" sector.
Cost o!/ect- ,ype of car assem!led "Corolla or #eo $rism%
Cost 'aria!ility- =ith respect to changes in the num!er of cars assem!led
,here may !e some de!ate o'er classifications of indi'idual items, especially with regard to
cost 'aria!ility.
Cost #te $ or # % or &
A 7 :
< *
C 7 *
7 7 *
6 7 :
* :
# 7 :
H *
2-22 "1>4)3 min.% %aria'le costs and fi(ed costs.
1. :aria!le cost per ton of !each sand mined
Su!contractor ? @3 per ton
#o'ernment ta& >3 per ton
,otal ?133 per ton
*i&ed costs per month
3 to 133 tons of capacity per day A ?1>3,333
131 to )33 tons of capacity per day A ?333,333
)31 to 333 tons of capacity per day A ?5>3,333
).
T
o
t
a
l
F
i
x
e
d
C
o
s
t
s
$450,000
$300,000
$150,000
100 200 300
TonsofCapacityperDay
$975,000
$650,000
$325,000
2,500 5,000 7,500
TonsMined
T
o
t
a
l
V
a
r
i
a
b
l
e
C
o
s
t
s

,he concept of rele'ant range is potentially rele'ant for !oth graphs. Howe'er, the 9uestion does not
place restrictions on the unit 'aria!le costs. ,he rele'ant range for the total fi&ed costs is from 3 to
133 tonsB 131 to )33 tonsB )31 to 333 tons, and so on. =ithin these ranges, the total fi&ed costs do
not change in total.
3.
Tons
)ined
*er $ay
Tons
)ined
*er )onth
&i(ed +nit
Cost *er Ton
%aria'le
+nit
Cost *er
Ton
Total +nit
Cost *er
Ton
,1- ,2- . ,1- /
25
,0- . &C 1 ,2- ,4- ,5- . ,0- 2
,4-
"a% 1@3 5,>33 ?333,333 C 5,>33 A
?DD.DE
?133 ?1FD.DE
"!% ))3 >,>33 ?5>3,333 C >,>33 A
?@1.@)
?133 ?)11.@)
,he unit cost for ))3 tons mined per day is ?)11.@), while for 1@3 tons it is only ?1FD.DE. ,his
difference is caused !y the fi&ed cost increment from 131 to )33 tons !eing spread o'er an increment
of @3 tons, while the fi&ed cost increment from )31 to 333 tons is spread o'er an increment of only
)3 tons.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions >
2-20 ")3 min.% %aria'le costs, fi(ed costs, rele3ant ran"e.
1. Since the production capacity is 5,333 /aw !reakers per month, the current annual rele'ant range
of output is 3 to 5,333 /aw !reakers G 1) months A 3 to 5@,333 /aw !reakers.
). Current annual fi&ed manufacturing costs within the rele'ant range are ?1,333 G 1) A ?1),333 for
rent and other o'erhead costs, plus ?D,333 C 13 A ?D33 for depreciation, totaling ?1),D33.
,he 'aria!le costs, the materials, are 13 cents per /aw !reaker, or ?3,D33 "?3.13 per /aw !reaker G
3,333 /aw !reakers per month G 1) months% for the year.
3. f demand changes from 3,333 to D,333 /aw !reakers per month, or from 3,333 G 1) A 3D,333 to
D,333 G 1) A E),333 /aw !reakers per year, Hum!all will need a second machine. Assuming Hum!all
!uys a second machine identical to the first machine, it will increase capacity from 5,333 /aw
!reakers per month to @,333. ,he annual rele'ant range will !e !etween 5,333 G 1) A 5@,333 and
@,333 G 1) A FD,333 /aw !reakers.
Assume the second machine costs ?D,333 and is depreciated using straight2line depreciation o'er
13 years and zero residual 'alue, /ust like the first machine. ,his will add ?D33 of depreciation per
year.
*i&ed costs for ne&t year will increase to ?13,)33, ?1),D33 from the current year I ?D33 "!ecause
rent and other fi&ed o'erhead costs will remain the same at ?1),333%. ,hat is, total fi&ed costs for
ne&t year e9ual ?D33 "depreciation on first machine% I ?D33 "depreciation on second machine% I
?1),333 "rent and other fi&ed o'erhead costs%.
,he 'aria!le cost per /aw !reaker ne&t year will !e F3J G ?3.13 A ?3.3F. ,otal 'aria!le costs
e9ual ?3.3F per /aw !reaker G E),333 /aw !reakers A ?D,5@3.
2-24 ")3433 min.% #n3entoria'le costs 3ers!s *eriod costs.
1. Manufacturing-sector companies purchase materials and components and con'ert them into
different finished goods.
Merchandising-sector companies purchase and then sell tangi!le products without changing
their !asic form.
Service-sector companies pro'ide ser'ices or intangi!le products to their customersKfor
e&ample, legal ad'ice or audits.
(nly manufacturing and merchandising companies ha'e in'entories of goods for sale.
). Inventoriable costs are all costs of a product that are regarded as an asset when they are
incurred and then !ecome cost of goods sold when the product is sold. ,hese costs for a
manufacturing company are included in work2in2process and finished goods in'entory "they are
0in'entoried1% to !uild up the costs of creating these assets.
Period costs are all costs in the income statement other than cost of goods sold. ,hese costs
are treated as e&penses of the period in which they are incurred !ecause they are presumed not to
!enefit future periods "or !ecause there is not sufficient e'idence to conclude that such !enefit
e&ists%. 6&pensing these costs immediately !est matches e&penses to re'enues.
3. "a% +ineral water purchased for resale !y SafewayKin'entoria!le cost of a merchandising
company. t !ecomes part of cost of goods sold when the mineral water is sold.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions D
"!% 6lectricity used at #6 assem!ly plantKin'entoria!le cost of a manufacturing company. t
is part of the manufacturing o'erhead that is included in the manufacturing cost of a refrigerator
finished good.
"c% 7epreciation on #oogle.s computer e9uipmentKperiod cost of a ser'ice company.
#oogle has no in'entory of goods for sale and, hence, no in'entoria!le cost.
"d% 6lectricity for Safeway.s store aislesKperiod cost of a merchandising company. t is a
cost that !enefits the current period and it is not tracea!le to goods purchased for resale.
"e% 7epreciation on #6.s assem!ly testing e9uipmentKin'entoria!le cost of a
manufacturing company. t is part of the manufacturing o'erhead that is included in the
manufacturing cost of a refrigerator finished good.
"f% Salaries of Safeway.s marketing personnelKperiod cost of a merchandising company. t
is a cost that is not tracea!le to goods purchased for resale. t is presumed not to !enefit future
periods "or at least not to ha'e sufficiently relia!le e'idence to estimate such future !enefits%.
"g% <ottled water consumed !y #oogle.s engineersKperiod cost of a ser'ice company.
#oogle has no in'entory of goods for sale and, hence, no in'entoria!le cost.
"h% Salaries of #oogle.s marketing personnelKperiod cost of a ser'ice company. #oogle has
no in'entory of goods for sale and, hence, no in'entoria!le cost.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions E
2-29 ")3 min.% &lo5 of #n3entoria'le Costs.
"All num!ers !elow are in millions%.
1.
7irect materials in'entory @;1;)33@ ? F3
7irect materials purchased 3D3
7irect materials a'aila!le for production 5>3
7irect materials used 3E>
7irect materials in'entory @;31;)33@ ? E>
).
,otal manufacturing o'erhead costs ? 5@3
Su!tract- :aria!le manufacturing o'erhead costs ")>3%
*i&ed manufacturing o'erhead costs for August ? )33
3.
,otal manufacturing costs ? 1,D33
Su!tract- 7irect materials used "from re9uirement 1% "3E>%
,otal manufacturing o'erhead costs "5@3%
7irect manufacturing la!or costs for August ? E5>
5.
=ork2in2process in'entory @;1;)33@ ? )33
,otal manufacturing costs 1,D33
=ork2in2process a'aila!le for production 1,@33
Su!tract- Cost of goods manufactured "mo'ed into *#% "1,D>3%
=ork2in2process in'entory @;31;)33@ ? 1>3
>.
*inished goods in'entory @;1;)33@ ? 1)>
Cost of goods manufactured "mo'ed from =$% 1,D>3
*inished goods a'aila!le for sale in August ? 1,EE>
D.
*inished goods a'aila!le for sale in August "from re9uirement >% ? 1,EE>
Su!tract- Cost of goods sold "1,E33%
*inished goods in'entory @;31;)33@ ? E>
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions @
2-00 ")3 min.% Co*!tin" cost of "oods *!rchased and cost of "oods sold.
"1% )ar3in $e*artent 6tore
6ched!le of Cost of 7oods P!rchased
&or the 8ear Ended $ece'er 01, 2004
,in tho!sands-
$urchases ?1>>,333
Add transportation2in E,333
1D),333
7educt-
$urchase return and allowances ?5,333
$urchase discounts D,333 13,333
Cost of goods purchased ?1>),333
")% )ar3in $e*artent 6tore
6ched!le of Cost of 7oods 6old
&or the 8ear Ended $ece'er 01, 2004
,in tho!sands-
<eginning merchandise in'entory 1;1;)33@ ? )E,333
Cost of goods purchased "a!o'e% 1>),333
Cost of goods a'aila!le for sale 1EF,333
6nding merchandise in'entory 1);31;)33@ 35,333
Cost of goods sold ?15>,333
2-02 ")>433 min.% #ncoe stateent and sched!le of cost of "oods an!fact!red.
Ho5ell Cor*oration
#ncoe 6tateent for the 8ear Ended $ece'er 01, 2009
,in illions-
8e'enues ?F>3
Cost of goods sold-
<eginning finished goods, Lan. 1, )33F ? E3
Cost of goods manufactured "!elow% D5>
Cost of goods a'aila!le for sale E1>
6nding finished goods, 7ec. 31, )33F >> DD3
#ross margin )F3
+arketing, distri!ution, and customer2ser'ice costs )53
(perating income ? >3
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions F
Ho5ell Cor*oration
6ched!le of Cost of 7oods )an!fact!red
for the 8ear Ended $ece'er 01, 2009
,in illions-
7irect materials costs-
<eginning in'entory, Lan. 1, )33F ? 1>
$urchases of direct materials 3)>
Cost of direct materials a'aila!le for use 353
6nding in'entory, 7ec. 31, )33F )3
7irect materials used ?3)3
7irect manufacturing la!or costs 133
ndirect manufacturing costs-
ndirect manufacturing la!or D3
$lant supplies used 13
$lant utilities 33
7epreciation44plant and e9uipment @3
$lant super'isory salaries >
+iscellaneous plant o'erhead 3> ))3
+anufacturing costs incurred during )33F D53
Add !eginning work2in2process in'entory, Lan. 1, )33F 13
,otal manufacturing costs to account for D>3
7educt ending work2in2process, 7ec. 31, )33F >
Cost of goods manufactured ?D5>
2-00 "1>4)3 min.% #nter*retation of stateents ,contin!ation of 2-02-.
1. ,he schedule in )23) can !ecome a Schedule of Cost of #oods +anufactured and Sold
simply !y including the !eginning and ending finished goods in'entory figures in the supporting
schedule, rather than directly in the !ody of the income statement. Mote that the term cost of goods
manufactured refers to the cost of goods !rought to completion "finished% during the accounting
period, whether they were started !efore or during the current accounting period. Some of the
manufacturing costs incurred are held !ack as costs of the ending work in processB similarly, the
costs of the !eginning work in process in'entory !ecome a part of the cost of goods manufactured
for )33F.
). ,he sales manager.s salary would !e charged as a marketing cost as incurred !y !oth
manufacturing and merchandising companies. t is !asically an operating cost that appears !elow the
gross margin line on an income statement. n contrast, an assem!ler.s wages would !e assigned to
the products worked on. ,hus, the wages cost would !e charged to =ork2in2$rocess and would not
!e e&pensed until the product is transferred through *inished #oods n'entory to Cost of #oods Sold
as the product is sold.
3. ,he direct2indirect distinction can !e resol'ed only with respect to a particular cost o!/ect.
*or e&ample, in defense contracting, the cost o!/ect may !e defined as a contract. ,hen, a plant
super'isor working only on that contract will ha'e his or her salary charged directly and wholly to
that single contract.
5. 7irect materials used A ?3)3,333,333 C 1,333,333 units A ?3)3 per unit
7epreciation on plant e9uipment A ?@3,333,333 C 1,333,333 units A ?@3 per unit
>. 7irect materials unit cost would !e unchanged at ?3)3 per unit. 7epreciation cost per unit
would !e ?@3,333,333 C 1,)33,333 A ?DD.DE per unit. ,otal direct materials costs would rise !y )3J
to ?3@5,333,333 "?3)3 per unit G 1,)33,333 units%, whereas total depreciation would !e unaffected at
?@3,333,333.
D. Nnit costs are a'erages, and they must !e interpreted with caution. ,he ?3)3 direct materials
unit cost is 'alid for predicting total costs !ecause direct materials is a 'aria!le costB total direct
materials costs indeed change as output le'els change. Howe'er, fi&ed costs like depreciation must
!e interpreted 9uite differently from 'aria!le costs. A common error in cost analysis is to regard all
unit costs as oneKas if all the total costs to which they are related are 'aria!le costs. Changes in
output le'els "the denominator% will affect total variable costs, !ut not total fied costs. #raphs of
the two costs may clarify this pointB it is safer to think in terms of total costs rather than in terms of
unit costs.
2-09 ")3 min.% :a'or cost, o3ertie and idle tie.
1."a% ,otal cost of hours worked at regular rates
5) hours G 1) per hour ? >35.33
5) hours G 1) per hour >35.33
53 hours G 1) per hour >1D.33
53 hours G 1) per hour 5@3.33
),335.33
+inus idle time ">.) hours G ?1) per hour% D).53
7irect manufacturing la!or costs ?1,F51.D3
"!% dle time A >.) hours G 1) per hour A
"c% ('ertime and holiday premium.
?D).53
=eek 1- ('ertime "5)253% hours G $remium, ?D per hour ? 1).33
=eek )- ('ertime "5)253% hours G$remium, ?D per hour 1).33
=eek 3- ('ertime "53253% hours G $remium, ?D per hour 1@.33
=eek 5- Holiday @ hours G $remium, ?1) per hour FD.33
,otal o'ertime and holiday premium ?13@.33
"d% ,otal earnings in +ay
7irect manufacturing la!or costs ?1,F51.D3
dle time D).53
('ertime and holiday premium 13@.33
,otal earnings ?),15).33
). dle time caused !y e9uipment !reakdowns and scheduling mi&ups is an indirect cost of the /o!
!ecause it is not related to a specific /o!.
('ertime premium caused !y the hea'y o'erall 'olume of work is also an indirect cost
!ecause it is not related to a particular /o! that happened to !e worked on during the o'ertime hours.
f, howe'er, the o'ertime is the result of a demanding 0rush /o!,1 the o'ertime premium is a direct
cost of that /o!.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1)
2-0; "33453 min.% &ire loss, co*!tin" in3entory costs.
1. *inished goods in'entory, );)D;)33F A ?>3,333
). =ork2in2process in'entory, );)D;)33F A ?)@,333
3. 7irect materials in'entory, );)D;)33F A ?D),333
,his pro!lem is not as easy as it first appears. ,hese answers are o!tained !y working from the
known figures to the unknowns in the schedule !elow. ,he !asic relationships !etween categories of
costs are-
$rime costs "gi'en% A ?)F5,333
7irect materials used A ?)F5,333 4 7irect manufacturing la!or costs
A ?)F5,333 4 ?1@3,333 A ?115,333
Con'ersion costs A 7irect manufacturing la!or costs C 3.D
?1@3,333 C 3.D A ?333,333
ndirect manuf. costs A ?333,333 4 ?1@3,333 A ?1)3,333 "or 3.53 ?333,333%
6ched!le of Co*!tations
7irect materials, 1;1;)33F ? 1D,333
7irect materials purchased 1D3,333
7irect materials a'aila!le for use 1ED,333
7irect materials, );)D;)33F 3 A D),333
7irect materials used "?)F5,333 4 ?1@3,333% 115,333
7irect manufacturing la!or costs 1@3,333
$rime costs )F5,333
ndirect manufacturing costs 1)3,333
+anufacturing costs incurred during the current period 515,333
Add work in process, 1;1;)33F 35,333
+anufacturing costs to account for 55@,333
7educt work in process, );)D;)33F ) A )@,333
Cost of goods manufactured 5)3,333
Add finished goods, 1;1;)33F 33,333
Cost of goods a'aila!le for sale "gi'en% 5>3,333
7educt finished goods, );)D;)33F 1 A >3,333
Cost of goods sold "@3J of ?>33,333% ?533,333
Some students may wish to place the key amounts in a =ork in $rocess ,2account. ,his pro!lem can
!e used to introduce students to the flow of costs through the general ledger "amounts in thousands%-

=ork in $rocess *inished #oods
Cost of
#oods Sold
< 35 < 33
7+ used 115 C(#+ 5)3 2222222O 5)3 C(#S 533 2222O533
7P 1@3
(H 1)3 A'aila!le
,o account for 55@ for sale 5>3
6 )@ 6 >3
CHAPTER 0
0-4 An increase in the income ta& rate does not affect the !reake'en point. (perating income at
the !reake'en point is zero, and no income ta&es are paid at this point.
0-19 "13 min.% C%P co*!tations.
%aria'le &i(ed Total <*eratin" Contri'!tion Contri'!tion
Re3en!es Costs Costs Costs #ncoe )ar"in )ar"in =
a. >2,000 ? >33 ?000 ? @33 ?1,)33 ?1,>33 ;5.0=
!. ),333 1,500 333 1,400 )33 >33 25.0=
c. 1,333 E33 000 1,333 0 000 00.0=
d. 1,>33 900 333 1,200 000 900 53.3J
0-1; "1341> min.% C%P co*!tations.
1a. Sales "?33 per unit G )33,333 units% ?D,333,333
:aria!le costs "?)> per unit G )33,333 units% >,333,333
Contri!ution margin ?1,333,333
1!. Contri!ution margin "from a!o'e% ?1,333,333
*i&ed costs @33,333
(perating income ? )33,333
)a. Sales "from a!o'e% ?D,333,333
:aria!le costs "?1D per unit G )33,333 units% 3,)33,333
Contri!ution margin ?),@33,333
)!. Contri!ution margin ?),@33,333
*i&ed costs ),533,333
(perating income ? 533,333
3. (perating income is e&pected to increase !y ?)33,333 if +s. Schoenen.s proposal is accepted.
,he management would consider other factors !efore making the final decision. t is likely
that product 9uality would impro'e as a result of using state of the art e9uipment. 7ue to increased
automation, pro!a!ly many workers will ha'e to !e laid off. $atel.s management will ha'e to
consider the impact of such an action on employee morale. n addition, the proposal increases the
company.s fi&ed costs dramatically. ,his will increase the company.s operating le'erage and risk.
0-20 (30 min.)CVP analysis, sensitivity analysis.
1. S$ A ?33.33 "1 4 3.33 margin to !ookstore%
A ?33.33 3.E3 A ?)1.33
:CN A ? 5.33 'aria!le production and marketing cost
3.1> 'aria!le author royalty cost "3.1> ?)1.33%
? E.1>
C+N A ?)1.33 4 ?E.1> A ?13.@> per copy
*C A ? >33,333 fi&ed production and marketing cost
3,333,333 up2front payment to =ashington
?3,>33,333
Solution 6&hi!it 32)3A shows the $: graph.
6<:+T#<? E@H#A#T 0-20A
$: #raph for +edia $u!lishers
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1>
133,333 )33,333 333,333 533,333 >33,333
3

+nits sold
(
p e
r a t
i n
g
i n
c o
m
e
" 3
3 3
. s %
?3.> million
)>),E3@ units
*C A ?3,>33,333
C+N A ?13.@> per !ook sold
?5,333
3,333
),333
1,333
21,333
2),333
23,333
25,333
)a.
A
C+N
*C
A
?13.@>
?3,>33,333
A )>),E3@ copies sold "rounded up%
)!. ,arget ( A
C+N
( *C+
A
?13.@>
?),333,333 ?3,>33,333 +
A
?13.@>
?>,>33,333
A 3FE,11) copies sold "rounded up%
3a. 7ecreasing the normal !ookstore margin to )3J of the listed !ookstore price of ?33 has the
following effects-
S$ A ?33.33 "1 4 3.)3%
A ?33.33 3.@3 A ?)5.33
:CN A ? 5.33 'aria!le production and marketing cost
I 3 .D3 'aria!le author royalty cost "3.1> ?)5.33%
? E .D3
C+N A ?)5.33 4 ?E.D3 A ?1D.53 per copy
A
C+N
*C
A
?1D.53
?3,>33,333
A )13,51> copies sold "rounded up%
,he !reake'en point decreases from )>),E3@ copies in re9uirement ) to )13,51> copies.
3!. ncreasing the listed !ookstore price to ?53 while keeping the !ookstore margin at 33J has
the following effects-
S$ A?53.33 "1 4 3.33%
A ?53.33 3.E3 A ?)@.33
:CN A? 5.33 'aria!le production and marketing cost
I 5 .)3 'aria!le author royalty cost "3.1> ?)@.33%
? @ .)3
C+NA ?)@.33 4 ?@.)3 A ?1F.@3 per copy
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1D
A
?1F.@3
?3,>33,333
A 1ED,ED@ copies sold "rounded up%
,he !reake'en point decreases from )>),E3@ copies in re9uirement ) to 1ED,ED@ copies.
3c. ,he answers to re9uirements 3a and 3! decrease the !reake'en point relati'e to that in
re9uirement ) !ecause in each case fi&ed costs remain the same at ?3,>33,333 while the contri!ution
margin per unit increases.
0-24 "13 min.% C%P analysis, ar"in of safety.
1. <reake'en point re'enues A
percentage margin on Contri!uti
costs *i&ed
Contri!ution margin percentage A
?D33,333
?1,>33,333
A 3.53 or
53J
). Contri!ution margin percentage A
price Selling
unit per cost :aria!le price Selling
3.53 A
S$ ?1>
S$
3.53 S$ A S$ 4 ?1>
3.D3 S$ A ?1>
S$ A ?)>
3. <reake'en sales in units A 8e'enues C Selling price A ?1,>33,333 C ?)> A D3,333 units
+argin of safety in units A sales in units 4 <reake'en sales in units
A @3,333 4 D3,333 A )3,333 units

8e'enues, @3,333 units ?)> ?),333,333
<reake'en re'enues 1,>33,333
+argin of safety ? >33,333
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1E
0-25 ")> min.% <*eratin" le3era"e.
1a. Pet Q denote the 9uantity of carpets sold
<reake'en point under (ption 1
?>33Q ?3>3Q A ?>,333
?1>3Q A ?>,333
Q A ?>,333 ?1>3 A 35 carpets "rounded up%
1!. <reake'en point under (ption )
?>33Q ?3>3Q "3.13 ?>33Q% A 3
133Q A 3
Q A 3
). (perating income under (ption 1 A ?1>3Q ?>,333
(perating income under (ption ) A ?133Q
*ind Q such that ?1>3Q ?>,333 A ?133Q
?>3Q A ?>,333
Q A ?>,333 ?>3 A 133 carpets
8e'enues A ?>33 G 133 carpets A ?>3,333
*or Q A 133 carpets, operating income under !oth (ption 1 and (ption ) A ?13,333
*or Q O 133, say, 131 carpets,
(ption 1 gi'es operating income A "?1>3 131% ?>,333 A ?13,1>3
(ption ) gi'es operating income A ?133 131 A ?13,133
So Color 8ugs will prefer (ption 1.
*or Q R 133, say, FF carpets,
(ption 1 gi'es operating income A "?1>3 FF% ?>,333 A ?F,@>3
(ption ) gi'es operating income A ?133 FF A ?F,F33
So Color 8ugs will prefer (ption ).
3. 7egree of operating le'erage A
income (perating
margin on Contri!uti
Nnder (ption 1, degree of operating le'erage A
?13,333
133 ?1>3
A 1.>
Nnder (ption ), degree of operating le'erage A
?13,333
133 ?133
A 1.3
5. ,he calculations in re9uirement 3 indicate that when sales are 133 units, a percentage change
in sales and contri!ution margin will result in 1.> times that percentage change in operating income
for (ption 1, !ut the same percentage change in operating income for (ption ). ,he degree of
operating le'erage at a gi'en le'el of sales helps managers calculate the effect of fluctuations in
sales on operating incomes.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1@
0-05 ")34)> min.% C%P analysis.
1. Selling price
?1D.33
:aria!le costs per unit-
$urchase price ?13.33
Shipping and handling ).33
1).33
Contri!ution margin per unit "C+N% ? 5.33
<reake'en point in units A
unit per margin Contr.
costs *i&ed
A
?5.33
?D33,333
A 1>3,333
units
+argin of safety "units% A )33,333 4 1>3,333 A >3,333 units
). Since #ala&y is operating a!o'e the !reake'en point, any incremental
contri!ution margin will increase operating income dollar for dollar.
ncrease in units sales A 13J G )33,333 A )3,333
ncremental contri!ution margin A ?5 G )3,333 A ?@3,333
,herefore, the increase in operating income will !e e9ual to ?@3,333.
#ala&y.s operating income in )33@ would !e ?)33,333 I ?@3,333 A ?)@3,333.
3. Selling price ?1D.33
:aria!le costs-
$urchase price ?13 G 133J ?13.33
Shipping and handling ).33
1>.33
Contri!ution margin per unit
? 1.33
,arget sales in units A
C+N
,( *C+
A
?1
?)33,333 ?D33,333 +
A @33,333 units
,arget sales in dollars A ?1D G @33,333 A ?1),@33,333
0-4; ")3 min.% 7ross ar"in and contri'!tion ar"in.
1. ,icket sales "?)3
>33 attendees% ?13,333

:aria!le cost of dinner "?13
a
>33 attendees%?>,333
:aria!le in'itations and paperwork "?1
!

>33% >33 >,>33

Contri!ution margin 5,>33
*i&ed cost of dinner D,333
*i&ed cost of in'itations and paperwork ),>33 @,>33
(perating profit "loss% ? "5,333%
a
?>,333;>33 attendees A ?13;attendee
!
?>33;>33 attendees A ?1;attendee
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1F
). ,icket sales "?)3
1,333 attendees% ?)3,333

:aria!le cost of dinner "?13
1,333 attendees% ?13,333

:aria!le in'itations and paperwork "?1
1,333% 1,333 11,333

Contri!ution margin F,333
*i&ed cost of dinner D,333
*i&ed cost of in'itations and paperwork ),>33 @,>33
(perating profit "loss% ? >33
0-44 "33 min.% Ethics, C%P analysis.
1. Contri!ution margin percentage A
8e'enues osts
8e'enues
:aria!le c
A
?>, , ?3, , 333 333 333 333
?>,333,333
A
?>,333,333
?),333,333
A 53J
<reake'en re'enues A
costs *i&ed
A
3.53
?),1D3,333
A ?>,533,333
). f 'aria!le costs are >)J of re'enues, contri!ution margin percentage e9uals 5@J "133J
>)J%
<reake'en re'enues A
costs *i&ed
A
3.5@
?),1D3,333
A ?5,>33,333
3. 8e'enues ?>,333,333
:aria!le costs "3.>) ?>,333,333% ),D33,333
*i&ed costs ),1D3,333
(perating income ? )53,333
5. ncorrect reporting of en'ironmental costs with the goal of continuing operations is unethical.
n assessing the situation, the specific 0Standards of 6thical Conduct for +anagement Accountants1
"descri!ed in 6&hi!it 12E% that the management accountant should consider are listed !elow.
!ompetence
Clear reports using rele'ant and relia!le information should !e prepared. $reparing reports on the
!asis of incorrect en'ironmental costs to make the company.s performance look !etter than it is
'iolates competence standards. t is unethical for <ush not to report en'ironmental costs to make the
plant.s performance look good.

+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions )3
Integrity
,he management accountant has a responsi!ility to a'oid actual or apparent conflicts of interest and
ad'ise all appropriate parties of any potential conflict. <ush may !e tempted to report lower
en'ironmental costs to please Pemond and =oodall and sa'e the /o!s of his colleagues. ,his action,
howe'er, 'iolates the responsi!ility for integrity. ,he Standards of 6thical Conduct re9uire the
management accountant to communicate fa'ora!le as well as unfa'ora!le information.
!redibility
,he management accountant.s Standards of 6thical Conduct re9uire that information should !e
fairly and o!/ecti'ely communicated and that all rele'ant information should !e disclosed. *rom a
management accountant.s standpoint, underreporting en'ironmental costs to make performance look
good would 'iolate the standard of o!/ecti'ity.
<ush should indicate to Pemond that estimates of en'ironmental costs and lia!ilities should !e
included in the analysis. f Pemond still insists on modifying the num!ers and reporting lower
en'ironmental costs, <ush should raise the matter with one of Pemond.s superiors. f after taking all
these steps, there is continued pressure to understate en'ironmental costs, <ush should consider
resigning from the company and not engage in unethical !eha'ior.
CHAPTER 10
10-1 ,he two assumptions are
1. :ariations in the le'el of a single acti'ity "the cost dri'er% e&plain the 'ariations in the related
total costs.
). Cost !eha'ior is appro&imated !y a linear cost function within the rele'ant range. A linear
cost function is a cost function where, within the rele'ant range, the graph of total costs
'ersus the le'el of a single acti'ity forms a straight line.
10-1; "1> min.% #dentifyin" 3aria'le-, fi(ed-, and i(ed-cost f!nctions.
1. See Solution 6&hi!it 1321E.
). Contract 1- y A ?>3
Contract )- y A ?33 I ?3.)3"
Contract 3- y A ?1"
where " is the num!er of miles tra'eled in the day.
3. Contract Cost &!nction
1
)
3
*i&ed
+i&ed
:aria!le
6<:+T#<? E@H#A#T 10-1;
$lots of Car 8ental Contracts (ffered !y $acific Corp.

+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions ))
10-14 ")3 min.% %ario!s cost-'eha3ior *atterns.
1. S
). <
3. #
5. L Mote that A is incorrect !ecause, although the cost per pound e'entually e9uals a
constant at ?F.)3, the total dollars of cost increases linearly from that point
onward.
>. ,he total costs will !e the same regardless of the 'olume le'el.
D. P
E. * ,his is a classic step2cost function.
@. S
F. C
10-19 "33 min.% )atchin" "ra*hs 5ith descri*tions of cost and re3en!e 'eha3ior.

a. "1%
!. "D% A step2cost function.
c. "F%
d. ")%
e. "@%
f. "13% t is data plotted on a scatter diagram, showing a linear 'aria!le cost function with
constant 'ariance of residuals. ,he constant 'ariance of residuals implies that
there is a uniform dispersion of the data points a!out the regression line.
g. "3%
h. "@%
10-20 "1> min.% Acco!nt analysis ethod.
1. :aria!le costs-
Car wash la!or ?)D3,333
Soap, cloth, and supplies 5),333
=ater 3@,333
6lectric power to mo'e con'eyor !elt E),333
,otal 'aria!le costs ?51),333
*i&ed costs-
7epreciation ? D5,333
Salaries 5D,333
,otal fi&ed costs ?113,333
Some costs are classified as 'aria!le !ecause the total costs in these categories change in proportion
to the num!er of cars washed in Porenzo.s operation. Some costs are classified as fi&ed !ecause the
total costs in these categories do not 'ary with the num!er of cars washed. f the con'eyor !elt
mo'es regardless of the num!er of cars on it, the electricity costs to power the con'eyor !elt would
!e a fi&ed cost.
). :aria!le costs per car A
?51),333
@3,333
A ?>.1> per car
,otal costs estimated for F3,333 cars A ?113,333 I "?>.1> G F3,333% A ?>E3,>33
10-20 "1>4)3 min.% Estiatin" a cost f!nction, hi"h-lo5 ethod.
1. ,he key point to note is that the pro!lem pro'ides high2low 'alues of " "annual round trips
made !y a helicopter% and #
" "the operating cost per round trip%. =e first need to calculate the
annual operating cost # "as in column "3% !elow%, and then use those 'alues to estimate the function
using the high2low method.
Cost $ri3erB
Ann!al Ro!nd-
Tri*s ,X-
<*eratin"
Cost *er
Ro!nd-Tri*
Ann!al
<*eratin"
Cost ,Y-
,1- ,2- ,0- . ,1-
,2-
Highest o!ser'ation of cost dri'er ),333 ?333 ?D33,333
Powest o!ser'ation of cost dri'er 1,333 ?3>3 ?3>3,333
7ifference 1,333 ?)>3,333

Slope coefficient A ?)>3,333
1,333 A ?)>3 per round2trip

Constant A ?D33,333 4 "?)>3
),333% A ?133,333
,he estimated relationship is # A ?133,333 I ?)>3 "B where # is the annual operating cost of a
helicopter and " represents the num!er of round trips it makes annually.

). ,he constant a "estimated as ?133,333% represents the fi&ed costs of operating a helicopter,
irrespecti'e of the num!er of round trips it makes. ,his would include items such as insurance,
registration, depreciation on the aircraft, and any fi&ed component of pilot and crew salaries. ,he
coefficient b "estimated as ?)>3 per round2trip% represents the 'aria!le cost of each round tripKcosts
that are incurred only when a helicopter actually flies a round trip. ,he coefficient b may include
costs such as landing fees, fuel, refreshments, !aggage handling, and any regulatory fees paid on a
per2flight !asis.
3. f each helicopter is, on a'erage, e&pected to make 1,)33 round trips a year, we can use the
estimated relationship to calculate the e&pected annual operating cost per helicopter-
# A ?133,333 I ?)>3 "
" A 1,)33
# A ?133,333 I ?)>3
1,)33 A ?133,333 I ?333,333 A ?533,333

=ith 13 helicopters in its fleet, 8eisen.s estimated operating !udget is 13
?533,333 A ?5,333,333.
10-09 "33min.% )!lti*le re"ression ,contin!ation of 10-04-.
1. Solution 6&hi!it 1323F presents the regression output for setup costs using !oth num!er of setups
and num!er of setup2hours as independent 'aria!les "cost dri'ers%.
6<:+T#<? E@H#A#T 10-09
8egression (utput for +ultiple 8egression for Setup Costs Nsing <oth Mum!er of Setups and
Mum!er of Setup2Hours as ndependent :aria!les "Cost 7ri'ers%
).
6conomic
plausi!ility
A positi'e relationship !etween setup costs and each of the independent
'aria!les "num!er of setups and num!er of setup2hours%
is economically plausi!le.
#oodness of fit r
)
A @DJ, Ad/usted r
)
A @1J
Standard error of regression A?15,3F)
6&cellent goodness of fit.
Significance of
ndependent
:aria!les
,he t2'alue of 3.5D for num!er of setups is not significant at the 3.3> le'el.
,he t2'alue of 5.D@ for num!er of setup2hours is significant at the 3.3>
le'el.
Specification
analysis of
estimation
assumptions
Assuming linearity, constant 'ariance, and normality of residuals, the
7ur!in2=atson statistic of 1.3D suggests the residuals are independent.
Howe'er, we must !e cautious when drawing inferences from only F
o!ser'ations.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions )>
3. +ulticollinearity is an issue that can arise with multiple regression !ut not simple regression
analysis. +ulticollinearity means that the independent 'aria!les are highly correlated.
,he correlation feature in 6&cel.s 7ata Analysis re'eals a coefficient of correlation of
3.>D !etween num!er of setups and num!er of setup2hours. Since the correlation is less than
3.E3, the multiple regression does not suffer from multicollinearity pro!lems.
5. ,he simple regression model using the num!er of setup2hours as the independent 'aria!le
achie'es a compara!le r
)
to the multiple regression model. Howe'er, the multiple regression
model includes an insignificant independent 'aria!le, num!er of setups. Adding this 'aria!le
does not impro'e =illiams. a!ility to !etter estimate setup costs. <e!e should use the simple
regression model with num!er of setup2hours as the independent 'aria!le to estimate costs.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions )D
CHAPTER 11
11-20 "13 min.% 6election of ost *rofita'le *rod!ct.
(nly +odel 15 should !e produced. ,he key to this pro!lem is the relationship of manufacturing
o'erhead to each product. Mote that it takes twice as long to produce +odel FB machine2hours for
+odel F are twice that for +odel 15. +anagement should choose the product mi& that
ma&imizes operating income for a gi'en production capacity "the scarce resource in this
situation%. n this case, +odel 15 will yield a ?F.>3 contri!ution to fi&ed costs per machine hour,
and +odel F will yield ?F.33-
)odel 9 )odel 14
Selling price
:aria!le costs per unit "total cost 4 *+(H%
Contri!ution margin per unit
8elati'e use of machine2hours per unit of product
Contri!ution margin per machine hour
?133.33
@).33
? 1@.33
C )
? F.33
?E3.33
D3.>3
? F.>3
C 1
? F.>3
11-24 "33 min.% EC!i*ent !*"rade 3ers!s re*laceent.
1. <ased on the analysis in the ta!le !elow, ,ech+ech will !e !etter off !y ?1@3,333 o'er
three years if it replaces the current e9uipment.
<3er 0 years $ifference
Co*arin" Rele3ant Costs of +*"rade and +*"rade Re*lace in fa3or of Re*lace
Re*lace Alternati3es ,1- ,2- ,0- . ,1- D ,2-
Cash operating costs
?153B ?@3 per desk D,333 desks per yr. 3 yrs. ?),>)3,333 ?1,553,333 ?1,3@3,333
Current disposal price "D33,333% D33,333
(ne time capital costs, written off periodically as
depreciation ),E33,333 5,)33,333 "1,>33,333%
,otal rele'ant costs ?>,))3,333 ?>,353,333 ? 1@3,333
Mote that the !ook 'alue of the current machine "?F33,333% would either !e written off as
depreciation o'er three years under the upgrade option, or, all at once in the current year under
the replace option. ts net effect would !e the same in !oth alternati'es- to increase costs !y
?F33,333 o'er three years, hence it is irrele'ant in this analysis.
). Suppose the capital e&penditure to replace the e9uipment is ?T. *rom re9uirement 1,
column ")%, su!stituting for the one2time capital cost of replacement, the rele'ant cost of
replacing is ?1,553,333 4 ?D33,333 I ?T. *rom column "1%, the rele'ant cost of upgrading is
?>,))3,333. =e want to find T such that
?1,553,333 4 ?D33,333 I ?T R ?>,))3,333 "i.e., ,ech+ech will fa'or replacing%
Sol'ing the a!o'e ine9uality gi'es us T R ?>,))3,333 4 ?@53,333 A ?5,3@3,333.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions )E
,ech+ech would prefer to replace, rather than upgrade, if the replacement cost of the new
e9uipment does not e&ceed ?5,3@3,333. Mote that this result can also !e o!tained !y taking the
original replacement cost of ?5,)33,333 and adding to it the ?1@3,333 difference in fa'or of
replacement calculated in re9uirement 1.
3. Suppose the units produced and sold o'er 3 years e9ual y. Nsing data from re9uirement 1,
column "1%, the rele'ant cost of upgrade would !e ?153y I ?),E33,333, and from column ")%, the
rele'ant cost of replacing the e9uipment would !e ?@3y 4 ?D33,333 I ?5,)33,333. ,ech+ech
would want to upgrade if
?153y I ?),E33,333 R ?@3y 4 ?D33,333 I ?5,)33,333
?D3y R ?F33,333
y R ?F33,333
?D3 A 1>,333 units

or upgrade when y R 1>,333 units "or >,333 per year for 3 years% and replace when y O 1>,333
units o'er 3 years.
=hen production and sales 'olume is low "less than >,333 per year%, the higher operating
costs under the upgrade option are more than offset !y the sa'ings in capital costs from
upgrading. =hen production and sales 'olume is high, the higher capital costs of replacement are
more than offset !y the sa'ings in operating costs in the replace option.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions )@
5. (perating income for the first year under the upgrade and replace alternati'es are shown
!elow-
8ear 1
+*"rade Re*lace
,1- ,2-
8e'enues "D,333
?>33% ?3,333,333 ?3,333,333

Cash operating costs
?153B ?@3 per desk
D,333 desks per year @53,333 5@3,333

7epreciation "?F33,333
a
I ?),E33,333%
3B ?5,)33,333
3 1,)33,333 1,533,333
Poss on disposal of old e9uipment "3B ?F33,333 4 ?D33,333% 3 333,333
,otal costs ),353,333 ),1@3,333
(perating ncome ? FD3,333 ? @)3,333
a
,he !ook 'alue of the current production e9uipment is ?1,>33,333
> A ?F33,333B it
has a remaining useful life of 3 years.
*irst2year operating income is higher !y ?153,333 under the upgrade alternati'e, and 7an 7oria,
with his one2year horizon and operating income2!ased !onus, will choose the upgrade
alternati'e, e'en though, as seen in re9uirement 1, the replace alternati'e is !etter in the long run
for ,ech+ech. ,his e&ercise illustrates the possi!le conflict !etween the decision model and the
performance e'aluation model.
11-01 "33 min.% Rele3ant costs, o**ort!nity costs.
1. 6asyspread ).3 has a higher rele'ant operating income than 6asyspread 1.3. <ased on this
analysis, 6asyspread ).3 should !e introduced immediately-
Easys*read 1.0 Easys*read 2.0
8ele'ant re'enues ?1D3 ?1F>
8ele'ant costs-
+anuals, diskettes, compact discs ? 3 ?33
,otal rele'ant costs 3 33
8ele'ant operating income ?1D3 ?1D>
8easons for other cost items !eing irrele'ant are-
$asyspread %&'
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions )F
+anuals, diskettesKalready incurred
7e'elopment costsKalready incurred
+arketing and administrati'eKfi&ed costs of period
$asyspread (&'
7e'elopment costsKalready incurred
+arketing and administrationKfi&ed costs of period
Mote that total marketing and administration costs will not change whether 6asyspread ).3 is
introduced on Luly 1, )33F, or on (cto!er 1, )33F.
2 ). (ther factors to !e considered-
a. Customer satisfaction. f ).3 is significantly !etter than 1.3 for its customers, a
customer dri'en organization would immediately introduce it unless other factors
offset this !ias towards 0do what is !est for the customer.1
!. Quality le'el of 6asyspread ).3. t is critical for new software products to !e fully
de!ugged. 6asyspread ).3 must !e error2free. Consider an immediate release only if
).3 passes all 9uality tests and can !e fully supported !y the salesforce.
c. mportance of !eing percei'ed to !e a market leader. <eing first in the market with a
new product can gi'e <asil Software a 0first2mo'er ad'antage,1 e.g., capturing an
initial large share of the market that, in itself, causes future potential customers to
lean towards purchasing 6asyspread ).3. +oreo'er, !y introducing ).3 earlier, <asil
can get 9uick feed!ack from users a!out ways to further refine the software while its
competitors are still working on their own first 'ersions. +oreo'er, !y locking in
early customers, <asil may increase the likelihood of these customers also !uying
future upgrades of 6asyspread ).3.
d. +orale of de'elopers. ,hese are key people at <asil Software. 7elaying introduction
of a new product can hurt their morale, especially if a competitor then preempts <asil
from !eing 'iewed as a market leader.
11-04 "3>453 min.% $ro**in" a *rod!ct line, sellin" ore !nits.
1. ,he incremental re'enue losses and incremental sa'ings in cost !y discontinuing the
,a!les product line follows-
$ifferenceB
#ncreental
,:oss in Re3en!es-
and 6a3in"s in Costs
fro $ro**in"
Ta'les :ine
8e'enues
7irect materials and direct manufacturing la!or
7epreciation on e9uipment
+arketing and distri!ution
#eneral administration
Corporate office costs
,otal costs
(perating income "loss%
?">33,333%
333,333
3
E3,333
3
3
3E3,333
?"133,333%
7ropping the ,a!les product line results in re'enue losses of ?>33,333 and cost sa'ings of
?3E3,333. Hence, #rossman Corporation.s operating income will !e ?133,333 lower if it
drops the ,a!les line.
Mote that, !y dropping the ,a!les product line, Home *urnishings will sa'e none of the
depreciation on e9uipment, general administration costs, and corporate office costs, !ut it
will sa'e 'aria!le manufacturing costs and all marketing and distri!ution costs on the
,a!les product line.
). #rossman.s will generate incremental operating income of ?1)@,333 from selling 5,333
additional ta!les and, hence, should try to increase ta!le sales. ,he calculations follow-
#ncreental Re3en!es
,Costs- and <*eratin" #ncoe
8e'enues ?>33,333
7irect materials and direct manufacturing la!or "333,333%
Cost of e9uipment written off as depreciation "5),333%
*
+arketing and distri!ution costs "33,333%
U
#eneral administration costs 3
**
Corporate office costs 3
**
(perating income ?1)@,333
*
Mote that the additional costs of e9uipment are rele'ant future costs for the 0selling more ta!les decision1 !ecause
they represent incremental future costs that differ !etween the alternati'es of selling and not selling additional
ta!les.
U
Current marketing and distri!ution costs which 'aries with num!er of shipments A ?E3,333 4
?53,333 A ?33,333. As the sales of ta!les dou!le, the num!er of shipments will dou!le, resulting
in incremental marketing and distri!ution costs of ") ?33,333% 4 ?33,333 A ?33,333.
**
#eneral administration and corporate office costs will !e unaffected if #rossman decides to sell more ta!les.
Hence, these costs are irrele'ant for the decision.
3.Solution 6&hi!it 11235, Column 1, presents the rele'ant loss of re'enues and the rele'ant
sa'ings in costs from closing the Morthern 7i'ision. As the calculations show, #rossman.s
operating income would decrease !y ?153,333 if it shut down the Morthern 7i'ision "loss in
re'enues of ?1,>33,333 'ersus sa'ings in costs of ?1,3D3,333%.
#rossman will sa'e 'aria!le manufacturing costs, marketing and distri!ution costs, and di'ision
general administration costs !y closing the Morthern 7i'ision !ut e9uipment2related depreciation
and corporate office allocations are irrele'ant to the decision. 69uipment2related costs are
irrele'ant !ecause they are past costs "and the e9uipment has zero disposal price%. Corporate
office costs are irrele'ant !ecause #rossman will not sa'e any actual corporate office costs !y
closing the Morthern 7i'ision. ,he corporate office costs that used to !e allocated to the
Morthern 7i'ision will !e allocated to other di'isions.
5. Solution 6&hi!it 11235, Column ), presents the rele'ant re'enues and rele'ant costs of
opening the Southern 7i'ision "a di'ision whose re'enues and costs are e&pected to !e identical
to the re'enues and costs of the Morthern 7i'ision%. #rossman should open the Southern
7i'ision !ecause it would increase operating income !y ?53,333 "increase in rele'ant re'enues
of ?1,>33,333 and increase in rele'ant costs of ?1,5D3,333%. ,he rele'ant costs include direct
materials, direct manufacturing la!or, marketing and distri!ution, e9uipment, and di'ision
general administration costs !ut not corporate office costs. Mote, in particular, that the cost of
e9uipment written off as depreciation is rele'ant !ecause it is an e&pected future cost that
#rossman will incur only if it opens the Southern 7i'ision. Corporate office costs are irrele'ant
!ecause actual corporate office costs will not change if #rossman opens the Southern 7i'ision.
,he current corporate staff will !e a!le to o'ersee the Southern 7i'ision.s operations. #rossman
will allocate some corporate office costs to the Southern 7i'ision !ut this allocation represents
corporate office costs that are already currently !eing allocated to some other di'ision. <ecause
actual total corporate office costs do not change, they are irrele'ant to the di'ision.
6<:+T#<? E@H#A#T 11-04
8ele'ant28e'enue and 8ele'ant2Cost Analysis for Closing Morthern 7i'ision and (pening
Southern 7i'ision
,:oss in Re3en!es-
and 6a3in"s in
Costs fro Closin"
?orthern $i3ision
,1-
#ncreental
Re3en!es and
,#ncreental Costs-
fro <*enin"
6o!thern $i3ision
,2-
8e'enues ?"1,>33,333% ?1,>33,333
:aria!le direct materials and direct
manufacturing la!or costs @)>,333 "@)>,333%
69uipment cost written off as depreciation 3 "133,333%
+arketing and distri!ution costs )3>,333 ")3>,333%
7i'ision general administration costs 333,333 "333,333%
Corporate office costs 3 3
,otal costs 1,3D3,333 "1,5D3,333%
6ffect on operating income "loss% ? "153,333% ? 53,333
11-05 "33453 min.% )aEe or '!y, !nEno5n le3el of 3ol!e.
1. ,he 'aria!le costs re9uired to manufacture 1>3,333 starter assem!lies are
7irect materials ?)33,333
7irect manufacturing la!or 1>3,333
:aria!le manufacturing o'erhead 133,333
,otal 'aria!le costs ?5>3,333
,he 'aria!le costs per unit are ?5>3,333 C 1>3,333 A ?3.33 per unit.
Pet T A num!er of starter assem!lies re9uired in the ne&t 1) months.
,he data can !e presented in !oth 0all data1 and 0rele'ant data1 formats-
All $ata Rele3ant $ata
Alternati3e
1B
)aEe
Alternati3e
2B
A!y
Alternati3e
1B
)aEe
Alternati3e
2B A!y
:aria!le manufacturing costs
*i&ed general manufacturing o'erhead
*i&ed o'erhead, a'oida!le
7i'ision ) manager.s salary
7i'ision 3 manager.s salary
$urchase cost, if !ought from
,idnish 6lectronics
,otal
? 3T
1>3,333
133,333
53,333
>3,333
4
?353,333
I ? 3T
4
?1>3,333
4
>3,333
4
5T
?)33,333
I ? 5T
? 3T
4
133,333
53,333
>3,333
4
?1F3,333
I ? 3T
4
4
4
?>3,333
4
5T
?>3,333
I ? 5T
,he num!er of units at which the costs of make and !uy are e9ui'alent is
All data analysis- ?353,333 I ?3T A ?)33,333 I ?5T
T A 153,333
or
8ele'ant data analysis- ?1F3,333 I ?3T A ?>3,333 I ?5T
@ . 140,000
Assuming cost minimization is the o!/ecti'e, then
V f production is e&pected to !e less than 153,333 units, it is prefera!le to !uy units
from ,idnish.
V f production is e&pected to e&ceed 153,333 units, it is prefera!le to manufacture
internally "make% the units.
V f production is e&pected to !e 153,333 units, (&ford should !e indifferent !etween
!uying units from ,idnish and manufacturing "making% the units internally.
). ,he information on the storage cost, which is a'oida!le if self2manufacture is
discontinued, is rele'antB these storage charges represent current outlays that are a'oida!le if
self2manufacture is discontinued. Assume these ?>3,333 charges are represented as an
opportunity cost of the make alternati'e. ,he costs of internal manufacture that incorporate this
?>3,333 opportunity cost are
All data analysis- ?3F3,333 I ?3T
8ele'ant data analysis- ?)53,333 I ?3T
,he num!er of units at which the costs of make and !uy are e9ui'alent is
All data analysis- ?3F3,333 I ?3T A ?)33,333 I ?5T
T A 1F3,333
8ele'ant data analysis- ?)53,333 I ?3T A ?>3,333 I ?5T
T A 1F3,333
f production is e&pected to !e less than 1F3,333, it is prefera!le to !uy units from ,idnish. f
production is e&pected to e&ceed 1F3,333, it is prefera!le to manufacture the units internally.
CHAPTER 4
4.19 "13 min% Fo' order costin", *rocess costin".
a.Lo! costing l. Lo! costing
!. $rocess costing m. $rocess costing
c.Lo! costing n. Lo! costing
d. $rocess costing o. Lo! costing
e.Lo! costing p. Lo! costing
f. $rocess costing 9. Lo! costing
g. Lo! costing r. $rocess costing
h. Lo! costing "!ut some process costing% s. Lo! costing
i. $rocess costing t. $rocess costing
/. $rocess costing u. Lo! costing
k. Lo! costing
4-21 ")3)> min.% Fo' costin", cons!ltin" fir.
1. <udgeted indirect2cost rate A ?13,333,333 C ?>,333,333 A )D3J of professional la!or costs
). At the !udgeted re'enues of ?)3,333,333, ,aylor.s operating income of ?),333,333 e9uals
13J of re'enues.
+arkup rate A ?)3,333,333 C ?>,333,333 A 533J of direct professional la!or costs
3. <udgeted costs
7irect costs-
7irector, ?)33 3 ? D33
$artner, ?133 1D 1,D33
Associate, ?>3 53 ),333
Assistant, ?33 1D3 5,@33 ? F,333
ndirect costs-
Consulting support, )D3J ?F,333 )3,533
,otal costs ?3),533
As calculated in re9uirement ), the !id price to earn a 13J income2to2re'enue margin is 533J of
direct professional costs. ,herefore, ,aylor should !id 5 ?F,333 A ?3D,333 for the 8ed 8ooster
/o!.
<id price to earn target operating income2to2re'enue margin of 13J can also !e
calculated as follows-
Pet 8 A re'enue to earn target income
8 4 3.138 A ?3),533
3.F38 A ?3),533
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions
C(S,
APP(CA,(M
<AS6
}
}
}
Consulting
Support
Consulting
Support
C(S, (<L6C,-
L(< *(8
C(MSNP,M#
CP6M,
786C,
C(S,S
}
ndirect Costs
7irect Costs
M786C,
C(S,
$((P
$rofessional
Pa!or Costs
$rofessional
Pa!or Costs
$rofessional
Pa!or
Client
Support
3>
8 A ?3),533 C 3.F3 A ?3D,333
or, 7irect costs ? F,333
ndirect costs )3,533
(perating income 3,D33
<id price ?3D,333
4-00 ")>433 min.% 6er3ice ind!stry, Go' costin", t5o direct- and indirect-cost cate"ories,
la5 fir ,contin!ation of 4-02-.
Although not re9uired, the following o'er'iew diagram is helpful to understand Seating.s /o!2
costing system.
1. Professional
Partner :a'or
Professional
Associate :a'or
<udgeted compensation per professional
7i'ided !y !udgeted hours of !illa!le
time per professional
<udgeted direct2cost rate
? )33,333
C1,D33
?1)> per hour*
?@3,333
C1,D33
?>3 per hour
U
HCan also !e calculated as
,otal !udgeted partner la!or costs
,otal !udgeted partner la!or 2 hours
.
?)33,333 >
1,D33 >
.
333 , @
?1,333,333
. ?1)>
U
Can also !e calculated as
,otal !udgeted associate la!or costs
,otal !udgeted associate la!or 2 hours
.
?@3,333 )3
1,D33 )3
.
?1,D33,333
3) 333 ,
. ? >3
). 7eneral
6!**ort
6ecretarial
6!**ort
$rofessional
Pa!or2Hours
#eneral
Support
C(S, (<L6C,-
L(< *(8
CP6M,
M786C,
C(S,
$((P
C(S,
APP(CA,(M
<AS6
}
}
W
}
786C,
C(S,
ndirect Costs
7irect Costs
$artner
Pa!or2Hours
Secretarial
Support
$rofessional
Associate Pa!or
$rofessional
$artner Pa!or
3D
<udgeted total costs
7i'ided !y !udgeted 9uantity of allocation !ase
<udgeted indirect cost rate
?1,@33,333
C 53,333 hours
?5> per hour
?533,333
C @,333 hours
?>3 per hour
3. Richardson P!nch
7irect costs-
$rofessional partners, ?1)> D3B ?1)> 33
$rofessional associates, ?>3 53B ?>3 1)3
7irect costs
ndirect costs-
#eneral support, ?5> 133B ?5> 1>3
Secretarial support, ?>3 D3B ?>3 33
ndirect costs
,otal costs
?E,>33
),333
? F,>33
5,>33
3,333
E,>33
?1E,333
?3,E>3
D,333
? F,E>3
D,E>3
1,>33
@,)>3
?1@,333
5. Richardson P!nch
Single direct 2 Single indirect
"from $ro!lem 523)%
+ultiple direct 4 +ultiple indirect
"from re9uirement 3 of $ro!lem 5233%
7ifference
?1),333
1E,333
? >,333
undercosted
?1@,333
1@,333
? 3
no change
,he 8ichardson and $unch /o!s differ in their use of resources. ,he 8ichardson /o! has a
mi& of D3J partners and 53J associates, while $unch has a mi& of )3J partners and @3J
associates. ,hus, the 8ichardson /o! is a relati'ely high user of the more costly partner2related
resources "!oth direct partner costs and indirect partner secretarial support%. ,he refined2costing
system in $ro!lem 523) increases the reported cost in $ro!lem 523) for the 8ichardson /o! !y
51.EJ "from ?1),333 to ?1E,333%.
4-04 ")3)> min.% Proration of o3erhead.
1. <udgeted manufacturing o'erhead rate is ?5,@33,333 C @3,333 hours A ?D3 per machine2hour.
).
+anufacturing o'erhead
underallocated
A
incurred
4
allocated
A ?5,F33,333 4 ?5,>33,333*
A ?533,333
*?D3 E>,333 actual machine2hours A ?5,>33,333
a. =rite2off to Cost of #oods Sold
Acco!nt
,1-
Acco!nt
Aalance
,Aefore Proration-
,2-
Irite-off
of >400,000
+nderallocated
)an!fact!rin"
<3erhead
,0-
Acco!nt
Aalance
,After Proration-
,4- . ,2- 2 ,0-
=ork in $rocess
*inished #oods
Cost of #oods Sold
,otal
? E>3,333
1,)>3,333
@,333,333
?13,333,333
? 3
3
533,333
?533,333
? E>3,333
1,)>3,333
@,533,333
?13,533,333
!. $roration !ased on ending !alances "!efore proration% in =ork in $rocess, *inished
#oods and Cost of #oods Sold.
Acco!nt
,1-
Acco!nt Aalance
,Aefore Proration-
,2-
Proration of >400,000
+nderallocated
)an!fact!rin"
<3erhead
,0-
Acco!nt
Aalance
,After Proration-
,4- . ,2- 2 ,0-
=ork in $rocess
*inished #oods
Cost of #oods Sold
,otal
? E>3,333
1,)>3,333
@,333,333
?13,333,333
" E.>J%
"1).>J%
"@3 .3J%
133 .3J
3.3E> ?533,333 A ? 33,333
3.1)> ?533,333 A >3,333
3.@33 ?533,333 A 3)3,333
?533,333
? E@3,333
1,333,333
@,3)3,333
?13,533,333
c. $roration !ased on the allocated o'erhead amount "!efore proration% in the ending
!alances of =ork in $rocess, *inished #oods, and Cost of #oods Sold.
Acco!nt
,1-
Acco!nt
Aalance
,Aefore
Proration-
,2-
Allocated <3erhead
#ncl!ded in
the Acco!nt Aalance
,Aefore Proration-
,0- ,4-
Proration of >400,000
+nderallocated
)an!fact!rin" <3erhead
,5-
Acco!nt
Aalance
,After
Proration-
,9- . ,2- 2 ,5-
=ork in $rocess ? E>3,333 ? )53,333
a
" >.33J% 3.3>33 ?533,333 A ? )1,3)3 ? EE1,3)3
*inished #oods 1,)>3,333 DD3,333
!
"15.DEJ% 3.15DE ?533,333 A >@,D@3 1,33@,D@3
Cost of #oods Sold @,333,333 3,D33,333
c
"@3.33J% 3.@333 ?533,333 A 3)3,333
@,3)3,3
33
,otal ?13,333,333 ?5,>33,333 133.33 J ?533,333 ?13,533,333
a
?D3 5,333 machine2hours
B
!
?D3 11,333 machine2hoursB
c
?D3 D3,333 machine2hours
3. Alternati'e "c% is theoretically preferred o'er "a% and "!%. Alternati'e "c% yields the same
ending !alances in work in process, finished goods, and cost of goods sold that would ha'e !een
reported had actual indirect cost rates !een used.
Chapter 5 also discusses an ad/usted allocation rate approach that results in the same
ending !alances as does alternati'e "c%. ,his approach operates 'ia a restatement of the indirect
costs allocated to all the indi'idual /o!s worked on during the year using the actual indirect cost
rate.
4-05 "1> min.% ?oral costin", o3erhead allocation, 5orEin" 'acE5ard.

1a. +anufacturing o'erhead allocated A )33J G 7irect manufacturing la!or cost
?3,D33,333 A ) G 7irect manufacturing la!or cost
7irect manufacturing la!or cost A
)
?3,D33,333
A ?1,@33,333
!.
,otal manufacturing
cost
A
7irect material
used
I
7irect manufacturing
la!or cost
I
+anufacturing
o'erhead allocated
?@,333,333 A 7irect material used I ?1,@33,333 I ?3,D33,333
7irect material used A ?),D33,333
).
=ork in $rocess
1;1;)33F
I ,otal manufacturing cost A Cost of goods manufactured I
=ork in $rocess
1);31;)33F
7enote =ork2in2process on 1);31;)33F !y T
?3)3,333 I ?@,333,333 A ?E,F)3,333 I T
T A ?533,333
=ork2in2process in'entory, 1);31;3F A ?533,333.
CHAPTER 5
5-16 (20 min.) Cost hierarchy.
1. a. ndirect manufacturing la!or costs of ?1,)33,333 support direct manufacturing la!or
and are output unit2le'el costs. 7irect manufacturing la!or generally increases with
output units, and so will the indirect costs to support it.
!. <atch2le'el costs are costs of acti'ities that are related to a group of units of a product
rather than each indi'idual unit of a product. $urchase order2related costs "including
costs of recei'ing materials and paying suppliers% of ?D33,333 relate to a group of
units of product and are !atch2le'el costs.
c. Cost of indirect materials of ?3>3,333 generally changes with la!or hours or machine
hours which are unit2le'el costs. ,herefore, indirect material costs are output unit2
le'el costs.
d. Setup costs of ?E33,333 are !atch2le'el costs !ecause they relate to a group of units
of product produced after the machines are set up.
e. Costs of designing processes, drawing process charts, and making engineering
changes for indi'idual products, ?F33,333, are product2sustaining !ecause they relate
to the costs of acti'ities undertaken to support indi'idual products regardless of the
num!er of units or !atches in which the product is produced.
f. +achine2related o'erhead costs "depreciation and maintenance% of ?1,)33,333 are
output unit2le'el costs !ecause they change with the num!er of units produced.
g. $lant management, plant rent, and insurance costs of ?F>3,333 are facility2sustaining
costs !ecause the costs of these acti'ities cannot !e traced to indi'idual products or
ser'ices !ut support the organization as a whole.
). ,he comple& !oom !o& made in many !atches will use significantly more !atch2le'el
o'erhead resources compared to the simple !oom !o& that is made in a few !atches. n addition,
the comple& !oom !o& will use more product2sustaining o'erhead resources !ecause it is
comple&. <ecause each !oom !o& re9uires the same amount of machine2hours, !oth the simple
and the comple& !oom !o& will !e allocated the same amount of o'erhead costs per !oom !o& if
,eledor uses only machine2hours to allocate o'erhead costs to !oom !o&es. As a result, the
comple& !oom !o& will !e undercosted "it consumes a relati'ely high le'el of resources !ut is
reported to ha'e a relati'ely low cost% and the simple !oom !o& will !e o'ercosted "it consumes
a relati'ely low le'el of resources !ut is reported to ha'e a relati'ely high cost%.
3. Nsing the cost hierarchy to calculate acti'ity2!ased costs can help ,eledor to identify !oth
the costs of indi'idual acti'ities and the cost of acti'ities demanded !y indi'idual products.
,eledor can use this information to manage its !usiness in se'eral ways-
a. $ricing and product mi& decisions. Snowing the resources needed to manufacture and
sell different types of !oom !o&es can help ,eledor to price the different !oom !o&es
and also identify which !oom !o&es are more profita!le. t can then emphasize its
more profita!le products.
!. ,eledor can use information a!out the costs of different acti'ities to impro'e
processes and reduce costs of the different acti'ities. ,eledor could ha'e a target of
reducing costs of acti'ities "setups, order processing, etc.% !y, say, 3J and constantly
seek to eliminate acti'ities and costs "such as engineering changes% that its customers
percei'e as not adding 'alue.
c. ,eledor management can identify and e'aluate new designs to impro'e performance
!y analyzing how product and process designs affect acti'ities and costs.
d. ,eledor can use its A<C systems and cost hierarchy information to plan and manage
acti'ities. =hat acti'ities should !e performed in the period and at what costX
5-2; "33 min.% AAC, *rod!ct-costin" at 'anEs, cross-s!'sidiJation.
1.
Ro'inson 6Eerrett &arrel Total
8e'enues
Spread re'enue on annual !asis
"3J B ?1,133, ?@33, ?)>,333%
+onthly fee charges
"?)3 B 3, 1), 3%
,otal re'enues
? 33
3
33
? )5
)53
)D5
?E>3.33
3 .33
E>3 .33
? @3E.33
)53 .33
1,35E .33
Costs
7eposit;withdrawal with teller
?).>3
53B >3B >

7eposit;withdrawal with A,+
?3.@3
13B )3B 1D
7eposit;withdrawal on prearranged !asis
?3.>3
3B 1)B D3
<ank checks written
?@.33
FB 3B )
*oreign currency drafts
?1).33
5B 1B D
n9uiries
?1.>3
13B 1@B F
,otal costs
(perating income "loss%
133
@
3
E)
5@
1>
)53
?")13%
1)>
1D
D
)5
1)
)E
)13
? >5
1).>3
1).@3
33.33
1D.33
E).33
13 .>3
1>D .@3
?>F3 .)3
)3E.>3
3D.@3
3D.33
11).33
13).33
>> .>3
D3F .@3
? 53E .)3
,he assumption that the 8o!inson and *arrel accounts e&ceed ?1,333 e'ery month and
the Skerrett account is less than ?1,333 each month means the monthly charges apply only to
Skerrett.
(ne student with a !anking !ackground noted that in this solution 133J of the spread is
attri!uted to the 0depositor side of the !ank.1 He noted that often the spread is di'ided !etween
the 0depositor side1 and the 0lending side1 of the !ank.
). Cross2su!sidization across indi'idual $remier Accounts occurs when profits made on
some accounts are offset !y losses on other accounts. ,he aggregate profita!ility on the three
customers is ?53E.)3. ,he *arrel account is highly profita!le "?>F3.)3%, while the 8o!inson
account is siza!ly unprofita!le. ,he Skerrett account shows a small profit !ut only !ecause of the
?)53 monthly fees. t is unlikely that Skerrett will keep paying these high fees and that *<
would want Skerret to pay such high fees from a customer relationship standpoint.
,he facts also suggest that the customers do not use the !ank ser'ices uniformly. *or
e&ample, 8o!inson and Skerret ha'e a lot of transactions with the teller or A,+, and also in9uire
a!out their account !alances more often than *arrell. ,his suggests cross2su!sidization. *<
should !e 'ery concerned a!out the cross2su!sidization. Competition likely would 0understand1
that high2!alance low2acti'ity type accounts "such as *arrel% are highly profita!le. (ffering free
ser'ices to these customers is not likely to retain these accounts if other !anks offer higher
interest rates. Competition likely will reduce the interest rate spread *< can earn on the high2
!alance low2acti'ity accounts they are a!le to retain.
3. $ossi!le changes *< could make are-
a. (ffer higher interest rates on high2!alance accounts to increase *<.s competiti'eness
in attracting and retaining these accounts.
!. ntroduce charges for indi'idual ser'ices. ,he A<C study reports the cost of each
ser'ice. *< has to decide if it wants to price each ser'ice at cost, !elow cost, or
a!o'e cost. f it prices a!o'e cost, it may use ad'ertising and other means to
encourage additional use of those ser'ices !y customers. (f course, in determining its
pricing strategy, *< would need to consider how other competing !anks are pricing
their products and ser'ices.
5-04 "33453 min.% Acti3ity-'ased costin", erchandisin".
1. 7eneral
6!*erarEet
Chains
$r!"store
Chains
)o-and-Po*
6in"le
6tores Total
8e'enues ?3,E3@,333 ?3,1>3,333 ?1,F@3,333 ?@,@3@,333
Cost of goods sold 3,D33,333 3,333,333 1,@33,333 @,533,333
#ross margin ? 13@,333 ? 1>3,333 ? 1@3,333 ? 53@,333
(ther operating costs 331,3@3
(perating income ? 13D,F)3
#ross margin J ).F1J 5.EDJ F.3FJ
,he gross margin of $harmacare, nc., was 5.FDJ "?53@,333 C ?@,@3@,333%. ,he
operating income margin of $harmacare, nc., was 1.>>J "?13D,F)3 C ?@,@3@,333%.
). ,he per2unit cost dri'er rates are-
1. Customer purchase order processing,
?@3,333 C ),333 "153 I 3D3 I 1,>33% orders A ?53 per order
). Pine item ordering,
?D3,@53 C )1,)@3 "1,FD3 I 5,3)3 I 1>,333% line items A ? 3 per line item
3. Store deli'ery,
?E1,333 C 1,5@3 "1)3 I 3D3 I 1,333% deli'eries A ?5E.FE3 per deli'ery
5. Cartons shipped,
?ED,333 C ED,333 "3D,333 I )5,333 I 1D,333% cartons A ? 1 per carton
>. Shelf2stocking,
?13,)53 C D53 "3D3 I 1@3 I 133% hours A ?1D per hour
). ,he acti'ity2!ased costing of each distri!ution market for August )33@ is-
7eneral
6!*erarEet
Chains
$r!"store
Chains
)o-and-
Po*
6in"le 6tores Total
1. Customer purchase order processing
"?53 153B 3D3B 1,>33% ? >,D33 ?15,533 ? D3,333 ? @3,333
). Pine item ordering
"?3 1,FD3B 5,3)3B 1>,333% >,@@3 1),FD3 5>,333 D3 ,@53
3. Store deli'ery,
"?5E.FE3 1)3B 3D3B 1,333% >,E>E 1E,)E3 5E,FE3 E1,333
5. Cartons shipped
"?1 3D,333B )5,333B 1D,333% 3D,333 )5,333 1D,333 ED,333
>. Shelf2stocking
"?1D 3D3B 1@3B 133% >,ED3 ),@@3 1,D33 13,)53
?>@,FFE ?E1,>13 ?1E3,>E3 ?331,3@3
,he re'ised operating income statement is-
7eneral )o-and-Po*
6!*erarEet $r!"store 6in"le
Chains Chains 6tores Total
8e'enues ?3,E3@,333 ?3,1>3,333 ?1,F@3,333 ?@,@3@,333
Cost of goods sold 3,D33,333 3,333,333 1,@33,333 @,533,333
#ross margin 13@,333 1>3,333 1@3,333 53@,333
(perating costs >@,FFE E1,>13 1E3,>E3 331,3@3
(perating income ? 5F,333 ? E@,5F3 ? F,5)E ? 13D,F)3
(perating income margin 1.3)J ).5FJ 3.5@J 1.>>J
5. ,he ranking of the three markets are-
+sin" 7ross )ar"in +sin" <*eratin" #ncoe
1. +om2and2$op Single Stores F.3FJ 1. 7rugstore Chains ).5FJ
). 7rugstore Chains 5.EDJ ). #eneral Supermarket Chains 1.3)J
3. #eneral Supermarket Chains ).F1J 3. +om2and2$op Single Stores 3.5@J
,he acti'ity2!ased analysis of costs highlights how the +om2and2$op Single Stores use a larger
amount of $harmacare.s resources per re'enue dollar than do the other two markets. ,he ratio of
the operating costs to re'enues across the three markets is-
#eneral Supermarket Chains 1.>FJ "?>@,FFE C ?3,E3@,333%
7rugstore Chains ).)EJ "?E1,>13 C ?3,1>3,333%
+om2and2$op Single Stores @.D1J "?1E3,>E3 C ?1,F@3,333%
,his is a classic illustration of the ma&im that 0all re'enue dollars are not created e9ual.1 ,he
analysis indicates that the +om2and2$op Single Stores are the least profita!le market.
$harmacare should work to increase profits in this market through- "1% a possi!le surcharge, ")%
decreasing the num!er of orders, "3% offering discounts for 9uantity purchases, etc.
(ther issues for $harmacare to consider include
a. !hoosing the appropriate cost drivers for each area& ,he pro!lem gi'es a cost dri'er
for each chosen acti'ity area. Howe'er, it is likely that o'er time further refinements
in cost dri'ers would occur. *or e&ample, not all store deli'eries are e9ually easy to
make, depending on parking a'aila!ility, accessi!ility of the storage;shelf space to the
deli'ery point, etc. Similarly, not all cartons are e9ually easy to deli'er44their weight,
size, or likely !reakage component are factors that can 'ary across carton types.
!. Developing a reliable data base on the chosen cost drivers& *or some items, such as
the num!er of orders and the num!er of line items, this information likely would !e
a'aila!le in machine reada!le form at a high le'el of accuracy. Nnless the deli'ery
personnel ha'e hand2held computers that they use in a systematic way, estimates of
shelf2stocking time are likely to !e unrelia!le. Ad'ances in information technology
likely will reduce pro!lems in this area o'er time.
c. Deciding how to handle costs that may be common across several activities& *or
e&ample, "3% store deli'ery and "5% cartons shipped to stores ha'e the common cost of
the same trip. Some organizations may treat "3% as the primary acti'ity and attri!ute
only incremental costs to "5%. Similarly, "1% order processing and ")% line item
ordering may ha'e common costs.
d. )ehavioral factors are likely to be a challenge to Flair& He must now tell those
salespeople who specialize in +om2and2$op accounts that they ha'e !een less
profita!le than pre'iously thought.
5-09 "53 min.% AAC, health care.
1a. +edical supplies rate A
years 2 patient of num!er ,otal
costs supplies +edical
A
1>3
?333,333

A ?),333;patient2year
A
space of feet s9uare of amount ,otal
costs maint. clinic and 8ent
A
33,333
?1@3,333

A ?D per s9uare foot
A
years 2 patient of num!er ,otal
laundry food, charts,
patient manage to costs Admin.
A
1>3
?D33,333

A ?5,333;patient2year
Pa!oratory ser'ices rate A
tests la!oratory of num!er ,otal
costs ser'ices Pa!oratory
A
),>33
?133,333

A ?53 per test
,hese cost dri'ers are chosen as the ones that !est match the descriptions of why the costs arise.
(ther answers are accepta!le, pro'ided that clear e&planations are gi'en.
1!. Acti'ity2!ased costs for each program and cost per patient2year of the alcohol and drug
program follow-
Alcohol $r!" After-Care Total
7irect la!or
$hysicians at ?1>3,333 G 3B 5B 3 K ? D33,333 K ? D33,333
$sychologists at ?E>,333 G DB 5B @ ?5>3,333 333,333 ? D33,333 1,3>3,333
Murses at ?33,333 G 5B DB 13 1)3,333 1@3,333 333,333 D33,333
7irect la!or costs >E3,333 1,3@3,333 F33,333 ),>>3,333
+edical supplies
1
?),333 G 53B >3B D3 @3,333 133,333 1)3,333 333,333
8ent and clinic maintenance
)
?D G F,333B F,333B 1),333 >5,333 >5,333 E),333 1@3,333
Administrati'e costs to manage
patient charts, food, and laundry
3
?5,333 G 53B >3B D3 1D3,333 )33,333 )53,333 D33,333
Pa!oratory ser'ices
5
?53 G 533B 1,533B E33 1D,333 >D,333 )@,333 133,333
,otal costs ?@@3,333 ?1,5F3,333 ?1,3D3,333 ?3,E33,333
Cost per patient2year
?@@3,333
?)),333
53
A
?1,5F3,333
?)F,@33
>3
A
1
Allocated using patient2years
)
Allocated using s9uare feet of space
3
Allocated using patient2years
5
Allocated using num!er of la!oratory tests
1c. ,he A<C system more accurately allocates costs !ecause it identifies !etter cost dri'ers.
,he A<C system chooses cost dri'ers for o'erhead costs that ha'e a cause2and2effect
relationship !etween the cost dri'ers and the costs. (f course, Clayton should continue to
e'aluate if !etter cost dri'ers can !e found than the ones they ha'e identified so far.
<y implementing the A<C system, Clayton can gain a more detailed understanding of
costs and cost dri'ers. ,his is 'alua!le information from a cost management perspecti'e. ,he
system can yield insight into the efficiencies with which 'arious acti'ities are performed.
Clayton can then e&amine if redundant acti'ities can !e eliminated. Clayton can study trends and
work toward impro'ing the efficiency of the acti'ities.
n addition, the A<C system will help Clayton determine which programs are the most
costly to operate. ,his will !e useful in making long2run decisions as to which programs to offer
or emphasize. ,he A<C system will also assist Clayton in setting prices for the programs that
more accurately reflect the costs of each program.
). ,he concern with using costs per patient2year as the rule to allocate resources among its
programs is that it emphasizes 0input1 to the e&clusion of 0outputs1 or effecti'eness of the
programs. After2all, Clayton.s goal is to cure patients while controlling costs, not minimize costs
per2patient year. ,he pro!lem, of course, is measuring outputs.
Nnlike many manufacturing companies, where the outputs are o!'ious !ecause they are
tangi!le and measura!le, the outputs of ser'ice organizations are more difficult to measure.
6&amples are 0cured1 patients as distinguished from 0processed1 or 0discharged1 patients,
0educated1 as distinguished from 0partially educated1 students, and so on.
5-09 ">3 min.% AAC, i*leentation, ethics.
1. Applewood 6lectronics should not emphasize the 8egal model and should not phase out
the +onarch model. Nnder acti'ity2!ased costing, the 8egal model has an operating income
percentage of less than 3J, while the +onarch model has an operating income percentage of
nearly 53J.
Cost dri'er rates for the 'arious acti'ities identified in the acti'ity2!ased costing "A<C% system
are as follows-
Soldering ? F5),333 1,>E3,333 A ? 3.D3 per solder point
Shipments @D3,333 )3,333 A 53.33 per shipment
Quality control 1,)53,333 EE,>33 A 1D.33 per inspection
$urchase orders F>3,533 1F3,3@3 A >.33 per order
+achine power >E,D33 1F),333 A 3.33 per machine2hour
+achine setups E>3,333 33,333 A )>.33 per setup
A**le5ood Electronics
Calc!lation of Costs of Each )odel !nder Acti3ity-Aased Costin"
)onarch Re"al
7irect costs
7irect materials "?)3@ )),333B ?>@5 5,333% ? 5,>ED,333 ?),33D,333
7irect manufacturing la!or "?1@ )),333B ?5) 5,333% 3FD,333 1D@,333
+achine costs "?155 )),333B ?E) 5,333% 3,1D@,333 )@@,333
,otal direct costs @,153,333 ),EF),333
ndirect costs
Soldering "?3.D3 1,1@>,333B ?3.D3 3@>,333% E11,333 )31,333
Shipments "?53 1D,)33B ?53 3,@33% DFD,D33 1D3,533
Quality control "?1D >D,)33B ?1D )1,333% @FF,)33 353,@33
$urchase orders "?> @3,133B ?> 13F,F@3% 533,>33 >5F,F33
+achine power "?3.33 1ED,333B ?3.33 1D,333% >),@33 5,@33
+achine setups "?)> 1D,333B ?)> 15,333% 533,333 3>3,333
,otal indirect costs 3,1D3,133 1,D3F,F33
,otal costs ?11,333,133 ?5,531,F33
Profita'ility analysis
)onarch Re"al Total
8e'enues ?1F,@33,333 ?5,>D3,333 ?)5,3D3,333
Cost of goods sold 11,333,133 5,531,F33 1>,E3),333
#ross margin ? @,5FF,F33 ? 1)@,133 ? @,D)@,333
$er2unit calculations-
+nits sold 22,000 4,000
Selling price
"?1F,@33,333 )),333B
?5,>D3,333 5,333% ?F33.33 ?1,153.33
Cost of goods sold
"?11,333,133 )),333B
?5,531,F33 5,333% >13.D5 1,13E.F@
7ross ar"in >049.09 > 02.02
7ross ar"in *ercenta"e 42.9= 2.4=
). Applewood.s simple costing system allocates all manufacturing o'erhead other than
machine costs on the !asis of machine2hours, an output unit2le'el cost dri'er. Conse9uently, the
more machine2hours per unit that a product needs, the greater the manufacturing o'erhead
allocated to it. <ecause +onarch uses twice the num!er of machine2hours per unit compared to
8egal, a large amount of manufacturing o'erhead is allocated to +onarch.
,he A<C analysis recognizes se'eral !atch2le'el cost dri'ers such as purchase orders,
shipments, and setups. 8egal uses these resources much more intensi'ely than +onarch. ,he
A<C system recognizes 8egal.s use of these o'erhead resources. Consider, for e&ample,
purchase order costs. ,he simple system allocates these costs on the !asis of machine2hours. As a
result, each unit of +onarch is allocated twice the purchase order costs of each unit of 8egal.
,he A<C system allocates ?533,>33 of purchase order costs to +onarch "e9ual to ?1@.)3
"?533,>33 )),333% per unit% and ?>5F,F33 of purchase order costs to 8egal "e9ual to ?13E.5@
"?>5F,F33 5,333% per unit%. 6ach unit of 8egal uses E.>> "?13E.5@ ?1@.)3% times the
purchases order costs of each unit of +onarch.
8ecognizing 8egal.s more intensi'e use of manufacturing o'erhead results in 8egal
showing a much lower profita!ility under the A<C system. <y the same token, the A<C analysis
shows that +onarch is 9uite profita!le. ,he simple costing system o'ercosted +onarch, and so
made it appear less profita!le.
3. 7u'al.s comments a!out A<C implementation are 'alid. =hen designing and
implementing A<C systems, managers and management accountants need to trade off the costs
of the system against its !enefits. Adding more acti'ities would make the system harder to
understand and more costly to implement !ut it would pro!a!ly impro'e the accuracy of cost
information, which, in turn, would help Applewood make !etter decisions. Similarly, using
inspection2hours and setup2hours as allocation !ases would also pro!a!ly lead to more accurate
cost information, !ut it would increase measurement costs.
5. Acti'ity2!ased management "A<+% is the use of information from acti'ity2!ased costing
to make impro'ements in a firm. *or e&ample, a firm could re'ise product prices on the !asis of
re'ised cost information. *or the long term, acti'ity2!ased costing can assist management in
making decisions regarding the 'ia!ility of product lines, distri!ution channels, marketing
strategies, etc. A<+ highlights possi!le impro'ements, including reduction or elimination of
non2'alue2added acti'ities, selecting lower cost acti'ities, sharing acti'ities with other products,
and eliminating waste. A<+ is an integrated approach that focuses management.s attention on
acti'ities with the ultimate aim of continuous impro'ement. As a whole2company philosophy,
A<+ focuses on strategic, as well as tactical and operational acti'ities of the company.
>. ncorrect reporting of A<C costs with the goal of retaining !oth the +onarch and 8egal
product lines is unethical. n assessing the situation, the specific 0Standards of 6thical Conduct
for +anagement Accountants1 "descri!ed in 6&hi!it 12E% that the management accountant should
consider are listed !elow.
Competence
Clear reports using rele'ant and relia!le information should !e prepared. $reparing reports on
the !asis of incorrect costs in order to retain product lines 'iolates competence standards. t is
unethical for <enzo to change the A<C system with the specific goal of reporting different
product cost num!ers that 7u'al fa'ors.
Integrity
,he management accountant has a responsi!ility to a'oid actual or apparent conflicts of interest
and ad'ise all appropriate parties of any potential conflict. <enzo may !e tempted to change the
product cost num!ers to please 7u'al, the di'ision president. ,his action, howe'er, would
'iolate the responsi!ility for integrity. ,he Standards of 6thical Conduct re9uire the management
accountant to communicate fa'ora!le as well as unfa'ora!le information.
Credibility
,he management accountant.s standards of ethical conduct re9uire that information should !e
fairly and o!/ecti'ely communicated and that all rele'ant information should !e disclosed. *rom
a management accountant.s standpoint, ad/usting the product cost num!ers to make !oth the
+onarch and 8egal lines look profita!le would 'iolate the standard of o!/ecti'ity.
<enzo should indicate to 7u'al that the product cost calculations are, indeed, appropriate.
f 7u'al still insists on modifying the product cost num!ers, <enzo should raise the matter with
one of 7u'al.s superiors. f, after taking all these steps, there is continued pressure to modify
product cost num!ers, <enzo should consider resigning from the company, rather than engage in
unethical !eha'ior.
CHAPTER 1;
1;-19 "1> min.% Iei"hted-a3era"e ethod, eC!i3alent !nits.
Nnder the weighted2a'erage method, e9ui'alent units are calculated as the e9ui'alent units of
work done to date. Solution 6&hi!it 1E21F shows e9ui'alent units of work done to date for the
Assem!ly 7i'ision of *enton =atches, nc., for direct materials and con'ersion costs.
6<:+T#<? E@H#A#T 1;-19
Steps 1 and )- Summarize (utput in $hysical Nnits and Compute (utput in 69ui'alent NnitsB
=eighted2A'erage +ethod of $rocess Costing, Assem!ly 7i'ision of *enton =atches, nc., for
+ay )33F.
,6te* 2-
,6te* 1- EC!i3alent +nits
Physical $irect Con3ersion
&lo5 of Prod!ction +nits )aterials Costs
=ork in process !eginning "gi'en% @3
Started during current period "gi'en% >3 3
,o account for >@ 3
Completed and transferred out during current period 5D3 5D3 5D3
=ork in process, ending* "1)3 D3JB 1)3 33J% 1) 3 E) 3D
Accounted for >@ 3 YYY YYY
=ork done to date >3) 5FD
*
7egree of completion in this department- direct materials, D3JB con'ersion costs, 33J.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions >3
1;-20 ")3 min.% Iei"hted-a3era"e ethod, assi"nin" costs ,contin!ation of 1;-19-.
Solution 6&hi!it 1E2)3 summarizes total costs to account for, calculates cost per e9ui'alent unit
of work done to date in the Assem!ly 7i'ision of *enton =atches, nc., and assigns costs to units
completed and to units in ending work2in2process in'entory.
6<:+T#<? E@H#A#T 1;-20
Steps 3, 5, and >- Summarize ,otal Costs to Account *or, Compute Cost per 69ui'alent Nnit, and
Assign ,otal Costs to Nnits Completed and to Nnits in 6nding =ork in $rocessB
=eighted2A'erage +ethod of $rocess Costing, Assem!ly 7i'ision of *enton =atches, nc., for
+ay )33F.
Total
Prod!ction
Costs
$irect
)aterials
Con3ersion
Costs
,6te* 0% =ork in process, !eginning "gi'en%
? >@5,533 ? 5F3,3D3
? F1,353
Costs added in current period "gi'en% 5 ,D1) ,333 3 ,))3 ,333 1 ,3F) ,333
,otal costs to account for ?> ,1FD ,533 ?3 ,E13 ,3D3 ?1 ,5@3 ,353
"6te* 4% Costs incurred to date ?3,E13,3D3 ?1,5@3,353
7i'ide !y e9ui'alent units of work
done to date "Solution 6&hi!it 1E21F% >3) 5FD
Cost per e9ui'alent unit of work done
to date
? D ,F@3 ? ) ,FF3

"6te* 5% Assignment of costs-
Completed and transferred out "5D3
units%
?5,>@D,)33
"5D3* ?D,F@3% I "5D3* ?),FF3%
=ork in process, ending "1)3 units%
D13 ,)33
"E)
U
?D ,F@3% I "3D
U

?) ,FF3 %
,otal costs accounted for
?> ,1FD ,533
?3 ,E13 ,3D3 I
?1 ,5@3 ,353
*
69ui'alent units completed and transferred out from Solution 6&hi!it 1E21F, Step ).
U
69ui'alent units in work in process, ending from Solution 6&hi!it 1E21F, Step ).
1;-05 ")> min.% Iei"hted-a3era"e ethod.
Solution 6&hi!it 1E23>A shows e9ui'alent units of work done to date of-
7irect materials D)> e9ui'alent units
Con'ersion costs >)> e9ui'alent units
Mote that direct materials are added when the Assem!ly 7epartment process is 13J
complete. <oth the !eginning and ending work in process are more than 13J complete and
hence are 133J complete with respect to direct materials.
Solution 6&hi!it 1E23>< summarizes the total Assem!ly 7epartment costs for April
)33F, calculates cost per e9ui'alent unit of work done to date for direct materials and con'ersion
costs, and assigns these costs to units completed "and transferred out%, and to units in ending
work in process using the weighted2a'erage method.
6<:+T#<? E@H#A#T 1;-05A
=eighted2A'erage +ethod of $rocess Costing, Assem!ly 7epartment of $orter Handcraft for
April )33F.
,6te* 1-,6te* 2-
EC!i3alent +nits
Physical $irect Con3ersion
&lo5 of Prod!ction +nits )aterials Costs
=ork in process, !eginning "gi'en% E>
Started during current period "gi'en% >>3
,o account for D)>
Completed and transferred out
during current period >33 >33 >33
=ork in process, ending*"gi'en% 1)>
1)> 133JB 1)> )3J 1)> )>
Accounted for D)>
=ork done to date D)> >)>
*
7egree of completion in this department- direct materials, 133JB con'ersion costs, )3J.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions >)
6<:+T#<? E@H#A#T 1;-05A
Steps 3, 5, and >- Summarize ,otal Costs to Account *or, Compute Cost per 69ui'alent Nnit, and
Assign ,otal Costs to Nnits Completed and to Nnits in 6nding =ork in $rocessB
=eighted2A'erage +ethod of $rocess Costing, Assem!ly 7epartment of $orter, April )33F.
Total
Prod!ction
Costs
$irect
)aterials
Con3ersion
Costs
,6te* 0% =ork in process, !eginning "gi'en% ? 1,F13 ? 1,EE> ? 13>
Costs added in current period "gi'en% )@,5F3 1E,D 33 13,@F3
,otal costs to account for ? 33,533 ? 1F,3E> ? 11,3)>
"6te* 4% Costs incurred to date ?1F,3E> ?11,3)>
7i'ide !y e9ui'alent units of work done to
date "Solution 6&hi!it 1E23>A% D)> >)>
Cost per e9ui'alent unit of work done to date ? 31 ? )1
"6te* 5% Assignment of costs-
Completed and transferred out ">33 units% ?)D,333 ">33
*
?31% I ">33
*
?)1%
=ork in process, ending "1)> units% 5,533
"1)>
U
?31% I ")>
U
? )1%
,otal costs accounted for ? 33,533 ? 1F,3E> I ? 11,3)>
*
69ui'alent units completed and transferred out from Solution 6&hi!it 1E23>A, Step ).
U
69ui'alent units in ending work in process from Solution 6&hi!it 1E23>A, Step ).
1;.04 "33 min.% Transferred-in costs, 5ei"hted a3era"e.
1. Solution 6&hi!it 1E23@A computes the e9ui'alent units of work done to date in the
<inding 7epartment for transferred2in costs, direct materials, and con'ersion costs.
Solution 6&hi!it 1E23@< summarizes total <inding 7epartment costs for April )33F,
calculates the cost per e9ui'alent unit of work done to date in the <inding 7epartment for
transferred2in costs, direct materials, and con'ersion costs, and assigns these costs to units
completed and transferred out and to units in ending work in process using the weighted2a'erage
method.
). Lournal entries-
a. =ork in $rocess44 <inding 7epartment 155,333
=ork in $rocess44$rinting 7epartment 155,333
Cost of goods completed and transferred out
during April from the $rinting 7epartment
to the <inding 7epartment
!. *inished #oods )5F,31)
=ork in $rocess44 <inding 7epartment )5F,31)
Cost of goods completed and transferred out
during April from the <inding 7epartment
to *inished #oods in'entory
S(PN,(M 6TH<, 1E23@A
=eighted2A'erage +ethod of $rocess Costing,
<inding 7epartment of $u!lish, nc. for April )33F.
,6te* 1- ,6te* 2-
EC!i3alent +nits
&lo5 of Prod!ction
Physical
+nits
Transferred-
in Costs
$irect
)aterials
Con3ersion
Costs
=ork in process, !eginning "gi'en% F33
,ransferred2in during current period "gi'en% ),E 33
,o account for 3,D 33
Completed and transferred out during current period- 3,333 3,333 3,333 3,333
=ork in process, ending
a
"gi'en% D33
"D33 133JB D33 3JB D33 D3J% D33 3 3D3
Accounted for 3,D 33
=ork done to date 3,D 33 3 ,333 3,3D 3
a
7egree of completion in this department- transferred2in costs, 133JB direct materials, 3JB
con'ersion costs, D3J.
6<:+T#<? E@H#A#T 1;-04A
Steps 3, 5, and >- Summarize ,otal Costs to Account *or, Compute Cost per 69ui'alent Nnit, and Assign ,otal Costs to
Nnits Completed and to Nnits in 6nding =ork in $rocessB
=eighted2A'erage +ethod of $rocess Costing,
<inding 7epartment of $u!lish, nc. for April )33F.

Total
Prod!ction
Costs
Transferred-in
Costs
$irect
)aterials
Con3ersion
Costs
,6te* 0- =ork in process, !eginning "gi'en% ? 5E,EE> ? 3),EE> ? 3 ?1>,333
Costs added in current period "gi'en% )3F,E 33 155 ,333 )D,E 33 DF ,333
,otal costs to account for ? )@E,5E> ?1 ED,EE> ? )D,E 33 ? @5 ,333
,6te* 4- Costs incurred to date ?1ED,EE> ?)D,E33 ?@5,333
7i'ide !y e9ui'alent units of work done to date
"Solution 6&hi!it 1E23@A% C 3,D 33 C 3 ,333 C 3,3D 3
Cost per e9ui'alent unit of work done to date ? 5F.135 ? @.F3 ? )>
,6te* 5- Assignment of costs-
Completed and transferred out "3,333 units% ?)5F,31)
"3,333
a
G ?5F.135% I "3,333
a
G ?@.F3% I
"3,333
a
G ?)>%
=ork in process, ending "D33 units%- 3@,5D3
"D 33
!
G ?5F.135% I "3
!
G ?@.F3% I "3D 3
!
G ?)>%
,otal costs accounted for ? )@E,5E>
?1 ED,EE
> I ? )D,E 33 I ? @5 ,333
a
69ui'alent units completed and transferred out from Sol. 6&hi!it 1E23@A, step ).
!
69ui'alent units in ending work in process from Sol. 6&hi!it 1E23@A, step ).
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions >>
CHAPTER 15
15-9 ,he stand2alone cost2allocation method uses information pertaining to each user of a cost
o!/ect as a separate entity to determine the cost2allocation weights.
,he incremental cost2allocation method ranks the indi'idual users of a cost o!/ect in the
order of users most responsi!le for the common costs and then uses this ranking to allocate costs
among those users. ,he first2ranked user of the cost o!/ect is the primary user and is allocated
costs up to the costs of the primary user as a stand2alone user. ,he second2ranked user is the first
incremental user and is allocated the additional cost that arises from two users instead of only the
primary user. ,he third2ranked user is the second incremental user and is allocated the additional
cost that arises from three users instead of two users, and so on.
,he Shapley :alue method calculates an a'erage cost !ased on the costs allocated to each
user as first the primary user, the second2ranked user, the third2ranked user, and so on.
15-19 "33 min.% 6!**ort de*artent cost allocationK direct and ste*-do5n ethods.
1. A6 #6 7<%T C<RP
a. 7irect method costs ?D33,333 ?),533,333
Alloc. of AS costs
"53;E>, 3>;E>% "D33,333% ? 3)3,333 ? )@3,333
Alloc. of S costs
"33;F3, D3;F3% "),533,333% @33,333 1,D33,333
? 3 ? 3 ?1,1)3,333 ?1,@@3,333
!. Step2down "AS first% costs ?D33,333 ?),533,333
Alloc. of AS costs
"3.)>, 3.53, 3.3>% "D33,333% 1>3,333 ? )53,333 ? )13,333
Alloc. of S costs
"33;F3, D3;F3% "),>>3,333% @>3,333 1,E33,333
? 3 ? 3 ?1,3F3,333 ?1,F13,333
c. Step-down (IS frst) costs $600,000$2,400,000
Alloc. of S costs
"3.13, 3.33, 3.D3% )53,333 "),533,333% ? E)3,333 ?1,553,333
Alloc. of AS costs
"53;E>, 3>;E>% "@53,333% 55@,333 3F),333
? 3 ? 3 ?1,1D@,333 ?1,@3),333
). 7<%T C<RP
7irect method ?1,1)3,333 ?1,@@3,333
Step2down "AS first% 1,3F3,333 1,F13,333
Step2down "S first% 1,1D@,333 1,@3),333
,he direct method ignores any ser'ices to other support departments. ,he step2down method
partially recognizes ser'ices to other support departments. ,he information systems support
group "with total !udget of ?),533,333% pro'ides 13J of its ser'ices to the AS group. ,he AS
support group "with total !udget of ?D33,333% pro'ides )>J of its ser'ices to the information
systems support group. =hen the AS group is allocated first, a total of ?),>>3,333 is then
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions >D
assigned out from the S group. #i'en C(8$.s disproportionate ")-1% usage of the ser'ices of
S, this method then results in the highest o'erall allocation of costs to C(8$. <y contrast,
#(:,.s usage of the AS group e&ceeds that of C(8$ "!y a ratio of @-E%, and so #(:, is
assigned relati'ely more in support costs when AS costs are assigned second, after they ha'e
already !een incremented !y the AS share of S costs as well.
3. ,hree criteria that could determine the se9uence in the step2down method are-
a. Allocate support departments on a ranking of the percentage of their total ser'ices
pro'ided to other support departments.
1. Administrati'e Ser'ices )>J
). nformation Systems 13J
!. Allocate support departments on a ranking of the total dollar amount in the support
departments.
1. nformation Systems ?),533,333
). Administrati'e Ser'ices ? D33,333
c. Allocate support departments on a ranking of the dollar amounts of ser'ice pro'ided
to other support departments
1. nformation Systems
"3.13 ?),533,333% A ?)53,333
). Administrati'e Ser'ices
"3.)> ?D33,333% A ?1>3,333
,he approach in "a% a!o'e typically !etter appro&imates the theoretically preferred
reciprocal method. t results in a higher percentage of support2department costs pro'ided to other
support departments !eing incorporated into the step2down process than does "!% or "c%, a!o'e.
15-20 ">3 min.% 6!**ort-de*artent cost allocation, reci*rocal ethod ,contin!ation of 15-19-.
1a.
Support Departments Operating Departments
AS I S Govt. Corp.
Costs
$600,000 $2,400,000
Alloc. of
AS costs
"3.)>, 3.53, 3.3>% (861,538) 215,385
$ 344,615 $ 301,538
Alloc. of S costs
"3.13, 3.33, 3.D3% 261,538 (2,615,385)
784,616 1,569,231
$ 0 $ 0
$1,129,231 $1,870,769
8eciprocal +ethod Computation
AS A ?D33,333 I 3.13 S
IS = $2,400,000 + 0.25AS
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions >E
IS = $2,400,000 + 0.25 ($600,000 + 0.10 IS)
= $2,400,000 + $150,000 + 0.025 IS
0.975IS = $2,550,000
IS = $2,550,000 0.975
= $2,615,385
AS = $600,000 + 0.10 ($2,615,385)
= $600,000 + $261,538
= $861,538
1!.
Support Departments Operating Departments
AS I S Govt. Corp.
Costs $600,000 $2,400,000
1
st
Allocation of AS
(0.25, 0.40, 0.35) (600,000) 150,000 $ 240,000 $ 210,000
2,550,000
1
st
Allocation of IS
(0.10, 0.30, 0.60) 255,000 (2,550,000) 765,000 1,530,000
2
nd
Allocation of AS
(0.25, 0.40, 0.35) (255,000) 63,750 102,000 89,250
2
nd
Allocation of IS
(0.10, 0.30, 0.60) 6,375 (63,750) 19,125 38,250
3rd Allocation of AS
(0.25, 0.40, 0.35) (6,375) 1,594 2,550 2,231
3
rd
Allocation of IS
(0.10, 0.30, 0.60) 160 (1,594) 478 956
4
th
Allocation of AS
(0.25, 0.40, 0.35) (160) 40 64 56
4
th
Allocation of IS
(0.10, 0.30, 0.60) 4 (40) 12 24
5
th
Allocation of AS
(0.25, 0.40, 0.35) (4) 1 2 1
5
th
Allocation of IS
(0.10, 0.30, 0.60) 0 (1) 0 1
Total allocation $ 0 $ 0 $1,129,231 $1,870,769
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions >@
).
7o3t. Cons!ltin" Cor*. Cons!ltin"
a. 7irect ?1,1)3,333 ?1,@@3,333
!. Step27own "AS first% 1,3F3,333 1,F13,333
c. Step27own "S first% 1,1D@,333 1,@3),3@3
d. 8eciprocal "linear e9uations% 1,1)F,)31 1,@E3,EDF
e. 8eciprocal "repeated iterations% 1,1)F,)31 1,@E3,EDF
,he four methods differ in the le'el of support department cost allocation across support
departments. ,he le'el of reciprocal ser'ice !y support departments is material. Administrati'e
Ser'ices supplies )>J of its ser'ices to nformation Systems. nformation Systems supplies 13J
of its ser'ices to Administrati'e Ser'ices. ,he nformation 7epartment has a !udget of ?),533,333
that is 533J higher than Administrati'e Ser'ices.
,he reciprocal method recognizes all the interactions and is thus the most accurate. ,his is
especially clear from looking at the repeated iterations calculations.
15-24 ")3 min.% Allocation of coon costs.
1. Alternati'e approaches for the allocation of the ?1,@33 airfare include the following-
a. ,he stand2alone cost allocation method. ,his method would allocate the air fare on
the !asis of each client.s percentage of the total of the indi'idual stand2alone costs.
<altimore client
( )
?1, 533
?1, 533 ?1,133 +
?1,@33 A ?1,33@
Chicago client
( )
?1,133
?1, 533 ?1,133 +
?1,@33 A EF)
?1,@33
Ad'ocates of this method often emphasize an e9uity or fairness rationale.
!. ,he incremental cost allocation method. ,his re9uires the choice of a primary party
and an incremental party.
f the <altimore client is the primary party, the allocation would !e-
<altimore client ?1,533
Chicago client 533
?1,@33
(ne rationale is that #unn was planning to make the <altimore trip, and the Chicago stop was
added su!se9uently. Some students ha'e suggested allocating as much as possi!le to the
<altimore client since #unn had decided not to work for them.
f the Chicago client is the primary party, the allocation would !e-
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions >F
Chicago client ?1,133
<altimore client E33
?1,@33
(ne rationale is that the Chicago client is the one who is going to use #unn.s ser'ices, and
presuma!ly recei'es more !enefits from the tra'el e&penditures.
c. #unn could calculate the Shapley 'alue that considers each client in turn as the
primary party- ,he <altimore client is allocated ?1,533 as the primary party and ?E33 as the
incremental party for an a'erage of "?1,533 I ?E33% C ) A ?1,3>3. ,he Chicago client is
allocated ?1,133 as the primary party and ?533 as the incremental party for an a'erage of
"?1,133 I 533% C ) A ?E>3. ,he Shapley 'alue approach would allocate ?1,3>3 to the <altimore
client and ?E>3 to the Chicago client.
). would recommend #unn use the Shapley 'alue. t is fairer than the incremental method
!ecause it a'oids considering one party as the primary party and allocating more of the common
costs to that party. t also a'oids disputes a!out who is the primary party. t allocates costs in a
manner that is close to the costs allocated under the stand2alone method !ut takes a more
comprehensi'e 'iew of the common cost allocation pro!lem !y considering primary and
incremental users, which the stand2alone method ignores.
,he Shapley 'alue "or the stand2alone cost allocation method% would !e the preferred
methods if #unn was to send the tra'el e&penses to the <altimore and Chicago clients !efore
deciding which engagement to accept. (ther factors such as whether to charge the Chicago client
more !ecause #unn is accepting the Chicago engagement or the <altimore client more !ecause
#unn is not going to work for them can !e considered if #unn sends in her tra'el e&penses after
making her decision. Howe'er, each company would not want to !e considered as the primary
party and so is likely to o!/ect to these arguments.
3. A simple approach is to split the ?D3 e9ually !etween the two clients. ,he limousine costs
at the Sacramento end are not a function of distance tra'eled on the plane.
An alternati'e approach is to add the ?D3 to the ?1,@33 and repeat re9uirement 1-
a. Stand2alone cost allocation method.
<altimore client
( )
?1, 5D3
?1, 5D3 ?1,1D3 +
?1,@D3 A ?1,33D
Chicago client
( )
?1,1D3
?1, 5D3 ?1,1D3 +
?1,@D3 A ? @)5
!. ncremental cost allocation method.
=ith <altimore client as the primary party-
<altimore client ?1,5D3
Chicago client 533
?1,@D3
=ith Chicago client as the primary party-
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions D3
Chicago client ?1,1D3
<altimore client E33
?1,@D3
c. Shapley 'alue.
<altimore client- "?1,5D3 I ?E33% C ) A ?1,3@3
Chicago client- "?533 I ?1,1D3% C ) A ? E@3
As discussed in re9uirement ), the Shapley 'alue or the stand2alone cost allocation
method would pro!a!ly !e the preferred approaches.
*ote+ f any students in the class ha'e faced this situation when 'isiting prospecti'e employers,
ask them how they handled it.
15-02 ")> min.% Coon costs.
1. Stand2alone cost2allocation method.
=right, nc. A
"F33 ?53%
"1, >33 ?3)%
"F33 ?53% "D33 ?53%

+
A
?3D, 333
?5@, 333
"?3D, 333 ?)5, 333%
+
A ?)@,@33
<rown, nc. A
"D33 ?53%
"1, >33 ?3)%
"F33 ?53% "D33 ?53%

+
A
?)5, 333
?5@, 333
"?3D, 333 ?)5, 333%
+
A ?1F,)33
2. With Wright, Inc. as the primary party:
Party Costs Allocated
C!!lati3e Costs
Allocated
=right ?3D,333 ?3D,333
<rown 1),333 "?5@,333 4 ?3D,333% ?5@,333
,otal ? 5@,333
=ith <rown, nc. as the primary party-
Party Costs Allocated
C!!lati3e Costs
Allocated
<rown ?)5,333 ?)5,333
=right )5,3 33 "?5@,333 4 ?)5,333% ?5@,333
,otal ? 5@,3 33
3. ,o use the Shapley 'alue method, consider each party as first the primary party and then
the incremental party. Compute the a'erage of the two to determine the allocation.
=right, nc.-
Allocation as the primary party ?3D,333
Allocation as the incremental party )5,3 33
,otal ? D3,3 33
Allocation "?D3,333 C )% ?33,333
<rown, nc.-
Allocation as the primary party ?)5,333
Allocation as the incremental party 1),3 33
,otal ? 3D,3 33
Allocation "?3D,333 C )% ?1@,333
Nsing this approach, =right, nc. is allocated ?33,333 and <rown, nc. is allocated ?1@,333 of
the total costs of ?5@,333.
5. ,he results of the four cost2allocation methods are shown !elow.
Iri"ht, #nc. Aro5n, #nc.
Stand2alone method ?)@,@33 ?1F,)33
ncremental "=right primary% 3D,333 1),333
ncremental "<rown primary% )5,333 )5,333
Shapley 'alue 33,333 1@,333
,he allocations are 'ery sensiti'e to the method used. ,he stand2alone method is simple and
fair since it allocates the common cost of the dyeing machine in proportion to the indi'idual
costs of leasing the machine. ,he Shapley 'alues are also fair. ,hey result in 'ery similar
allocations and any one of them can !e chosen. n this case, the stand2alone method is likely
more accepta!le. f they used the incremental cost2allocation method, =right, nc. and <rown,
nc. would pro!a!ly ha'e disputes o'er who is the primary party !ecause the primary party gets
allocated all of the primary party.s costs.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions D)
CHAPTER 19
19-19 ")3233 min.% Foint-cost allocation, ins!rance settleent.
1. "a% Sales 'alue at splitoff method-
Po!nds
of
Prod!ct
Iholesale
6ellin" Price
*er Po!nd
6ales
%al!e
at 6*litoff
Iei"htin"B
6ales %al!e
at 6*litoff
Foint
Costs
Allocated
Allocated
Costs *er
Po!nd
<reasts
=ings
,highs
<ones
*eathers
133
)3
53
@3
13
)>3
?3.>>
3.)3
3.3>
3.13
3.3>
?>>.33
5.33
15.33
@.33
3 .>3
? @1 .>3
3.DE>
3.35F
3.1E)
3.3F@
3 .33D
1 .333
?33.E>
).5>
@.D3
5.F3
3 .3 3
? > 3 .33
3.33E>
3.1))>
3.)1>3
3.3D13
3.3333
!osts of Destroyed Product
<reasts- ?3.33E> per pound 53 pounds A ?13.>3
=ings- ?3.1))> per pound 1> pounds A 1.@5
?1>. 35
!. $hysical measure method-
Po!nds
of
Prod!ct
Iei"htin"B
Physical
)eas!res
Foint
Costs
Allocated
Allocated
Costs *er
Po!nd
<reasts
=ings
,highs
<ones
*eathers
133
)3
53
@3
13
)>3
3.533
3.3@3
3.1D3
3.3)3
3.353
1.333
?)3.33
5.33
@.33
1D.33
) .33
? >3 .33
?3.)33
3.)33
3.)33
3.)33
3.)33
!osts of Destroyed Product
<reast- ?3.)3 per pound 53 pounds A ? @
=ings- ?3.)3 per pound 1> pounds A 3
?1 1
*ote- Although not re9uired, it is useful to highlight the indi'idual product profita!ility figures-
6ales %al!e at
6*litoff )ethod
Physical
)eas!res )ethod
Prod!ct
6ales
%al!e
Foint Costs
Allocated
7ross
#ncoe
Foint Costs
Allocated
7ross
#ncoe
<reasts
=ings
,highs
<ones
*eathers
?>>.33
5.33
15.33
@.33
3.>3
?33.E>
).5>
@.D3
5.F3
3.33
?)1.)>
1.>>
>.53
3.13
3.)3
?)3.33
5.33
@.33
1D.33
).33
?3>.33
3.33
D.33
"@.33%
"1.>3%
). ,he sales2'alue at splitoff method captures the !enefits2recei'ed criterion of cost
allocation and is the preferred method. ,he costs of processing a chicken are allocated to
products in proportion to the a!ility to contri!ute re'enue. Quality Chicken.s decision to process
chicken is hea'ily influenced !y the re'enues from !reasts and thighs. ,he !ones pro'ide
relati'ely few !enefits to Quality Chicken despite their high physical 'olume.
,he physical measures method shows profits on !reasts and thighs and losses on !ones
and feathers. #i'en that Quality Chicken has to /ointly process all the chicken products, it is non2
intuiti'e to single out indi'idual products that are !eing processed simultaneously as making
losses while the o'erall operations make a profit. Quality Chicken is processing chicken mainly
for !reasts and thighs and not for wings, !ones, and feathers, while the physical measure method
allocates a disproportionate amount of costs to wings, !ones and feathers.
19-21 "33 min.% Foint-cost allocation, *rocess f!rther.

Loint Costs A
?1,@33
C8@
"Mon2Salea!le%
M#5
"Mon2Salea!le%
T#63
"Mon2Salea!le%
$rocessing
?1E>
$rocessing
?)13
$rocessing
?13>
Crude (il
1>3 !!ls G ?1@ ; !!l A
?),E33
M#P
>3 !!ls G ?1> ; !!l A
?E>3
#as
@33 e9't !!ls G
?1.33 ; e9't !!l A
?1,353
Splitoff
$oint
1a. $hysical +easure +ethod
Cr!de <il ?7: 7as Total
1. $hysical measure of total prodn.
). =eighting "1>3B >3B @33 C 1,333%
3. Loint costs allocated "=eights ?1,@33%
1>3
3.1>
?)E3
>3
3.3>
?F3
@33
3.@3
?1,553
1,333
1.33
?1,@33
1!. M8: +ethod
1. *inal sales 'alue of total production
). 7educt separa!le costs
3. M8: at splitoff
5. =eighting "),>)>B D5>B @33 C 5,333%
>. Loint costs allocated "=eights ?1,@33%
?),E33

1E>
?),>)>
3.D31)>
?1,13D.)>
?E>3

13>
?D5>
3.1D1)>
?)F3.)>
?1,353

)13
?
@33
3.)3E>3
?3E3.>3
?5,5F3

5F3
?5,333
?1,@33
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions D>
). ,he operating2income amounts for each product using each method is-
"a% $hysical +easure +ethod
8e'enues
Cost of goods sold
Loint costs
Separa!le costs
,otal cost of goods sold
#ross margin
?),E33
)E3
1E>
55>
?),)>>
?E>3
F3
13>
1F>
?>>>
?1,353
1,553
)13
1,D>3
? "D13%
?5,5F3
1,@33
5F3
),)F3
?),)33
"!% M8: +ethod
8e'enues
Cost of goods sold
Loint costs
Separa!le costs
,otal cost of goods sold
#ross margin
?),E33.33
1,13D.)>
1E>.33
1,311.)>
?1,3@@.E>
?E>3.33
)F3.)>
13>.33
3F>.)>
?3>5.E>
?1,353.33
3E3.>3
)13.33
>@3.>3
? 5>D.>3
?5,5F3.33
1,@33.33
5F3.33
),)F3.33
?),)33.33
3. Meither method should !e used for product emphasis decisions. t is inappropriate to use
/oint2cost2allocated data to make decisions regarding dropping indi'idual products, or pushing
indi'idual products, as they are /oint !y definition. $roduct2emphasis decisions should !e made
!ased on rele'ant re'enues and rele'ant costs. 6ach method can lead to product emphasis
decisions that do not lead to ma&imization of operating income.
5. Since crude oil is the only product su!/ect to ta&ation, it is clearly in Sinclair.s !est interest to
use the M8: method since it leads to a lower profit for crude oil and, conse9uently, a smaller ta&
!urden. A letter to the ta&ation authorities could stress the conceptual superiority of the M8:
method. Chapter 1D argues that, using a !enefits2recei'ed cost allocation criterion, market2!ased
/oint cost allocation methods are prefera!le to physical2measure methods. A meaningful common
denominator "re'enues% is a'aila!le when the sales 'alue at splitoff point method or M8:
method is used. ,he physical2measures method re9uires nonhomogeneous products "li9uids and
gases% to !e con'erted to a common denominator.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions DD
19.22 "33 min.% Foint-cost allocation, sales 3al!e, *hysical eas!re, ?R% ethods.
1a.
PA?E: AB Allocation of Foint Costs !sin" 6ales %al!e at
6*litoff )ethod
6*ecial AL
Aeef
Raen
6*ecial 6L
6hri*
Raen Total
Sales 'alue of total production at splitoff point
"13,333 tons ?13 per tonB )3,333 ?1> per ton% ?133,333 ?333,333 ?533,333
=eighting "?133,333B ?333,333 C ?533,333% 3.)> 3.E>
Loint costs allocated "3.)>B 3.E> ?)53,333% ?D3,333 ?1@3,333 ?)53,333
PA?E: AB Prod!ct-:ine #ncoe 6tateent for F!ne 2009 6*ecial A 6*ecial 6 Total
8e'enues
"1),333 tons ?1@ per tonB )5,333 ?)> per ton% ?)1D,333 ?D33,333 ?@1D,333
7educt /oint costs allocated "from $anel A% D3,333 1@3,333 )53,333
7educt separa!le costs 5@ ,333 1D@ ,333 )1D ,333
#ross margin ? 13@ ,333 ? )> ),333 ?3D 3,333
#ross margin percentage >3J 5)J 55J
1!.
PA?E: AB Allocation of Foint Costs !sin" Physical-)eas!re
)ethod
6*ecial AL
Aeef
Raen
6*ecial 6L
6hri*
Raen Total
$hysical measure of total production "tons% 13,333 )3,333 33,333
=eighting "13,333 tonsB )3,333 tons C 33,333 tons% 33J DEJ
Loint costs allocated "3.33B 3.DE ?)53,333% ?@3,333 ?1D3,333 ?)53,333
8e'enues
"1),333 tons ?1@ per tonB )5,333 ?)> per ton% ?)1D,333 ?D33,333 ?@1D,333
7educt /oint costs allocated "from $anel A% @3,333 1D3,333 )53,333
#ross margin ? @@ ,333 ? )E ),333 ?3D 3,333
#ross margin percentage 51J 5>J 55J
1c.
PA?E: AB Allocation of Foint Costs !sin" ?et RealiJa'le
%al!e )ethod 6*ecial A 6*ecial 6 Total
*inal sales 'alue of total production during accounting period
"1),333 tons ?1@ per tonB )5,333 tons ?)> per ton% ?)1D,333 ?D33,333 ?@1D,333
Met realiza!le 'alue at splitoff point ? 1D@ ,333 ? 53) ,333 ? D 33,333
=eighting "?1D@,333B ?53),333 C ?D33,333% )@J E)J
Loint costs allocated "3.)@B 3.E) ?)53,333% ?DE,)33 ?1E),@33 ?)53,333
8e'enues "1),333 tons ?1@ per tonB )5,333 tons ?)> per ton% ?)1D,333 ?D33,333 ?@1D,333
7educt /oint costs allocated "from $anel A% DE,)33 1E),@33 )53,333
#ross margin ? 133,@ 33 ? )>F,) 33 ? 3D 3,333
#ross margin percentage 5D.EJ 53.)J 55.1J
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions DE
). Sherrie 7ong pro!a!ly performed the analysis shown !elow to arri'e at the net loss of
?),))@ from marketing the stock-
PA?E: AB Allocation of Foint Costs !sin"
6ales %al!e at 6*litoff
6*ecial AL
Aeef
Raen
6*ecial 6L
6hri*
Raen 6tocE Total
Sales 'alue of total production at splitoff point
"13,333 tons ?13 per tonB )3,333 ?1> per
tonB 5,333 ?> per ton% ?133,333 ?333,333 ?)3,333 ?5)3,333
=eighting
"?133,333B ?333,333B ?)3,333 C ?5)3,333% )3.@3F>J E1.5)@DJ 5.ED1FJ 133J
Loint costs allocated
"3.)3@3F>B 3.E15)@DB 3.35ED1F ?)53,333% ?>E,153 ?1E1,5)F ?11,5)@ ?)53,333
PA?E: AB Prod!ct-:ine #ncoe 6tateent
for F!ne 2009 6*ecial A 6*ecial 6 6tocE Total
8e'enues
"1),333 tons ?1@ per tonB )5,333 ?)> per tonB
5,333 ?> per ton% ?)1D,333 ?D33,333 ?)3,333 ?@3D,333
Separa!le processing costs 5@,333 1D@,333 3 )1D,333
Loint costs allocated "from $anel A% >E,153 1E1,5)F 11,5)@ )5 3,333
#ross margin ?113,@>E ?)D3,>E1 @,>E) 3@3,333
7educt marketing costs 13,@33 13,@ 33
(perating income ? " ),))@% ? 3DF,) 33
n this "misleading% analysis, the ?)53,333 of /oint costs are re2allocated !etween Special <,
Special S, and the stock. rrespecti'e of the method of allocation, this analysis is wrong. Loint
costs are always irrele'ant in a process2further decision. (nly incremental costs and re'enues
past the splitoff point are rele'ant. n this case, the correct analysis is much simpler- the
incremental re'enues from selling the stock are ?)3,333, and the incremental costs are the
marketing costs of ?13,@33. So, nstant *oods should sell the stockKthis will increase its
operating income !y ?F,)33 "?)3,333 4 ?13,@33%.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions D@
19-29 "33 min.% Foint-cost allocation, *rocess f!rther or sell.
A diagram of the situation is in Solution 6&hi!it 1D2)F.
1.
a. Sales 'alue at splitoff method.
)onthly
+nit
<!t*!t
6ellin"
Price
Per +nit
6ales %al!e
of Total Prodn.
at 6*litoff Iei"htin"
Foint Costs
Allocated
Studs "<uilding% E>,333 ? @ ? D33,333 5D.1>3FJ ? 5D1,>3F
7ecorati'e $ieces >,333 D3 333,333 )3.3EDF )33,EDF
$osts )3,333 )3 533,333 33.EDF) 33E,DF)
,otals ?1,333,333 133.3333J ?1,333,333
!. $hysical measure method.
Physical
)eas!re of
Total Prodn. Iei"htin"
Foint Costs
Allocated
Studs "<uilding% E>,333 E>.33J ? E>3,333
7ecorati'e $ieces >,333 >.33 >3,333
$osts )3,333 )3.33 )33,333
,otals 133,333 133.33J ?1,333,333
c. Met realiza!le 'alue method.
)onthly
+nits of
Total Prodn.
&!lly
Processed
6ellin"
Price
*er +nit
?et
RealiJa'le
%al!e at
6*litoff Iei"htin"

Foint Costs
Allocated
Studs "<uilding% E>,333 ? @ ? D33,333 55.555>J ? 555,55>
7ecorati'e $ieces 5,>33
a
133 3>3,333
b
)>.F)>F )>F,)>F
$osts )3,333 )3 533,333 )F.D)FD )FD,)FD
,otals ?1,3>3,333 133.3333J ?1,333,333
a
>,333 monthly units of output 13J normal spoilage A 5,>33 good units.
!
5,>33 good units ?133 A ?5>3,333 *urther processing costs of ?133,333 A ?3>3,333
). $resented !elow is an analysis for Sonimad Sawmill, nc., comparing the processing of
decorati'e pieces further 'ersus selling the rough2cut product immediately at splitoff-
+nits $ollars
+onthly unit output >,333
Pess- Mormal further processing shrinkage >33
Nnits a'aila!le for sale 5,>33
*inal sales 'alue "5,>33 units ?133 per unit% ?5>3,333
Pess- Sales 'alue at splitoff 333,333
ncremental re'enue 1>3,333
Pess- *urther processing costs 133,333
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions DF
Additional contri!ution from further processing ? >3,333
3. Assuming Sonimad Sawmill, nc. announces that in si& months it will sell the rough2cut
product at splitoff due to increasing competiti'e pressure, !eha'ior that may !e demonstrated !y
the skilled la!or in the planning and sizing process include the following-
lower 9uality,
reduced moti'ation and morale, and
/o! insecurity, leading to nonproducti'e employee time looking for /o!s elsewhere.
+anagement actions that could impro'e this !eha'ior include the following-
mpro'e communication !y gi'ing the workers a more comprehensi'e e&planation as
to the reason for the change so they can !etter understand the situation and !ring out a
plan for future operation of the rest of the plant.
,he company can offer incenti'e !onuses to maintain 9uality and production and
align rewards with goals.
,he company could pro'ide /o! relocation and internal /o! transfers.
6<:+T#<? E@H#A#T 19-29
Loint Costs
?1,333,333
Separable Costs
$rocessing
?133,333
Processing
Studs
?@ per unit
8aw 7ecorati'e
$ieces
?D3 per unit
$osts
?)3 per unit
7ecorati'e
$ieces
?133 per unit
Splitoff
$oint
E3
19-02 ")3 min.% Foint-cost allocation 5ith a 'y*rod!ct.
1. Sales 'alue at splitoff method- <yproduct recognized at time of production method
Loint cost to !e charged to /oint products A Loint Cost 4 M8: of <yproduct
A ?13,333 4 1333 tons G )3J G 3.)> 'ats G ?D3
A ?13,333 4 >3 'ats G ?D3
A ? E,333
7rade A
Coal
7rade A
Coal
Total
Sales 'alue of coal at splitoff,
1,333 tons G 3.5 G ?133B 1,333 tons G 3.5 G ?D3 ?53,333 ?)5,333 ?D5,333
=eighting, ?53,333B ?)5,333
?D5,333 3.D)> 3.3E>

Loint costs allocated,
3.D)>B 3.3E> G ?E,333 ? 5,3E> ? ),D)> ? E,333
#ross margin "Sales re'enue Z Allocated cost% ?3>,D)> ?)1,3E> ?>E,333
). Sales 'alue at splitoff method- <yproduct recognized at time of sale method
Loint cost to !e charged to /oint products A ,otal Loint Cost A ?13,333
7rade A
Coal
7rade A
Coal
Total
Sales 'alue of coal splitoff,
1,333 tons G .5 G ?133B 1,333 tons G .5 G ?D3 ?53,333 ?)5,333 ?D5,333
=eighting, ?53,333B ?)5,333
?D5,333 3.D)> 3.3E>

Loint costs allocated,
3.D)>B 3.3E> G ?13,333 ? D,)>3 ? 3,E>3 ?13,333
#ross margin "Sales re'enue Z Allocated cost% ?33,E>3 ?)3,)>3 ?>5,333
Since the entire production is sold during the period, the o'erall gross margin is the same
under the production and sales methods. n particular, under the sales method, the ?3,333
recei'ed from the sale of the coal tar is added to the o'erall re'enues, so that Cum!erland.s
o'erall gross margin is ?>E,333, as in the production method.
3. ,he production method of accounting for the !yproduct is only appropriate if
Cum!erland is positi'e they can sell the !yproduct and positi'e of the selling price.
+oreo'er, Cum!erland should 'iew the !yproduct.s contri!ution to the firm as material
enough to find it worthwhile to record and track any in'entory that may arise. ,he sales
method is appropriate if either the disposition of the !yproduct is unsure or the selling price
is unknown, or if the amounts in'ol'ed are so negligi!le as to make it economically
infeasi!le for Cum!erland to keep track of !yproduct in'entories.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions E1
CHAPTER ;
;-14 ")>433 min.% &le(i'le-'!d"et *re*aration and analysis.
1. :ariance Analysis for <ank +anagement $rinters for Septem!er )33F
:e3el 1 Analysis
Act!al
Res!lts
,1-
6tatic-A!d"et
%ariances
,2- . ,1- D ,0-
6tatic
A!d"et
,0-
Nnits sold
8e'enue
1),333
?)>),333
a
3,333 N
? 5@,333 N
1>,333
?333,333
c
:aria!le costs @5,333
d
3D,333 * 1)3,333
f
Contri!ution margin
*i&ed costs
(perating income
1D@,333
1>3,333
? 1@,333
1),333 N
>,333 N
? 1E,333 N
1@3,333
15>,333
? 3>,333
?1E,333 N
,otal static2!udget 'ariance
). ,evel ( -nalysis
Act!al
Res!lts
,1-
&le(i'le-
A!d"et
%ariances
,2- . ,1- D ,0-
&le(i'le
A!d"et
,0-
6ales
%ol!e
%ariances
,4- . ,0- D ,5-
6tatic
A!d"et
,5-
Nnits sold 1),333 3 1),333 3,333 N 1>,333
8e'enue ?)>),333
a
?1),333 * ?)53,333
!
?D3,333 N ?333,333
c
:aria!le costs @5,333
d
1),333 * FD,333
e
)5,333 * 1)3,333
f
Contri!ution margin 1D@,333 )5,333 * 155,333 3D,333 N 1@3,333
*i&ed costs 1>3,333 >,333 N 15>,333 3 15>,333
(perating income ? 1@,333 ?1F,333 * ? "1,333% ?3D,333 N ? 3>,333
?1F,333 * ?3D,333 N
,otal fle&i!le2!udget ,otal sales2'olume
'ariance
?1E,333 N
a

1),333 G ?)1 A ?)>),333
d

1),333 G ?E A ? @5,333
!

1),333 G ?)3 A ?)53,333
e

1),333 G ?@ A ? FD,333
c

1>,333 G ?)3 A ?333,333
f

1>,333 G ?@ A ?1)3,333
3. Pe'el ) analysis !reaks down the static2!udget 'ariance into a fle&i!le2!udget 'ariance
and a sales2'olume 'ariance. ,he primary reason for the static2!udget 'ariance !eing
unfa'ora!le "?1E,333 N% is the reduction in unit 'olume from the !udgeted 1>,333 to an actual
1),333. (ne e&planation for this reduction is the increase in selling price from a !udgeted ?)3 to
an actual ?)1. (perating management was a!le to reduce 'aria!le costs !y ?1),333 relati'e to
the fle&i!le !udget. ,his reduction could !e a sign of efficient management. Alternati'ely, it
could !e due to using lower 9uality materials "which in turn ad'ersely affected unit 'olume%.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions E)
;-19 "33 min.% &le(i'le '!d"et, 5orEin" 'acE5ard.
1. :ariance Analysis for ,he Clarkson Company for the year ended 7ecem!er 31, )33F
Act!al
Res!lts
,1-
&le(i'le-
A!d"et
%ariances
,2-.,1-,0-
&le(i'le
A!d"et
,0-
6ales-%ol!e
%ariances
,4-.,0-,5-
6tatic
A!d"et
,5-
Nnits sold 133,333 3 133,333 1 3,333 * 1)3,333
8e'enues ?E1>,333 ?)D3,333 * ?5>>,333
a
?3>,333 * ?5)3,333
:aria!le costs >1> ,333 )>> ,333 N )D3 ,333
!
)3 ,333 N )53 ,333
Contri!ution margin )33,333 >,333 * 1F>,333 1>,333 * 1@3,333
*i&ed costs 153 ,333 )3,333 N 1)3,333 3 1)3 ,333
(perating income ? D 3,333 ? 1>,333 N ? E>,333 ? 1 >,333 * ? D3 ,333
a
133,333 G ?3.>3 A ?5>>,333B ?5)3,333
1)3,333 A ?3.>3
!
133,333 G ?).33 A ?)D3,333B ?)53,333
1)3,333 A ?).33
). Actual selling price- ?E1>,333 133,333 A ?>.>3
<udgeted selling price- 5)3,333 C 1)3,333 A ?3.>3
Actual 'aria!le cost per unit- >1>,333 C 133,333 A ?3.FD
<udgeted 'aria!le cost per unit- )53,333 C 1)3,333 A ?).33
3. A zero total static2!udget 'ariance may !e due to offsetting total fle&i!le2!udget and total
sales2'olume 'ariances. n this case, these two 'ariances e&actly offset each other-
,otal fle&i!le2!udget 'ariance ?1>,333 Nnfa'ora!le
,otal sales2'olume 'ariance ?1>,333 *a'ora!le
A closer look at the 'ariance components re'eals some ma/or de'iations from plan.
Actual 'aria!le costs increased from ?).33 to ?3.FD, causing an unfa'ora!le fle&i!le2!udget
'aria!le cost 'ariance of ?)>>,333. Such an increase could !e a result of, for e&ample, a /ump in
direct material prices. Clarkson was a!le to pass most of the increase in costs onto their
customersKactual selling price increased !y >EJ ["?>.>3 4 ?3.>3%
?3.>3\, !ringing a!out an

offsetting fa'ora!le fle&i!le2!udget re'enue 'ariance in the amount of ?)D3,333. An increase in
the actual num!er of units sold also contri!uted to more fa'ora!le results. ,he company should
e&amine why the units sold increased despite an increase in direct material prices. *or e&ample,
Clarkson.s customers may ha'e stocked up, anticipating future increases in direct material prices.
Alternati'ely, Clarkson.s selling price increases may ha'e !een lower than competitors. price
increases. Nnderstanding the reasons why actual results differ from !udgeted amounts can help
Clarkson !etter manage its costs and pricing decisions in the future. ,he important lesson learned
here is that a superficial e&amination of summary le'el data "Pe'els 3 and 1% may !e insufficient.
t is imperati'e to scrutinize data at a more detailed le'el "Pe'el )%. Had Clarkson not !een a!le
to pass costs on to customers, losses would ha'e !een considera!le.
?1>,333 N
Total fle(i'le-'!d"et 3ariance
?1>,333 *
,otal sales 'olume 'ariance
?3
Total static-'!d"et 3ariance
E3
;-20 "33253 min.% &le(i'le '!d"et and sales 3ol!e 3ariances.
1. and ).
Perforance Re*ort for )arron, #nc., F!ne 2009
Act!al
&le(i'le
A!d"et
%ariances
&le(i'le
A!d"et
6ales %ol!e
%ariances
6tatic
A!d"et
6tatic
A!d"et
%ariance
6tatic A!d"et
%ariance as
= of 6tatic
A!d"et
,1- ,2- . ,1- D ,0- ,0- ,4- . ,0- D ,5- ,5- ,9- . ,1- D ,5- ,;- . ,9-
,5-
Nnits "pounds% >)>,333 2 >)>,333 )>,333 * >33,333 )>,333 * >.3J
8e'enues ?3,3D3,333 ? >),>33 N ?3,51),>33
a
?1D),>33 * ?3,)>3,333 ?113,333 * 3.5J
:aria!le mfg. costs 1,@F3,333 >),>33 N 1,@3E,>33
!
@E,>33 N 1,E>3,333 153,333 N @.3J
Contri!ution margin ?1,5E3,333 ?13>,333 N ?1,>E>,333 ? E>,333 * ?1,>33,333 ? 33,333 N ).3J
?13>,333 N ? E>,333 *
*le&i!le2!udget 'ariance Sales2'olume 'ariance
?33,333 N
Static2!udget 'ariance
a
<udgeted selling price A ?3,)>3,333
>33,333 l!s A ?D.>3 per l!.

*le&i!le2!udget re'enues A ?D.>3 per l!.
>)>,333 l!s. A ?3,51),>33

!
<udgeted 'aria!le mfg. cost per unit A ?1,E>3,333
>33,333 l!s. A ?3.>3

*le&i!le2!udget 'aria!le mfg. costs A ?3.>3 per l!.
>)>,333 l!s. A ?1,@3E,>33

+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions E5
3. ,he selling price 'ariance, caused solely !y the difference in actual and !udgeted selling
price, is the fle&i!le2!udget 'ariance in re'enues A ?>),>33 N.
5. ,he fle&i!le2!udget 'ariances show that for the actual sales 'olume of >)>,333 pounds,
selling prices were lower and costs per pound were higher. ,he fa'ora!le sales 'olume 'ariance
in re'enues "!ecause more pounds of ice cream were sold than !udgeted% helped offset the
unfa'ora!le 'aria!le cost 'ariance and shored up the results in Lune )33F. Pe'ine should !e more
concerned !ecause the small static2!udget 'ariance in contri!ution margin of ?33,333 N is
actually made up of a fa'ora!le sales2'olume 'ariance in contri!ution margin of ?E>,333, an
unfa'ora!le selling2price 'ariance of ?>),>33 and an unfa'ora!le 'aria!le manufacturing costs
'ariance of ?>),>33. Pe'ine should analyze why each of these 'ariances occurred and the
relationships among them. Could the efficiency of 'aria!le manufacturing costs !e impro'edX
7id the sales 'olume increase !ecause of a decrease in selling price or !ecause of growth in the
o'erall marketX Analysis of these 9uestions would help Pe'ine decide what actions he should
take.
;-20 "33 min.% $irect aterials and direct an!fact!rin" la'or 3ariances.
1.
)ay 2009
Act!al
Res!lts
Price
%ariance
Act!al
M!antity
A!d"eted
Price
Efficiency
%ariance
&le(i'le
A!d"et
,1- ,2- . ,1-D,0- ,0- ,4- . ,0- D ,5- ,5-
Nnits >>3 >>3
7irect materials ?1),E3>.33 ?1,@1>.33 N ?13,@F3.33
a
?FF3.33 N ?F,F33.33
!

7irect la!or ? @,5D5.>3 ? 135.>3 N ? @,3D3.33
c
?553.33 * ?@,@33.33
d

,otal price 'ariance ?1,F1F.>3 N
,otal efficiency 'ariance ?>>3.33 N
a
E,)D3 meters
?1.>3 per meter A ?13,@F3

!
>>3 lots
1) meters per lot
?1.>3 per meter A ?F,F33

c
1,35> hours
?@.33 per hour A ?@,3D3

d
>>3 lots
) hours per lot
?@ per hour A ?@,@33

,otal fle&i!le2!udget 'ariance for !oth inputs A ?1,F1F.>3N I ?>>3N A ?),5DF.>3N
,otal fle&i!le2!udget cost of direct materials and direct la!or A ?F,F33 I ?@,@33 A ?1@,E33
,otal fle&i!le2!udget 'ariance as J of total fle&i!le2!udget costs A ?),5DF.>3
?1@,E33 A 13.)1J
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions E>
).
)ay
2010
Act!al
Res!lts
Price
%ariance
Act!al
M!antity
A!d"eted
Price
Efficiency
%ariance
&le(i'le
A!d"et
,1- ,2- . ,1- D ,0- ,0- ,4- . ,0- D ,5- ,5-
Nnits >>3 >>3
7irect materials ?11,@)@.3D
a
?1,1>D.1D N ?13,DE).)3
!
?EE).)3 N ?F,F33.33
c
7irect manuf. la!or ? @,)F>.)1
d
? 13).51 N ? @,1F).@3
e
?D3E.)3 * ?@,@33.33
c
,otal price 'ariance ?1,)>@.>E N
,otal efficiency 'ariance ?1D>.33 N
a
Actual dir. mat. cost, +ay )313 A Actual dir. mat. cost, +ay )33F
3.F@
3.F> A ?1),E3>
3.F@

3.F> A ?11.@)@.3D
Alternati'ely, actual dir. mat. cost, +ay )313
A "Actual dir. mat. 9uantity used in +ay )33F
3.F@%
"Actual dir. mat. price in +ay )33F
3.F>%
A "E,)D3 meters
3.F@%
"?1.E>;meter
3.F>%
A E,115.@3
?1.DD)> A ?11,@)@.3D
!
"E,)D3 meters
3.F@%
?1.>3 per meter A ?13,DE).)3

c
Nnchanged from )33F.
d
Actual dir. la!or cost, +ay )313 A Actual dir. manuf. cost +ay )33F
3.F@ A ?@,5D5.>3
3.F@ A
?@,)F>.)1
Alternati'ely, actual dir. la!or cost, +ay )313
A "Actual dir. manuf. la!or 9uantity used in +ay )33F
3.F@%
Actual dir. la!or price in )33F

A "1,35> hours
3.F@%
?@.13 per hour

A 1,3)5.13 hours
?@.13 per hour A ?@,)F>.)1

e
"1,35> hours
3.F@%
?@.33 per hour A ?@,1F).@3

,otal fle&i!le2!udget 'ariance for !oth inputs A ?1,)>@.>EN I ?1D>N A ?1,5)3.>EN
,otal fle&i!le2!udget cost of direct materials and direct la!or A ?F,F33 I ?@,@33 A ?1@,E33

,otal fle&i!le2!udget 'ariance as J of total fle&i!le2!udget costs A ?1,5)3.>E
?1@,E33 A E.D1J
3. 6fficiencies ha'e impro'ed in the direction indicated !y the production managerK!ut, it
is unclear whether they are a trend or a one2time occurrence. Also, o'erall, 'ariances are still
E.DJ of fle&i!le input !udget. #loria7ee should continue to use the new material, especially in
light of its superior 9uality and feel, !ut it may want to keep the following points in mind-
,he new material costs su!stantially more than the old "?1.E> in )33F and ?1.DD)> in
)313 's. ?1.>3 per meter%. ts price is unlikely to come down e'en more within the
coming year. Standard material price should !e re2e&amined and possi!ly changed.
#loria7ee should continue to work to reduce direct materials and direct
manufacturing la!or content. ,he reductions from +ay )33F to +ay )313 are a good
de'elopment and should !e encouraged.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions ED
;-09 "D3 min.% Co*rehensi3e 3ariance analysis re3ie5.
Act!al Res!lts
Nnits sold "F3J G ),333,333% 1,@33,333
Selling price per unit ?5.@3
8e'enues "1,@33,333 G ?5.@3% ?@,D53,333
7irect materials purchased and used-
7irect materials per unit ?3.@3
,otal direct materials cost "1,@33,333 G ?3.@3% ?1,553,333
7irect manufacturing la!or-
Actual manufacturing rate per hour ?1>
Pa!or producti'ity per hour in units )>3
+anufacturing la!or2hours of input "1,@33,333 C )>3% E,)33
,otal direct manufacturing la!or costs "E,)33 G ?1>% ?13@,333
7irect marketing costs-
7irect marketing cost per unit ?3.33
,otal direct marketing costs "1,@33,333 G ?3.33% ?>53,333
*i&ed costs "?@>3,333 ?33,333% ?@)3,333
Static <udgeted Amounts
Nnits sold ),333,333
Selling price per unit ?>.33
8e'enues "),333,333 G ?>.33% ?13,333,333
7irect materials purchased and used-
Direct materials per unit $0.85
,otal direct materials costs "),333,333 G ?3.@>% ?1,E33,333
7irect manufacturing la!or-
Direct manufacturing rate per hour $15.00
Pa!or producti'ity per hour in units 333
+anufacturing la!or2hours of input "),333,333 C 333% D,DDE
,otal direct manufacturing la!or cost "D,DDE G ?1>.33% ?133,333
7irect marketing costs-
7irect marketing cost per unit ?3.33
,otal direct marketing cost "),333,333 G ?3.33% ?D33,333
i!ed costs $850"000
1. Act!al 6tatic-A!d"et
Res!lts Ao!nts
8e'enues ? @,D 53,333 ? 13 ,333,333
#ariable costs
Direct materials 1"$$0"000 1"%00"000
7irect manufacturing la!or 13@,333 133,333
7irect marketing costs >53 ,333 D33 ,333
,otal 'aria!le costs ),3@@ ,333 ),53 3,333
Contri!ution margin D,>>),333 E,D33,333
*i&ed costs @ ) 3,333 @> 3,333
(perating income ? >,E3) ,333 ? D,E>3 ,333
). Actual operating income ?>,E3),333
Static2!udget operating income D,E>3 ,333
,otal static2!udget 'ariance ?1, 31@ ,333 N
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions EE
*le&i!le2!udget2!ased 'ariance analysis for Sonnet, nc. for +arch )313-
Act!al
Res!lts
&le(i'le-A!d"et
%ariances
&le(i'le
A!d"et
6ales-%ol!e
%ariances
6tatic
A!d"et
Nnits "diskettes% sold 1, @ 33,333 3 1, @ 33,333 ) 33,333 ),3 33,333
8e'enues
:aria!le costs
7irect materials
7irect manuf. la!or
7irect marketing costs
,otal 'aria!le costs
? @,D 53,333
1,553,333
13@,333
>53 ,333
),3@@ ,333
?3D3,333 N
F3,333 *
1@,333 N
3
E) ,333 *
? F,333 ,333
1,>33,333
F3,333
>5 3,333
),1D3 ,333
?1, 3 33,333 N
1E3,333 *
13,333 *
D 3,333 *
)53 ,333 *
? 13,3 33,333
1,E33,333
133,333
D33 ,333
),5 33,333
Contri!ution margin D,>>),333 )@@,333 N D,@53,333 ED3,333 N E,D33,333
*i&ed costs @ ) 3,333 33,333 * @> 3,333 3 @> 3,333
(perating income ? >,E3) ,333 ?) >@ ,333 N ? >,FF3 ,333 ? ED 3,333 N ? D,E> 3,333
3. *le&i!le2!udget operating income A ?>,FF3,333.
5. *le&i!le2!udget 'ariance for operating income A ?)>@,333N.
>. Sales2'olume 'ariance for operating income A ?ED3,333N.
Analysis of direct mfg. la!or fle&i!le2!udget 'ariance for Sonnet, nc. for +arch )313
Act!al Costs
#nc!rred
,Act!al #n*!t Mty.
G Act!al Price-
Act!al #n*!t Mty.
G A!d"eted Price
&le(i'le A!d"et
,A!d"eted #n*!t
Mty. Allo5ed for
Act!al <!t*!t
G A!d"eted Price-
7irect.
+fg. Pa!or
"E,)33 G ?1>.33%
?13@,333
"E,)33 G ?1>.33%
?13@,333
"*D,333 G ?1>.33%
?F3,333
?3 ?1@,333 N
$rice 'ariance 6fficiency 'ariance
* 1,@33,333 units C 333 direct manufacturing la!or standard producti'ity rate per hour.
D. 7+P price 'ariance A ?3B 7+P efficiency 'ariance A ?1@,333N
E. 7+P fle&i!le2!udget 'ariance A ?1@,333N
CHAPTER 4
?ED3,333 N
,otal sales2'olume
'ariance
?)>@,333 N
,otal fle&i!le2!udget
'ariance
?1,31@,333 N
?1@,333 N
*le&i!le2!udget 'ariance
E@
4-19 ")3 min.% %aria'le an!fact!rin" o3erhead, 3ariance analysis.
1. :aria!le +anufacturing ('erhead :ariance Analysis for 6s9uire Clothing for Lune )33F
Act!al Costs
#nc!rred
Act!al #n*!t Mty.
/ Act!al Rate
,1-
Act!al #n*!t Mty.
/ A!d"eted Rate
,2-
&le(i'le A!d"etB
A!d"eted #n*!t Mty.
Allo5ed for
Act!al <!t*!t
/ A!d"eted Rate
,0-
AllocatedB
A!d"eted #n*!t Mty.
Allo5ed for
Act!al <!t*!t
/ A!d"eted Rate
,4-
"5,>3D G ?11.>3%
?>),1D5
"5,>3D G ?1)%
?>5,53)
"5 G 1,3@3 G ?1)%
?>1,@53
"5 G 1,3@3 G ?1)%
?>1,@53
). 6s9uire had a fa'ora!le spending 'ariance of ?),)D@ !ecause the actual 'aria!le o'erhead
rate was ?11.>3 per direct manufacturing la!or2hour 'ersus ?1) !udgeted. t had an unfa'ora!le
efficiency 'ariance of ?),>F) N !ecause each suit a'eraged 5.) la!or2hours "5,>3D hours C 1,3@3
suits% 'ersus 5.3 !udgeted la!or2hours.
?),)D@ *
Spending 'ariance
?),>F) N
6fficiency 'ariance
Me'er a 'ariance
?3)5 N
Me'er a 'ariance
EF
4-1; ")3 min.% &i(ed-an!fact!rin" o3erhead, 3ariance analysis ,contin!ation of 4-19-.
1 ] ).
<udgeted fi&ed o'erhead
rate per unit of
allocation !ase
A
5 353 , 1
533 , D) ?
A
1D3 , 5
533 , D) ?
A ?1> per hour
*i&ed +anufacturing ('erhead :ariance Analysis for 6s9uire Clothing for Lune )33F
Act!al Costs
#nc!rred
,1-
Same <udgeted
Pump Sum
,as in 6tatic A!d"et-
Re"ardless of
<!t*!t :e3el
,2-
&le(i'le A!d"etB
Same <udgeted
Pump Sum
Re"ardless of
<!t*!t :e3el
,0-
AllocatedB
A!d"eted #n*!t Mty.
Allo5ed for Act!al
<!t*!t
/ A!d"eted Rate
,4-
?D3,F1D ?D),533 ?D),533
"5 / 1,3@3 / ?1>%
?D5,@33
?1,>1D N ?),533 *
Spending 'ariance Me'er a 'ariance $roduction2'olume 'ariance
?1,>1D N ?),533 *
*le&i!le2!udget 'ariance $roduction2'olume 'ariance
,he fi&ed manufacturing o'erhead spending 'ariance and the fi&ed manufacturing
fle&i!le !udget 'ariance are the same44?1,>1D N. 6s9uire spent ?1,>1D a!o'e the ?D),533
!udgeted amount for Lune )33F.
,he production2'olume 'ariance is ?),533 *. ,his arises !ecause 6s9uire utilized its
capacity more intensi'ely than !udgeted "the actual production of 1,3@3 suits e&ceeds the
!udgeted 1,353 suits%. ,his results in o'erallocated fi&ed manufacturing o'erhead of ?),533 "5 G
53 G ?1>%. 6s9uire would want to understand the reasons for a fa'ora!le production2'olume
'ariance. s the market growingX s 6s9uire gaining market shareX =ill 6s9uire need to add
capacityX
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions @3
4-21 "131> min.% 4-3ariance analysis, fill in the 'lanEs.
%aria'le &i(ed
1. Spending 'ariance
). 6fficiency 'ariance
3. $roduction2'olume 'ariance
5. *le&i!le2!udget 'ariance
>. Nnderallocated "o'erallocated% +(H
?5,)33 N
5,>33 N
M6:68
@,E33 N
@,E33 N
?3,333 N
M6:68
D33 N
3,333 N
3,D33 N
,hese relationships could !e presented in the same way as in 6&hi!it @25.
Act!al Costs
#nc!rred
,1-
Act!al #n*!t Mty.
/ A!d"eted Rate
,2-
&le(i'le A!d"etB
A!d"eted #n*!t Mty.
Allo5ed for
Act!al <!t*!t
/ A!d"eted Rate
,0-
AllocatedB
A!d"eted #n*!t Mty.
Allo5ed for
Act!al <!t*!t
/ A!d"eted Rate
,4-
:aria!le
+(H
?3>,E33 ?31,>33 ?)E,333 ?)E,333
Act!al Costs
#nc!rred
,1-
Same <udgeted
Pump Sum
Re"ardless of
<!t*!t :e3el
,2-
&le(i'le A!d"etB
Same <udgeted
Pump Sum
Re"ardless of
<!t*!t :e3el
,0-
AllocatedB
A!d"eted #n*!t Mty.
Allo5ed for
Act!al <!t*!t
/ A!d"eted Rate
,4-
*i&ed
+(H
?1@,333 ?1>,333 ?1>,333 ?15,533
?5,)33 N
Spending 'ariance
?5,>33 N
6fficiency 'ariance
Me'er a 'ariance
?3,333 N
Spending 'ariance Me'er a 'ariance
?D33 N
$roduction2'olume 'ariance
?@,E33 N
*le&i!le2!udget 'ariance Me'er a 'ariance
?@,E33 N
Nnderallocated 'aria!le o'erhead
",otal 'aria!le o'erhead 'ariance%
?3,333 N
?D33 N
$roduction2'olume 'ariance
?3,D33 N
Nnderallocated fi&ed o'erhead
",otal fi&ed o'erhead 'ariance%
@1
An o'er'iew of the 5 o'erhead 'ariances is-
4-%ariance
Analysis
6*endin"
%ariance
Efficiency
%ariance
Prod!ction-%ol!e
%ariance
:aria!le
('erhead ?5,)33 N ?5,>33 N Me'er a 'ariance
*i&ed
('erhead ?3,333 N Me'er a 'ariance ?D33 N
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions @)
4-2; "1> min.% #dentifyin" fa3ora'le and !nfa3ora'le 3ariances.
Scenario
VOH
Spending
Variance
VOH
Efficiency
Variance
FOH
Spending
Variance
FOH
Production-
Volume Variance
Production output is
5% more than
budgeted, and actual
fixed manufacturing
overhead costs are 6%
more than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Cannot be
determined: no
information on
actual versus
flexible-budget
machine-hours
Unfavorable:
actual fixed
costs are more
than budgeted
fixed costs
Favorable: output
is more than
budgeted causing
FOH costs to be
overallocated
10% more than
budgeted; actual
machine hours are 5%
less than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Favorable: actual
machine-hours less
than flexible-
budget machine-
hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Favorable: output
is more than
budgeted causing
FOH costs to be
overallocated
8% less than budgeted
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Cannot be
determined: no
information on
actual machine-
hours versus
flexible-budget
machine-hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Unfavorable:
output less than
budgeted will
cause FOH costs to
be underallocated
Actual machine hours
are 15% greater than
flexible-budget
machine hours
Cannot be
determined: no
information on
actual versus
budgeted VOH
rates
Unfavorable: more
machine-hours
used relative to
flexible budget
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Cannot be
determined: no
information on
flexible-budget
machine-hours
relative to static-
budget machine-
hours
Relative to the flexible
budget, actual machine
hours are 10% greater
and actual variable
manufacturing
overhead costs are 15%
greater
Unfavorable:
actual VOH rate
greater than
budgeted VOH
rate
Unfavorable: actual
machine-hours
greater than
flexible-budget
machine-hours
Cannot be
determined: no
information on
actual versus
budgeted FOH
costs
Cannot be
determined: no
information on
actual output
relative to
budgeted output
4-29 "33 min.% Co*rehensi3e 3ariance analysis.
1. <udgeted num!er of machine2hours planned can !e calculated !y multiplying the num!er
of units planned "!udgeted% !y the num!er of machine2hours allocated per unit-
@@@ units ) machine2hours per unit A 1,EED machine2hours.
). <udgeted fi&ed +(H costs per machine2hour can !e computed !y di'iding the fle&i!le
!udget amount for fi&ed +(H "which is the same as the static !udget% !y the num!er of
machine2hours planned "calculated in "a.%%-
?35@,3FD C 1,EED machine2hours A ?1FD.33 per machine2hour
3. <udgeted 'aria!le +(H costs per machine2hour are calculated as !udgeted 'aria!le
+(H costs di'ided !y the !udgeted num!er of machine2hours planned-
?E1,353 C 1,EED machine2hours A ?53.33 per machine2hour.
5. <udgeted num!er of machine2hours allowed for actual output achie'ed can !e calculated
!y di'iding the fle&i!le2!udget amount for 'aria!le +(H !y !udgeted 'aria!le +(H
costs per machine2hour-
?ED,@33 C ?53.33 per machine2hourA 1,F)3 machine2hours allowed
>. ,he actual num!er of output units is the !udgeted num!er of machine2hours allowed for
actual output achie'ed di'ided !y the planned allocation rate of machine hours per unit-
1,F)3 machine2hours C ) machine2hours per unit A FD3 units.
D. ,he actual num!er of machine2hours used per output unit is the actual num!er of
machine hours used "gi'en% di'ided !y the actual num!er of units manufactured-
1,@)5 machine2hours C FD3 units A 1.F machine2hours used per output unit.
4-09 "3353 min.% Co*rehensi3e re3ie5 of Cha*ters ; and 4, 5orEin" 'acE5ard fro
"i3en 3ariances.
1. Solution 6&hi!it @23F outlines the Chapter E and @ framework underlying this solution.
a. $ounds of direct materials purchased A ?1ED,333 C ?1.13 A 1D3,333 pounds
!. $ounds of e&cess direct materials used A ?DF,333 C ?11.>3 A D,333 pounds
c. :aria!le manufacturing o'erhead spending 'ariance A ?13,3>3 4 ?1@,333 A ?E,D>3 *
d. Standard direct manufacturing la!or rate A ?@33,333 C 53,333 hours A ?)3 per hour
Actual direct manufacturing la!or rate A ?)3 I ?3.>3 A ?)3.>3
Actual direct manufacturing la!or2hours A ?>)),E>3 C ?)3.>3
A )>,>33 hours
e. Standard 'aria!le manufacturing o'erhead rate A ?5@3,333 C 53,333
A ?1) per direct manuf. la!or2hour
:aria!le manuf. o'erhead efficiency 'ariance of ?1@,333 C ?1) A 1,>33 e&cess hours
Actual hours 4 6&cess hours A Standard hours allowed for units produced
)>,>33 4 1,>33 A )5,333 hours
f. <udgeted fi&ed manufacturing o'erhead rate A ?D53,333 C 53,333 hours
A ?1D per direct manuf. la!or2hour
*i&ed manufacturing o'erhead allocated A ?1D )5,333 hours A ?3@5,333
$roduction2'olume 'ariance A ?D53,333 4 ?3@5,333 A ?)>D,333 N
1. ,he control of 'aria!le manufacturing o'erhead re9uires the identification of the cost dri'ers
for such items as energy, supplies, and repairs. Control often entails monitoring nonfinancial
measures that affect each cost item, one !y one. 6&amples are kilowatts used, 9uantities of
lu!ricants used, and repair parts and hours used. ,he most con'incing way to disco'er why
o'erhead performance did not agree with a !udget is to in'estigate possi!le causes, line item !y
line item.
ndi'idual fi&ed o'erhead items are not usually affected 'ery much !y day2to2day control.
nstead, they are controlled periodically through planning decisions and !udgeting procedures
that may sometimes ha'e planning horizons co'ering si& months or a year "for e&ample,
management salaries% and sometimes co'ering many years "for e&ample, long2term leases and
depreciation on plant and e9uipment%.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions @>
Solution 6&hi!it @23F
Act!al Costs
#nc!rred
,Act!al #n*!t Mty.
Act!al Rate-
Act!al #n*!t Mty.
A!d"eted Rate
P!rchases +sa"e
&le(i'le A!d"etB
A!d"eted #n*!t Mty.
Allo5ed for
Act!al <!t*!t
A!d"eted Rate
7irect
+aterials
1D3,333 ?13.53
?1,DD5,333
1D3,333 ?11.>3
?1,@53,333
FD,333 ?11.>3
?1,135,333
3 33,333 ?11.>3
?1,33>,333
7irect
+anuf.
Pa!or
3.@> 33,333 ?)3.>3
?>)),E>3
3.@> 33,333 ?)3
?>13,333
3.@3 33,333 ?)3
?5@3,333
Act!al Costs
#nc!rred
Act!al #n*!t Mty.
Act!al Rate
Act!al #n*!t Mty.
A!d"eted Rate
&le(i'le A!d"etB
A!d"eted #n*!t Mty.
Allo5ed for
Act!al <!t*!t
A!d"eted Rate
AllocatedB
A!d"eted #n*!t Mty.
Allo5ed for
Act!al <!t*!t
A!d"eted Rate
:aria!le
+(H
3.@> 33,333 ?11.E3
?)F@,3>3
3.@> 33,333 ?1)
?33D,333
3.@3 33,333 ?1)
?)@@,333
3.@3 33,333 ?1)
?)@@,333
Act!al Costs
#nc!rred
,1-
6ae A!d"eted
:!* 6!
Re"ardless of
<!t*!t :e3el
,2-
&le(i'le A!d"etB
6ae A!d"eted
:!* 6!
Re"ardless of
<!t*!t :e3el
,0-
AllocatedB
A!d"eted #n*!t Mty.
Allo5ed for
Act!al <!t*!t
/ A!d"eted Rate
,4-
*i&ed
+(H ?>FE,5D3 ?D53,333
3.@3 G >3,333 G ?1D
?D53,333
3.@3 & 33,333 G ?1D
?3@5,333
?1ED,333 *
$rice 'ariance
?DF,333 N
6fficiency 'ariance
?1),E>3 N
$rice 'ariance
?33,333 N
6fficiency 'ariance
?5),E>3 N
?E,D>3 *
Spending 'ariance
?1@,333 N
6fficiency
'ariance
Me'er a 'ariance
?13,3>3 N
*le&i!le2!udget 'ariance Me'er a 'ariance
?)>D,333 N
?5),>53 *
?)>D,333 N
$roduction 'olume 'ariance
Me'er a 'ariance
?5),>53 *
Spending 'ariance
'olume 'ariance
@D
CHAPTER 9
9-14 "53 min.% %aria'le and a'sor*tion costin", e(*lainin" o*eratin"-incoe differences.
1. Sey inputs for income statement computations are-
Fan!ary &e'r!ary )arch
<eginning in'entory
$roduction
#oods a'aila!le for sale
Nnits sold
6nding in'entory
3
1,333
1,333
E33
333
333
@33
1,133
@33
333
333
1,)>3
1,>>3
1,>33
>3
,he !udgeted fi&ed manufacturing cost per unit and !udgeted total manufacturing cost
per unit under a!sorption costing are-
"a% <udgeted fi&ed manufacturing costs
"!% <udgeted production
"c%A"a%C"!% <udgeted fi&ed manufacturing cost per unit
"d% <udgeted 'aria!le manufacturing cost per unit
"e%A"c%I"d% <udgeted total manufacturing cost per unit
?533,333
1,333
?533
?F33
?1,333
?533,333
1,333
?533
?F33
?1,333
?533,333
1,333
?533
?F33
?1,333
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions @E
"a% :aria!le Costing
Fan!ary 2009 &e'r!ary 2009 )arch 2009
8e'enues
a
?1,E>3,333 ?),333,333 ?3,E>3,333
:aria!le costs
<eginning in'entory
!
? 3 ?)E3,333 ? )E3,333
c
F33,333 E)3,333 1,1)>,333
Cost of goods a'aila!le for sale
7educt ending in'entory
d
F33,333
")E3,333 %
FF3,333
")E3,333 %
1,3F>,333

"5>,333%
:aria!le cost of goods sold
:aria!le operating costs
e
,otal 'aria!le costs
D33,333
5)3,333
1,3>3,333
E)3,333
5@3,333
1,)33,333
1,3>3,333
F33,333
),)>3,333
Contri!ution margin
*i&ed costs
*i&ed manufacturing costs
*i&ed operating costs
,otal fi&ed costs
(perating income
533,333
153,333
E33,333
>53,333
? 1D3,333
533,333
153,333
@33,333
>53,333
? )D3,333
533,333
153,333
1,>33,333
>53,333
? FD3,333
a
?),>33 G E33B ?),>33 G @33B ?),>33 G 1,>33
!
?X G 3B ?F33 G 333B ?F33 G 333
c
?F33 G 1,333B ?F33 G @33B ?F33 G 1,)>3
d
?F33 G 333B ?F33 G 333B ?F33 G >3
e
?D33 G E33B ?D33 G @33B ?D33 G 1,>33
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions @@
"!% A!sorption Costing
Fan!ary 2009 &e'r!ary 2009 )arch 2009
8e'enues
a
Cost of goods sold
<eginning in'entory
!
? 3
?1,E>3,333
? 3F3,333
?),333,333
? 3F3,333
?3,E>3,333
c
F33,333 E)3,333 1,1)>,333
Allocated fi&ed manufacturing
costs
d
533,333 3)3,333 >33,333
Cost of goods a'aila!le for sale 1,333,333 1,533,333 ),31>,333
e

"3F3,333% "3F3,333% "D>,333%
Ad/ustment for prod. 'ol. 'ar.
f
3 @3,333 N "133,333 % *
Cost of goods sold F13,333 1,1)3,333 1,@>3,333
#ross margin @53,333 @@3,333 1,F33,333
(perating costs
g
5)3,333 5@3,333 F33,333
*i&ed operating costs 153,333 153,333 153,333
,otal operating costs >D3,333 D)3,333 1,353,333
(perating income ? )@3,333 ? )D3,333 ? @D3,333
a
?),>33 G E33B ?),>33 G @33B ?),>33 G 1,>33
!
?XG 3B ?1,333 G 333B ?1,333 G 333
c
?F33 G 1,333B ?F33 G @33B ?F33 G 1,)>3
d
?533 G 1,333B ?533 G @33B ?533 G 1,)>3
e
?1,333 G 333B ?1,333 G 333B ?1,333 G >3
f
?533,333 4 ?533,333B ?533,333 4 ?3)3,333B ?533,333 4 ?>33,333
g
?D33 G E33B ?D33 G @33B ?D33 G 1,>33
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions @F
). 4 A 4
Lanuary- ?)@3,333 4 ?1D3,333 A "?533 G 333% 4 ?3
?1)3,333 A ?1)3,333
*e!ruary- ?)D3,333 4 ?)D3,333 A "?533 G 333% 4 "?533 G 333%
?3 A ?3
+arch- ?@D3,333 4 ?FD3,333 A "?533 G >3% 4 "?533 G 333%
4 ?133,333 A 4 ?133,333
,he difference !etween a!sorption and 'aria!le costing is due solely to mo'ing fi&ed
manufacturing costs into in'entories as in'entories increase "as in Lanuary% and out of
in'entories as they decrease "as in +arch%.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions F3
9-19 ")3433 min.% Thro!"h*!t costin" ,contin!ation of E(ercise 9-14-.
1.
8e'enues
a
7irect material cost of
goods sold
<eginning in'entory
!
? 3 ?1,E>3,333
?1>3,333
?),333,333
? 1>3,333
?3,E>3,333
7irect materials in goods
manufactured
c
Cost of goods a'aila!le
for sale
d
,otal direct material
cost of goods sold
>33,333
>33,333
"1>3,333 %
3>3,333
533,333
>>3,333
"1>3,333 %
533,333
D)>,333
EE>,333
")>,333 %
E>3,333
,hroughput contri!ution 1,533,333 1,D33,333 3,333,333
(ther costs
+anufacturing
e
(perating
f
,otal other costs
(perating income
@33,333
>D3,333
1,3D3,333
? 53,333
E)3,333
D)3,333
1,353,333
? )D3,333
F33,333
1,353,333
1,F53,333
?1,3D3,333
a
?),>33 G E33B ?),>33 G @33B ?),>33 G 1,>33
!
?X G 3B ?>33 G 333B ?>33 G 333
c
?>33 G 1,333B ?>33 G @33B ?>33 G 1,)>3
d
?>33 G 333B ?>33 G 333B ?>33 G>3
e
"?533 G 1,333% I ?533,333B "?533 G @33% I ?533,333B "?533 G 1,)>3% I ?533,333
f
"?D33 G E33% I ?153,333B "?D33 G @33% I ?153,333B "?D33 G 1,>33% I ?153,333
). (perating income under-
A!sorption costing
:aria!le costing
,hroughput costing
?)@3,333
1D3,333
53,333
?)D3,333
)D3,333
)D3,333
?@D3,333
FD3,333
1,3D3,333
,hroughput costing puts greater emphasis on sales as the source of operating income than does
a!sorption or 'aria!le costing.
3. ,hroughput costing puts a penalty on producing without a corresponding sale in the same
period. Costs other than direct materials that are 'aria!le with respect to production are e&pensed
when incurred, whereas under 'aria!le costing they would !e capitalized as an in'entoria!le
cost.
9-21 "13 min.% A'sor*tion and 3aria'le costin".
,he answers are 1"a% and )"c%. Computations-
1. A'sor*tion Costin"-
8e'enues
a
Cost of goods sold-
!
Allocated fi&ed manufacturing costs
c
#ross margin
?),533,333
3D3,333
?5,@33,333
),ED3,333
),353,333
(perating costs-
:aria!le operating
d

*i&ed operating
(perating income
1,)33,333
533,333 1,D33,333
? 553,333
a
?53 G 1)3,333
!
?)3 G 1)3,333
c
*i&ed manufacturing rate A ?D33,333 C )33,333 A ?3 per output unit
*i&ed manufacturing costs A ?3 G 1)3,333
d
?13 G 1)3,333
). %aria'le Costin"-
8e'enues
a
:aria!le costs-
:aria!le manufacturing cost of goods sold
!
c
Contri!ution margin
*i&ed costs-
*i&ed manufacturing costs
*i&ed operating costs
(perating income
?),533,333
1,)33,333
D33,333
533,333
?5,@33,333
3,D33,333
1,)33,333
1,333,333
? )33,333
a
?53 G 1)3,333
!
?)3 G 1)3,333
c
?13 G 1)3,333
9-25 ,10 in.- Ca*acity ana"eent, denoinator-le3el ca*acity conce*ts.
1. a, !
). a
3. d
5. c, d
>. c
D. d
E. a
@. ! "or a%
F. !
13. c, d
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions F)
11. a, !
9-29 ")> min.% $enoinator-le3el *ro'le.
1. <udgeted fi&ed manufacturing o'erhead costs rates-
$enoinator
Pe'el
Capacity
Concept
A!d"eted &i(ed
)an!fact!rin"
<3erhead *er
$eriod
A!d"eted
Ca*acity
Pe'el
A!d"eted &i(ed
)an!fact!rin"
<3erhead Cost
8ate
,heoretical ? 5,333,333 ),@@3 ? 1,3@@.@F
$ractical 5,333,333 1,F)3 ),3@3.33
Mormal 5,333,333 1,)33 3,333.33
+aster2!udget 5,333,333 1,>33 ),DDD,DE
,he rates are different !ecause of 'arying denominator2le'el concepts. ,heoretical and practical
capacity le'els are dri'en !y supply2side concepts, i.e., 0how much can produceX1 Mormal and
master2!udget capacity le'els are dri'en !y demand2side concepts, i.e., 0how much can sellX1
"or 0how much should produceX1%
). ,he 'ariances that arise from use of the theoretical or practical le'el concepts will signal
that there is a di'ergence !etween the supply of capacity and the demand for capacity. ,his is
useful input to managers. As a general rule, howe'er, it is important not to place undue reliance
on the production 'olume 'ariance as a measure of the economic costs of unused capacity.
3. Nnder a cost2!ased pricing system, the choice of a master2!udget le'el denominator will
lead to high prices when demand is low "more fi&ed costs allocated to the indi'idual product
le'el%, further eroding demandB con'ersely, it will lead to low prices when demand is high,
forgoing profits. ,his has !een referred to as the downward demand spiralKthe continuing
reduction in demand that occurs when the prices of competitors are not met and demand drops,
resulting in e'en higher unit costs and e'en more reluctance to meet the prices of competitors.
,he positi'e aspects of the master2!udget denominator le'el are that it is !ased on demand for
the product and indicates the price at which all costs per unit would !e reco'ered to ena!le the
company to make a profit. +aster2!udget denominator le'el is also a good !enchmark against
which to e'aluate performance.
9-29 "53 min.% %aria'le costin" and a'sor*tion costin", the All-&i(ed Co*any.
,his pro!lem always generates acti'e classroom discussion.
1. ,he treatment of fi&ed manufacturing o'erhead in a!sorption costing is affected primarily
!y what denominator le'el is selected as a !ase for allocating fi&ed manufacturing costs to units
produced. n this case, is 13,333 tons per year, )3,333 tons, or some other denominator le'el the
most appropriate !aseX
=e usually place the following possi!ilities on the !oard or o'erhead pro/ector and then
ask the students to indicate !y 'ote how many used one denominator le'el 'ersus another.
ncidentally, discussion tends to mo'e more clearly if 'aria!le2costing income statements are
discussed first, !ecause there is little disagreement as to computations under 'aria!le costing.
a. :aria!le2Costing ncome Statement-
2004 2009 To"ether
8e'enues "and contri!ution margin% ?333,333 ?333,333 ?D33,333
*i&ed costs-
+anufacturing costs ?)@3,333
(perating costs 53,333 3)3,333 3)3,333 D53,333
(perating income ? ")3,333% ? ")3,333% ? "53,333%
!. A!sorption2Costing ncome Statement-
,he am!iguity a!out the 13,3332 or )3,3332unit denominator le'el is intentional. * H(N =SH,
,H6 A+<#N,H +AH <6 A:(767 <H #:M# ,H6 S,N76M,S A S$6C*C
76M(+MA,(8 P6:6P M A7:AMC6.
Alternati'e 1. Nse )3,333 units as a denominatorB fi&ed manufacturing o'erhead per unit is
?)@3,333 )3,333 A ?15.
2004 2009 To"ether
8e'enues ?333,333 ? 333,333 ?D33,333
Cost of goods sold
<eginning in'entory 3 153,333
*
3
Allocated fi&ed manufacturing costs at ?15 )@3,333 K )@3,333
7educt ending in'entory "153,333% K K
Ad/ustment for production2'olume 'ariance 3 )@3,333 N )@3,333 N
Cost of goods sold 153,333 5)3,333 >D3,333
#ross margin 1D3,333 "1)3,333% 53,333
(perating costs 53,333 53,333 @3,333
(perating income ?1)3,333 ?"1D3,333% ? "53,333%
*
n'entory carried forward from )33@ and sold in )33F.
Alternati'e ). Nse 13,333 units as a denominatorB fi&ed manufacturing o'erhead per unit is
?)@3,333 ^13,333 A ?)@.
2004 2009 To"ether
8e'enues ?333,333 ?333,333 ?D33,333
Cost of goods sold
<eginning in'entory 3 )@3,333
*
3
Allocated fi&ed manufacturing costs at ?)@ >D3,333 K >D3,333
7educt ending in'entory ")@3,333% K K
Ad/ustment for production2'olume 'ariance ")@3,333% * )@3,333 N 3
Cost of goods sold 3 >D3,333 >D3,333
#ross margin 333,333 ")D3,333% 53,333
(perating costs 53,333 53,333 @3,333
(perating income ?)D3,333 ?"333,333% ? "53,333%
*
n'entory carried forward from )33@ and sold in )33F.
Mote that operating income under 'aria!le costing follows sales and is not affected !y
in'entory changes.
Mote also that students will understand the 'aria!le2costing presentation much more
easily than the alternati'es presented under a!sorption costing.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions F>
).
<reake'en point
under 'aria!le
costing
A
per ton margin on Contri!uti
costs *i&ed
A
?33
?3)3,333
A 13,DDE "rounded% tons per year or )1,335 for two years.
f the company could sell DDE more tons per year at ?33 each, it could get the e&tra
?)3,333 contri!ution margin needed to !reak e'en.
+ost students will say that the !reake'en point is 13,DDE tons per year under !oth
a!sorption costing and 'aria!le costing. ,he logical 9uestion to ask a student who answers
13,DDE tons for 'aria!le costing is- 0=hat operating income do you show for )33@ under
a!sorption costingX1 f a student answers ?1)3,333 "alternati'e 1 a!o'e%, or ?)D3,333
"alternati'e ) a!o'e%, ask- 0<ut you say your !reake'en point is 13,DDE tons. How can you show
an operating income on only 13,333 tons sold during )33@X1
,he answer to the a!o'e dilemma lies in the fact that operating income is affected !y
!oth sales and production under a!sorption costing.
#i'en that sales would !e 13,333 tons in )33@, sol'e for the production le'el that will
pro'ide a !reake'en le'el of zero operating income. Nsing the formula in the chapter, sales of
13,333 units, and a fi&ed manufacturing o'erhead rate of ?15 "!ased on ?)@3,333 C )3,333 units
denominator le'el A ?15%-

Pet $ A $roduction le'el
A
margin on contri!uti Nnit
produced
Nnits
units
in sales
<reake'en
rate
o'erhead
manuf. *i&ed
income
operating
,arget
costs
fi&ed ,otal
1
1
1
]
1
,
_
,
_
,
_
,
_
13,333 tons A
33 ?
% 333 _ 13 " 15 ? 3 ? 333 _ 3)3 ? P + +
?333,333 A ?3)3,333 I ?153,333 4 ?15$
?15$ A ?1D3,333
$ A 11,5)F units "rounded%
$roof-
#ross margin, 13,333 G "?33 4 ?15% ?1D3,333
$roduction2'olume 'ariance,
")3,333 4 11,5)F% G ?15 ?11F,FF5
+arketing and administrati'e costs 53,333 1>F,FF5
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions FD
(perating income "due to rounding% ? D
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions FE
#i'en that production would !e )3,333 tons in )33@, sol'e for the !reake'en unit sales le'el.
Nsing the formula in the chapter and a fi&ed manufacturing o'erhead rate of ?15 "!ased on a
denominator le'el of )3,333 units%-
Pet M A <reake'en sales in units
M A
margin on contri!uti Nnit
produced
Nnits
M
rate
o'erhead
manuf. *i&ed
income
operating
,arget
costs
fi&ed ,otal
1
1
1
]
1
,
_
,
_
,
_
,
_
M A
?3)3,333 I ?3 I ?15"M )3,333%
?33

?33M A ?3)3,333 I ?15M 4 ?)@3,333
?1DM A ?53,333
M A ),>33 units
$roof-
#ross margin, ),>33 G "?33 4 ?15% ?53,333
$roduction2'olume 'ariance ? 3
+arketing and administrati'e costs 53,333 53,333
(perating income ? 3
=e find it helpful to put the following comparisons on the !oard-
:aria!le costing !reake'en A f"sales%
A 13,DDE tons
A!sorption costing !reake'en A f"sales and production%
A f"13,333 and 11,5)F%
A f"),>33 and )3,333%
3. A!sorption costing in'entory cost- 6ither ?153,333 or ?)@3,333 at the end of )33@ and
zero at the end of )33F.
:aria!le costing- èro at all times. ,his is a ma/or criticism of 'aria!le costing and
focuses on the issue of the definition of an asset.
5. (perating income is affected !y !oth production and sales under a!sorption costing.
Hence, most managers would prefer a!sorption costing !ecause their performance in any gi'en
reporting period, at least in the short run, is influenced !y how much production is scheduled
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions F@
near the end of a period.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions FF
CHAPTER 14
14-22 ")3)> min.% C!stoer *rofita'ility, distri'!tion.
1. ,he acti'ity2!ased costing for each customer is-
Charleston
Pharacy
Cha*el Hill
Pharacy
1. (rder processing,
?53 G 13B ?53 G 13 ? >)3 ? 533
). Pine2item ordering,
?3 G "13 G FB 13 G 1@% 3>1 >53
3. Store deli'eries,
?>3 G EB ?>3 G13 3>3 >33
5. Carton deli'eries,
?1 G "E G ))B 13 G )3% 1>5 )33
>. Shelf2stocking,
?1D G "E G 3B 13 G 3.>% 3 @3
(perating costs ?1,3E> ?1,E)3
,he operating income of each customer is-
Charleston
Pharacy
Cha*el Hill
Pharacy
8e'enues,
?),533 G EB ?1,@33 G 13 ?1D,@33 ?1@,333
Cost of goods sold,
?),133 G EB ?1,D>3 G 13 15,E33 1D,>33
#ross margin ),133 1,>33
(perating costs 1,3E> 1,E)3
(perating income ? E)> ? "))3%
Chapel Hill $harmacy has a lower gross margin percentage than Charleston "@.33J 's. 1).>3J%
and consumes more resources to o!tain this lower margin.
=ays *igure *our could use this information include-
a. $ay increased attention to the top )3J of the customers. ,his could entail asking them for
ways to impro'e ser'ice. Alternati'ely, you may want to highlight to your own personnel
the importance of these customersB e.g., it could entail stressing to deli'ery people the
importance of ne'er missing deli'ery dates for these customers.
!. =ork out ways internally at *igure *our to reduce the rate per cost dri'erB e.g., reduce the
cost per order !y ha'ing !etter order placement linkages with customers. ,his cost
reduction !y *igure *our will impro'e the profita!ility of all customers.
c. =ork with customers so that their !eha'ior reduces the total 0system2wide1 costs. At a
minimum, this approach could entail ha'ing customers make fewer orders and fewer line
items. ,his latter point is contro'ersial with studentsB the rationale is that a reduction in
the num!er of line items "di'ersity of products% carried !y +a and $a stores may reduce
the di'ersity of products *igure *our carries.
,here are se'eral options here-
Simple 'er!al persuasion !y showing customers cost dri'ers at *igure *our.
6&plicitly pricing out acti'ities like cartons deli'ered and shelf2stocking so that
customers pay for the costs they cause.
8estricting options a'aila!le to certain customers, e.g., customers with low re'enues
could !e restricted to one free deli'ery per week.
An e'en more e&treme e&ample is working with customers so that deli'eries are easier to make
and shelf2stocking can !e done faster.
d. (ffer salespeople !onuses !ased on the operating income of each customer rather than
the gross margin of each customer.
Some students will argue that the !ottom 53J of the customers should !e dropped. ,his
action should !e only a last resort after all other a'enues ha'e !een e&plored. +oreo'er, an
unprofita!le customer today may well !e a profita!le customer tomorrow, and it is myopic to
focus on only a 12month customer2profita!ility analysis to classify a customer as unprofita!le.
14-20 "33453 min.% %ariance analysis, !lti*le *rod!cts.
1. =
units in 9uantity
sales Actual

,
_
units in 9uantity
sales <udgeted

per ticket margin
on contri!uti <udgeted
Power2tier tickets A "3,333 4 5,333% ?)3 A ?15,333 N
Npper2tier tickets A "E,E33 4 D,333% ? > A @,>33 *
All tickets ? >,>33 N
).
unit per margin on contri!uti
a'erage <udgeted
A
333 , 13
?>% "D,333 ?)3% 333 , 5 " +
A
13,333
?33,333 333 , @3 ? +
A
333 , 13
333 , 113 ?
A ?11 per unit "seat sold%
Sales2mi& percentages-
A!d"eted Act!al
Power2tier
333 , 13
333 , 5
A
3.53
333 , 11
333 , 3
A
3.33
Npper2tier 333 , 13
333 , D
A
3.D3
333 , 11
E33 , E
A
3.E3
Solution 6&hi!it 152)3 presents the sales2'olume, sales29uantity, and sales2mi& 'ariances for
lower2tier tickets, upper2tier tickets, and in total for 7etroit $enguins in )313.
,he sales29uantity 'ariances can also !e computed as-
A
,
_
sold
tickets all of
units <udgeted
sold
tickets all of
units Actual

percentage
mi& 2 sales
<udgeted

per ticket
margin cont.
<udgeted
,he sales29uantity 'ariances are-
Power2tier tickets A "11,333 4 13,333% G 3.53 G ?)3 A ? @,333 *
Npper2tier tickets A "11,333 4 13,333% G 3.D3 G ? > A 3,333 *
All tickets ?11,333 *
,he sales2mi& 'ariance can also !e computed as-
A
sold
tickets all of
units Actual
G
Actual <udgeted <udgeted
contri!ution margin sales2mi& sales2mi&
per ticket percentage percentage
_

,
,he sales2mi& 'ariances are
Power2tier tickets A 11,333 G "3.33 4 3.53% G ?)3 A ?)),333 N
Npper2tier tickets A 11,333 G "3.E3 4 3.D3% G ? > A >,>33 *
All tickets ?1D,>33 N
3. ,he 7etroit $enguins increased a'erage attendance !y 13J per game. Howe'er, there
was a siza!le shift from lower2tier seats "!udgeted contri!ution margin of ?)3 per seat% to the
upper2tier seats "!udgeted contri!ution margin of ?> per seat%. ,he net result- the actual
contri!ution margin was ?>,>33 !elow the !udgeted contri!ution margin.
6<:+T#<? E@H#A#T 14-20
Columnar $resentation of Sales2:olume, Sales2Quantity and Sales2+i& :ariances for 7etroit
$enguins
&le(i'le A!d"etB
Act!al +nits of
All Prod!cts 6old
G Act!al 6ales )i(
G A!d"eted
Contri'!tion
)ar"in *er +nit
,1-
Act!al +nits of
All Prod!cts 6old
G A!d"eted 6ales )i(
G A!d"eted
Contri'!tion )ar"in
*er +nit
,2-
6tatic A!d"etB
A!d"eted +nits of
All Prod!cts 6old
G A!d"eted 6ales )i(
G A!d"eted
Contri'!tion
)ar"in *er +nit
,0-
$anel A-
Power2tier "11,333 G 3.33
a
% G ?)3
3,333 G ?)3
"11,333 G 3.53
!
% G ?)3
5,533 G ?)3
"13,333 G 3.53
!
% G ?)3
5,333 G ?)3
?DD,333 ?@@,333 ?@3,333
?)),333N ?@,333 *
Sales2mi& 'ariance Sales29uantity 'ariance
?15,333 N
Sales2'olume 'ariance
$anel <-
Npper2tier "11,333 G 3.E3
c
% G ?>
E,E33 G ?>
"11,333 G 3.D3
d
% G ?>
D,D33 G ?>
"13,333 G 3.D3
d
% G ?>
D,333 G ?>
?3@,>33 ?33,333 ?33,333
?>,>33 * ?3,333 *
Sales2mi& 'ariance Sales29uantity 'ariance
?@,>33 *
$anel C-
All ,ickets
"Sum of Power2
tier and Npper2
tier tickets%
?135,>33
e
?1)1,333
f
?113,333
g
?1D,>33 N ?11,333 *
,otal sales2mi& 'ariance ,otal sales29uantity 'ariance
?>,>33 N
,otal sales2'olume 'ariance
* A fa'ora!le effect on operating incomeB N A unfa'ora!le effect on operating income.
Actual Sales +i&-
a
Power2tier A 3,333 C 11,333 A 33J
c
Npper2tier A E,E33 C 11,333 A E3J
e
?DD,333 I ?3@,>33 A ?135,>33

<udgeted Sales +i&-
!
Power2tier A 5,333 C 13,333 A 53J
d
Npper2tier A D,333 C 13,333 A D3J
f

?@@,333 I ?33,333 A ?1)1,333
g

?@3,333 I ?33,333 A ?113,333
14-04 "53 min.% %ariance analysis, !lti*le *rod!cts.
1, ), and 3. Solution 6&hi!it 15235 presents the sales2'olume, sales29uantity, and sales2mi&
'ariances for each type of cookie and in total for 7e!!ie.s 7elight, nc., in August )33F.
,he sales2'olume 'ariances can also !e computed as
Sales2'olume
'ariance
A
( )
Actual 9uantity <udgeted 9uantity
of pounds sold of pounds sold
G
<udgeted contri!ution
margin per pound
,he sales2'olume 'ariances are
Chocolate chip A ">E,D33 4 5>,333% ?).33 A ?)>,)33 *
(atmeal raisin A "1@,333 4 )>,333% ?).33 A 1D,133 N
Coconut A "F,D33 4 13,333% ?).D3 A 1,353 N
=hite chocolate A "13,)33 4 >,333% ?3.33 A )5,D33 *
+acadamia nut A ")1,D33 4 1>,333% ?3.13 A )3,5D3 *
All cookies ?>3,1)3 *
,he sales29uantity 'ariance can also !e computed as
Sales2'olume
'ariance
A
Actual pounds <udgeted pounds
of all cookies of all cookies
sold sold
_

,

<udgeted
sales2mi&
percentage

<udgeted
contri!ution
margin per pound
,he sales29uantity 'ariances are
Chocolate chip A "1)3,333 4 133,333% 3.5> ?).33 A ?1@,333 *
(atmeal raisin A "1)3,333 4 133,333% 3.)> ?).33 A 11,>33 *
Coconut A "1)3,333 4 133,333% 3.13 ?).D3 A >,)33 *
=hite chocolate A "1)3,333 4 133,333% 3.3> ?3.33 A 3,333 *
+acadamia nut A "1)3,333 4 133,333% 3.1> ?3.13 A F,333 *
All cookies ?5E,333 *
,he sales2mi& 'ariance can also !e computed as-
Sales29uantity
'ariance
A
( )
Actual sales2 <udgeted sales2
mi& percentage mi& percentage

Actual pounds
of all cookies
sold

<udgeted
contri!ution
margin per pound
,he sales2mi& 'ariances are-
Chocolate chip A "3.5@ 4 3.5>% 1)3,333 ?).33 A ? E,)33 *
(atmeal raisin A "3.1> 4 3.)>% 1)3,333 ?).33 A )E,D33 N
Coconut A "3.3@ 4 3.13% 1)3,333 ?).D3 A D,)53 N
=hite chocolate A "3.11 4 3.3>% 1)3,333 ?3.33 A )1,D33 *
+acadamia nut A "3.1@ 4 3.1>% 1)3,333 ?3.13 A 11,1D3 *
All cookies ? D,1)3 *
A summary of the 'ariances is-
6ales-%ol!e %ariance
Chocolate chip ?)>,)33 *
(atmeal raisin 1D,133 N
Coconut 1,353 N
=hite chocolate )5,D33 *
+acadamia nut )3,5D3 *
All cookies ?>3,1)3 *

6ales-)i( %ariance
Chocolate chip ? E,)33 *
(atmeal raisin )E,D33 N
Coconut D,)53 N
=hite chocolate )1,D33 *
+acadamia nut 11,1D3 *
All cookies ? D,1)3 *
6ales-M!antity %ariance
Chocolate chip ?1@,333 *
(atmeal raisin 11,>33 *
Coconut >,)33 *
=hite chocolate 3,333 *
+acadamia nut F,333 *
All cookies ?5E,333 *
5. 7e!!ie.s 7elight shows a fa'ora!le sales29uantity 'ariance !ecause it sold more cookies
in total than was !udgeted. ,ogether with the higher 9uantities, 7e!!ie.s also sold more of the
high2contri!ution margin white chocolate and macadamia nut cookies relati'e to the !udgeted
mi&44as a result, 7e!!ie.s also showed a fa'ora!le total sales2mi& 'ariance.
6<:+T#<? E@H#A#T 14-04
Columnar $resentation of Sales2:olume, Sales2Quantity, and Sales2+i& :ariances
for 7e!!ie.s 7elight, nc.
&le(i'le A!d"etB
Act!al Po!nds of
All CooEies 6old
/ Act!al 6ales )i(
/ A!d"eted
Contri'!tion )ar"in
*er Po!nd
,1-
Act!al Po!nds of
All CooEies 6old
/ A!d"eted 6ales )i(
/ A!d"eted
Contri'!tion )ar"in
*er Po!nd
,2-
6tatic A!d"etB
A!d"eted Po!nds of
All CooEies 6old
/ A!d"eted
Contri'!tion )ar"in
*er Po!nd
,0-
$anel A-
Chocolate Chip "1)3,333 G 3.5@
a
% G ?)
>E,D33 G ?)
"1)3,333 G 3.5>
!
% G ?)
>5,333 G ?)
"133,333 G 3.5>
!
% G ?)
5>,333 G ?)
?11>,)33 ?13@,333 ?F3,333
$anel <-
(atmeal 8aisin
"1)3,333 G 3.1>
c
% G
?).33
1@,333 G ?).33
"1)3,333 G 3.)>
d
% G
?).33
33,333 G ?).33
"133,333 G 3.)>
d
% G ?).33
)>,333 G ?).33
?51,533 ?DF,333 ?>E,>33
$anel C-
Coconut
"1)3,333 G 3.3@
e
% G
?).D3
F,D33 G ?).D3
"1)3,333 G 3.13
f
% G
?).D3
1),333 G ?).D3
"133,333 G 3.13
f
% G ?).D3
13,333 G ?).D3
?)5,FD3 ?31,)33 ?)D,333
?E,)33 *
Sales2mi& 'ariance
?1@,333 *
Sales29uantity 'ariance
?)>,)33 *
?)E,D33 N
Sales2mi& 'ariance
?11,>33 *
?1D,133 N
?D,)53 N
Sales2mi& 'ariance
?>,)33 *
?1,353 N
13E
Actual Sales +i&-
a
Chocolate Chip A >E,D33 C 1)3,333 A 5@J
c
(atmeal 8aisin A 1@,333 C 1)3,333 A 1>J
e
Coconut A F,D33 C 1)3,333 A @J
<udgeted Sales +i&-
!
Chocolate Chip A 5>,333 C 133,333 A 5>J
d
(atmeal 8aisin A )>,333 C 133,333 A )>J
f
Coconut A 13,333 C 133,333 A 13J
6<:+T#<? E@H#A#T 14-04 "Cont.d.%
Columnar $resentation of Sales2:olume, Sales2Quantity, and Sales2+i& :ariances
for 7e!!ie.s 7elight, nc.
&le(i'le A!d"etB
Act!al Po!nds of
All CooEies 6old
/ Act!al 6ales )i(
/ A!d"eted
Contri'!tion )ar"in
*er Po!nd
,1-
Act!al Po!nds of
All CooEies 6old
/ A!d"eted
Contri'!tion )ar"in
*er Po!nd
,2-
6tatic A!d"etB
A!d"eted Po!nds of
All CooEies 6old
/ A!d"eted
Contri'!tion )ar"in
*er Po!nd
,0-
$anel 7-
=hite Chocolate
"1)3,333 G 3.11
g
% G
?3.33
13,)33 G ?3.33
"1)3,333 G 3.3>
h
% G
?3.33
D,333 G ?3.33
"133,333 G 3.3>
h
% G ?3.33
>,333 G ?3.33
?3F,D33 ?1@,333 ?1>,333
$anel 6-
+acadamia Mut
"1)3,333 G 3.1@
/
% G
?3.13
)1,D33 G ?3.13
"1)3,333 G 3.1>
k
% G
?3.13
1@,333 G ?3.13
"133,333 G 3.1>
k
% G ?3.13
1>,333 G ?3.13
?DD,FD3 ?>>,@33 ?5D,>33
$anel *- ?)@@,1)3
l
?)@),333
m
?)3>,333
n
All Cookies
?)1,D33 *
Sales2mi& 'ariance
?3,333 *
?)5,D33 *
?11,1D3 *
Sales2mi& 'ariance
?F,333 *
?)3,5D3 *
?D,1)3 *
,otal sales2mi& 'ariance
?5E,333 *
,otal sales29uantity 'ariance
?>3,1)3 *
,otal sales2'olume 'ariance
13F
Actual Sales +i&-
g
=hite Chocolate A13,)33 C 1)3,333 A
11J
/
+acadamia Mut A )1,D33 C 1)3,333 A
1@J
l
?11>,)33 I ?51,533 I ?)5,FD3
I ?3F,D33 I ?DD,FD3 A
?)@@,1)3
<udgeted Sales +i&-
h
=hite Chocolate A >,333 C 133,333 A
>J
k
+acadamia Mut A 1>,333 C 133,333 A
1>J
m
?13@,333 I ?DF,333 I ?31,)33
I ?1@,333 I ?>>,@33 A
?)@),333
n
?F3,333 I ?>E,>33 I ?)D,333
I ?1>,333 I ?5D,>33 A
?)3>,333
14-05 "1> min.% )arEet-share and arEet-siJe 3ariances "continuation of 15235%.
Act!al A!d"eted
Chicago +arket
7e!!ieas 7elight
+arket share
FD3,333
1)3,333
3.1)>
1,333,333
133,333
3.133
,he !udgeted a'erage contri!ution margin per unit "also called !udgeted contri!ution margin per
composite unit for !udgeted mi&% is ?).3>-
A!d"eted
Contri'!tion
)ar"in *er
Po!nd
A!d"eted
6ales %ol!e
in Po!nds
A!d"eted
Contri'!tion
)ar"in
Chocolate chip
(atmeal raisin
Coconut
=hite chocolate
+acadamia nut
All cookies
?).33
).33
).D3
3.33
3.13
5>,333
)>,333
13,333
>,333
1>,333
133,333
? F3,333
>E,>33
)D,333
1>,333
5D,>33
?)3>,333
.
133,333
?)3>,333
. >2.05
A G G
A "FD3,333 4 1,333,333% G 3.133 G ?).3>
A ?F,533 N
A G G
A FD3,333 G "3.1)> 4 3.133% G ?).3>
A ?>D,533 *
<y increasing its actual market share from the 13J !udgeted to the actual 1).>3J,
7e!!ie.s 7elight has a fa'ora!le market2share 'ariance of ?>D,533. ,here is a smaller offsetting
unfa'ora!le market2size 'ariance of ?F,533 due to the 53,333 unit decline in the Chicago market
"from 1,333,333 !udgeted to an actual of FD3,333%.
Solution 6&hi!it 1523> presents the sales29uantity, market2share, and market2size 'ariances for
7e!!ie.s 7elight, nc., in August )33F.
6<:+T#<? E@H#A#T 14-05
)arEet-6hare and )arEet-6iJe %ariance Analysis of $e''ieNs $eli"ht for A!"!st 2009
6tatic A!d"etB
Act!al )arEet 6iJe Act!al )arEet 6iJe A!d"eted )arEet 6iJe
Act!al )arEet 6hare A!d"eted )arEet 6hare A!d"eted )arEet 6hare
A!d"eted A3era"e A!d"eted A3era"e A!d"eted A3era"e
Contri'!tion )ar"in Contri'!tion )ar"in Contri'!tion )ar"in
Per +nit Per +nit Per +nit
FD3,333 3.1)>
a
?).3>
!
FD3,333 3.13
c
?).3>
!
1,333,333 3.13
c
?).3>
!
?)@),333 ?))>,D33 ?)3>,333
?>D,533 * ?F,533 N
+arket2share 'ariance +arket2size 'ariance
?5E,333 *
* A fa'ora!le effect on operating incomeB N A unfa'ora!le effect on operating income
a
Actual market share- 1)3,333 units C FD3,333 units A 3.1)>, or 1).>J
!
<udgeted a'erage contri!ution margin per unit- ?)3>,333 C 1,333,333 units A ?).3> per unit
c
<udgeted market share- 133,333 units C 1,333,333 units A 3.13, or 13J
An o'er'iew of $ro!lems 15235 and 1523> is-
Sales2:olume :ariance
?>3,1)3 *
+arket2Size :ariance
?F,533 N
+arket2Share :ariance
?>D,533 *
Sales2+i& :ariance
?D,1)3 *
Sales2Quantity :ariance
?5E,333 *
11)

CHAPTER 22
22-21 "33 min.% Effect of alternati3e transfer-*ricin" ethods on di3ision o*eratin" incoe.
)ethod A
#nternal Transfers
at )arEet Prices
)ethod A
#nternal Transfers at
110= of &!ll Costs
1. Mining Division
8e'enues-
?F3, ?DD
1
)33,333 units ?1@,333,333 ?13,)33,333
Costs-
7i'ision 'aria!le costs-
?>)
)
)33,333 units 13,533,333 13,533,333
7i'ision fi&ed costs-
?@
3
)33,333 units 1,D33,333 1,D33,333
,otal di'ision costs 1),333,333 1),333,333
7i'ision operating income ? D,333,333 ? 1,)33,333
Metals Division
8e'enues-
?1>3 )33,333 units ?33,333,333 ?33,333,333
Costs-
,ransferred2in costs-
?F3, ?DD )33,333 units 1@,333,333 13,)33,333
7i'ision 'aria!le costs-
?3D
5
)33,333 units E,)33,333 E,)33,333
7i'ision fi&ed costs-
?1>
>
)33,333 units 3,333,333 3,333,333
,otal di'ision costs )@,)33,333 )3,533,333
7i'ision operating income ? 1,@33,333 ? D,D33,333
1
?DD A *ull manufacturing cost per unit in the +ining 7i'ision, ?D3 113J
)
:aria!le cost per unit in +ining 7i'ision A 7irect materials I 7irect manufacturing la!or I
E>J of manufacturing o'erhead A ?1) I ?1D I "E>J ?3)% A ?>)
3
*i&ed cost per unit A )>J of manufacturing o'erhead A )>J ?3) A ?@
5
:aria!le cost per unit in +etals 7i'ision A 7irect materials I 7irect manufacturing la!or I 53J
of manufacturing o'erhead A ?D I ?)3 I "53J ?)>% A ?3D
>
*i&ed cost per unit in +etals 7i'ision A D3J of manufacturing o'erhead A D3J ?)> A ?1>
). <onus paid to di'ision managers at 1J of di'ision operating income will !e as follows-
)ethod A
#nternal Transfers
at )arEet Prices
)ethod A
#nternal Transfers at
110= of &!ll Costs
+ining 7i'ision manager.s !onus
"1J ?D,333,333B 1J ?1,)33,333% ?D3,333 ? 1),333
+etals 7i'ision manager.s !onus
"1J ?1,@33,333B 1J ?D,D33,333% 1@,333 DD,333
,he +ining 7i'ision manager will prefer +ethod A "transfer at market prices% !ecause
this method gi'es ?D3,333 of !onus rather than ?1),333 under +ethod < "transfers at 113J of
full costs%. ,he +etals 7i'ision manager will prefer +ethod < !ecause this method gi'es
?DD,333 of !onus rather than ?1@,333 under +ethod A.
3. <rian Lones, the manager of the +ining 7i'ision, will appeal to the e&istence of a
competiti'e market to price transfers at market prices. Nsing market prices for transfers in these
conditions leads to goal congruence. 7i'ision managers acting in their own !est interests make
decisions that are also in the !est interests of the company as a whole.
Lones will further argue that setting transfer prices !ased on cost will cause Lones to pay
no attention to controlling costs since all costs incurred will !e reco'ered from the +etals
7i'ision at 113J of full costs.
22-22 "33 min.% Transfer *ricin", "eneral "!ideline, "oal con"r!ence.
1. Nsing the general guideline presented in the chapter, the minimum price at which the
Air!ag 7i'ision would sell air!ags to the ,i'o 7i'ision is ?F3, the incremental costs. ,he Air!ag
7i'ision has idle capacity "it is currently working at @3J of capacity%. ,herefore, its opportunity
cost is zeroKthe Air!ag 7i'ision does not forgo any e&ternal sales and as a result, does not forgo
any contri!ution margin from internal transfers. ,ransferring air!ags at incremental cost achie'es
goal congruence.
). ,ransferring products internally at incremental cost has the following properties-
a. Achie'es goal congruenceKHes, as descri!ed in re9uirement 1 a!o'e.
!. Nseful for e'aluating di'ision performanceKMo, !ecause this transfer price does not
co'er or e&ceed full costs. <y transferring at incremental costs and not co'ering fi&ed
costs, the Air!ag 7i'ision will show a loss. ,his loss, the result of the incremental
cost2!ased transfer price, is not a good measure of the economic performance of the
su!unit.
c. +oti'ating management effortKHes, if !ased on !udgeted costs "actual costs can
then !e compared to !udgeted costs%. f, howe'er, transfers are !ased on actual costs,
Air!ag 7i'ision management has little incenti'e to control costs.
d. $reser'es di'ision autonomyKMo. <ecause it is rule2!ased, the Air!ag 7i'ision has
no say in the setting of the transfer price.
3. f the two di'isions were to negotiate a transfer price, the range of possi!le transfer prices
will !e !etween ?F3 and ?1)> per unit. ,he Air!ag 7i'ision has e&cess capacity that it can use to
supply air!ags to the ,i'o 7i'ision. ,he Air!ag 7i'ision will !e willing to supply the air!ags
only if the transfer price e9uals or e&ceeds ?F3, its incremental costs of manufacturing the
air!ags. ,he ,i'o 7i'ision will !e willing to !uy air!ags from the Air!ag 7i'ision only if the
price does not e&ceed ?1)> per air!ag, the price at which the ,i'o di'ision can !uy air!ags in the
market from e&ternal suppliers. =ithin the price range or ?F3 and ?1)>, each di'ision will !e
willing to transact with the other and ma&imize o'erall income of Quest +otors. ,he e&act
transfer price !etween ?F3 and ?1)> will depend on the !argaining strengths of the two
di'isions. ,he negotiated transfer price has the following properties.
a. Achie'es goal congruenceKHes, as descri!ed a!o'e.
!. Nseful for e'aluating di'ision performanceKHes, !ecause the transfer price is the
result of direct negotiations !etween the two di'isions. (f course, the transfer prices
will !e affected !y the !argaining strengths of the two di'isions.
c. +oti'ating management effortKHes, !ecause once negotiated, the transfer price is
independent of actual costs of the Air!ag 7i'ision. Air!ag 7i'ision management has
e'ery incenti'e to manage efficiently to impro'e profits.
d. $reser'es su!unit autonomyKHes, !ecause the transfer price is !ased on direct
negotiations !etween the two di'isions and is not specified !y head9uarters on the
!asis of some rule "such as Air!ag 7i'ision.s incremental costs%.
5. Meither method is perfect, !ut negotiated transfer pricing "re9uirement 3% has more
fa'ora!le properties than the cost2!ased transfer pricing "re9uirement )%. <oth transfer2pricing
methods achie'e goal congruence, !ut negotiated transfer pricing facilitates the e'aluation of
di'ision performance, moti'ates management effort, and preser'es di'ision autonomy, whereas
the transfer price !ased on incremental costs does not achie'e these o!/ecti'es.
22-2; ")3min.% 7eneral "!ideline, transfer *ricin".
1. ,he minimum transfer price that the S7 would demand from the A7 is the net price it
could o!tain from selling its screens on the outside market- ?1)3 minus ?> marketing and
distri!ution cost per screen, or ?11> per screen. ,he S7 is operating at capacity. ,he incremental
cost of manufacturing each screen is ?@3. ,herefore, the opportunity cost of selling a screen to
the A7 is the contri!ution margin the S7 would forego !y transferring the screen internally
instead of selling it on the outside market.
Contri!ution margin per screen A ?11> 4 ?@3 A ?3>
Nsing the general guideline,
+inimum transfer
price per screen
A
ncremental cost per
screen inccurred up to
the point of transfer
I
(pportunity cost per
screen to the
selling di'ision
A ?@3 I ?3> A ?11>
). ,he ma&imum transfer price the A7 manager would !e willing to offer S7 is its own
total cost for purchasing from outside, ?1)3 plus ?3 per screen, or ?1)3 per screen.
3a. f the S7 has e&cess capacity "relati'e to what the outside market can a!sor!%, the
minimum transfer price using the general guideline is- for the first ),333 units "or )3J of
output%, ?@3 per screen !ecause opportunity cost is zeroB for the remaining @,333 units "or @3J
of output%, ?11> per screen !ecause opportunity cost is ?3> per screen.
3!. *rom the point of 'iew of Shamrock.s management, all of the S7.s output should !e
transferred to the A7. ,his would a'oid the ?3 per screen 'aria!le purchasing cost that is
incurred !y the A7 when it purchases screens from the outside market and it would also sa'e the
?> marketing and distri!ution cost the S7 would incur to sell each screen to the outside market.
3c. f the managers of the A7 and the S7 could negotiate the transfer price, they would settle
on a price !etween ?11> per screen "the minimum transfer price the S7 will accept% and ?1)3 per
screen "the ma&imum transfer price the A7 would !e willing to pay%. *rom re9uirements 1 and ),
we see that any price in this range would !e accepta!le to !oth di'isions for all of the S7.s
output, and would also !e optimal from Shamrock.s point of 'iew. ,he e&act transfer price
!etween ?11> and ?1)3 will depend on the !argaining strengths of the two di'isions. (f course,
Shamrockas management could also mandate a particular transfer price !etween ?11> and ?1)3
per screen.
22-02 "53 min.% )!ltinational transfer *ricin", "lo'al ta( iniiJation.
,his is a two2country two2di'ision transfer2pricing pro!lem with two alternati'e transfer2pricing
methods.
Summary data in N.S. dollars are-
South -frica Mining Division
:aria!le costs- >D3 À8 C E A ?@3 per l!. of raw diamonds
*i&ed costs- 1,>53 À8 C E A ?))3 per l!. of raw diamonds
+arket price- 3,1>3 À8 C E A ?5>3 per l!. of raw diamonds
.&S& Processing Division
:aria!le costs A ?1>3 per l!. of polished industrial diamonds
*i&ed costs A ?E33 per l!. of polished industrial diamonds
+arket price A ?>,333 per l!. of polished industrial diamonds
1. ,he transfer prices are-
a. (''/ of full costs
+ining 7i'ision to $rocessing 7i'ision
A ).3 G "?@3 I ?))3% A ?D33 per l!. of raw diamonds
!. Market price
+ining 7i'ision to $rocessing 7i'ision
A ?5>3 per l!. of raw diamonds
200= of
&!ll Cost
)arEet
Price
South Africa Mining Division
Division revenues, $600, $450 4,000
Costs
Division variable costs, $80 4,000
Division fixed costs, $220 4,000
Total division costs
Division operating income
U.S. Processing Division
Division revenues, $5,000 2,000
Costs
Transferred-in costs, $600, $450 4,000
Division variable cost, $150 2,000
Division fixed costs, $700 2,000
Total division costs
Division operating income
$2,400,000
320,000
880,000
1,200,000
$1,200,000
$10,000,000
2,400,000
300,000
1,400,000
4,100,000
$ 5,900,000
$1,800,000
320,000
880,000
1,200,000
$ 600,000
$10,000,000
1,800,000
300,000
1,400,000
3,500,000
$ 6,500,000
). 200= of
&!ll Cost
)arEet
Price
South -frica Mining Division
7i'ision operating income
ncome ta& at 1@J
7i'ision after2ta& operating income
?1,)33,333
)1D,333
? F@5,333
?D33,333
13@,333
?5F),333
.&S& Processing Division
7i'ision operating income
ncome ta& at 33J
7i'ision after2ta& operating income
?>,F33,333
1,EE3,333
?5,133,333
?D,>33,333
1,F>3,333
?5,>>3,333
3. 200= of
&!ll Cost
)arEet
Price
South -frica Mining Division+
After2ta& operating income
.&S& Processing Division+
Industrial Diamonds-
? F@5,333
5,133,333
?>,115,333
? 5F),333
5,>>3,333
?>,35),333
,he South Africa +ining 7i'ision manager will prefer the higher transfer price of )33J of full
cost and the N.S. $rocessing 7i'ision manager will prefer the lower transfer price e9ual to
market price. ndustrial 7iamonds will ma&imize companywide net income !y using the )33J
of full cost transfer2pricing method. ,his method sources more of the total income in South
Africa, the country with the lower income ta& rate.
5. *actors that e&ecuti'es consider important in transfer pricing decisions include-
a. $erformance e'aluation
!. +anagement moti'ation
c. $ricing and product emphasis
d. 6&ternal market recognition
*actors specifically related to multinational transfer pricing include-
a. ('erall income of the company
!. ncome or di'idend repatriation restrictions
c. Competiti'e position of su!sidiaries in their respecti'e markets
22-04 "33 min.% Transfer *ricin", "oal con"r!ence.
1. See column "1% of Solution 6&hi!it ))235. ,he net cost of the in2house option is ?)33,333.
). See columns ")a% and ")!% of Solution 6&hi!it ))235. As the calculations show, if
Lohnson Corporation offers a price of ?3@ per tape player, (rsilo Corporation should purchase
the tape players from LohnsonB this will result in an incremental net cost of ?)13,333 "column
)a%. f Lohnson Corporation offers a price of ?5> per tape player, (rsilo Corporation should
manufacture the tape players in2houseB this will result in an incremental net cost of ?)33,333
"column )!%.
6<:+T#<? E@H#A#T 22-04
Transfer 10,000
ta*e *layers to
Asse'ly. 6ell
2,000 in o!tside
arEet at >05
each
,1-
A!y 10,000 ta*e
*layers fro
Fohnson at >04.
6ell 12,000 ta*e
*layers in o!tside
arEet at >05
each
,2a-
A!y 10,000 ta*e
*layers fro
Fohnson at >40.
6ell 12,000 ta*e
*layers in
o!tside arEet
at >05 each
,2(-
A!y 10,000 ta*e
*layers fro
Fohnson at >45.
6ell 12,000 ta*e
*layers in
o!tside arEet at
>05 each
,2'-
ncremental cost of Cassette
7i'ision supplying 13,333 tape
players to Assem!ly 7i'ision
?)> 13,333B 3B 3B 3
?")>3,333% ? 3 ? 3 ? 3
ncremental costs of !uying 13,333
tape players from Lohnson
?3B ?3@ 13,333B ?53 13,333B
?5> 13,333
3 "3@3,333% "533,333% "5>3,333%
8e'enue from selling tape players in
outside market ?3> ),333B
1),333B 1),333B 1),333
E3,333 5)3,333 5)3,333 5)3,333
ncremental costs of manufacturing
tape players for sale in outside
market ?)> ),333B 1),333B
1),333B 1),333
">3,333% "333,333% "333,333% "333,333%
8e'enue from supplying head
mechanism to Lohnson
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1)3
?)3 3B 13,333B 13,333B 13,333 3 )33,333 )33,333 )33,333
ncremental costs of supplying head
mechanism to Lohnson
?1> 3B 13,333B 13,333B 13,333
3 "1>3,333% "1>3,333% "1>3,333%
Met costs ?")33,333% ?")13,333% ?")33,333% ?")@3,333%
Comparing columns "1% and ")a%, at a price of ?3@ per tape player from Lohnson, the net
cost of ?)13,333 is less than the net cost of ?)33,333 to (rsilo Corporation if it made the tape
players in2house. So, (rsilo Corporation should outsource to Lohnson.
Comparing columns "1% and ")!%, at a price of ?5> per tape player from Lohnson, the net
cost of ?)@3,333 is greater than the net cost of ?)33,333 to (rsilo Corporation if it made the tape
players in2house. ,herefore, (rsilo Corporation should re/ect Lohnson.s offer.
Mow consider column ")&% of Solution 6&hi!it ))235. t shows that at a price of ?53 per
tape player from Lohnson, the net cost is e&actly ?)33,333, the same as the net cost to (rsilo
Corporation of manufacturing in2house "column 1%. ,hus, for prices !etween ?3@ and ?53, (rsilo
will prefer to purchase from Lohnson. *or prices greater than ?53 "and up to ?5>%, (rsilo will
prefer to manufacture in2house.
3. ,he Cassette 7i'ision can manufacture at most 1),333 tape players and it is currently
operating at capacity. ,he incremental costs of manufacturing a tape player are ?)> per unit. ,he
opportunity cost of manufacturing tape players for the Assem!ly 7i'ision is "1% the contri!ution
margin of ?13 "selling price, ?3> minus incremental costs ?)>% that the Cassette 7i'ision would
forgo !y not selling tape players in the outside market plus ")% the contri!ution margin of ?>
"selling price, ?)3 minus incremental costs, ?1>% that the Cassette 7i'ision would forgo !y not
!eing a!le to sell the head mechanism to e&ternal suppliers of tape players such as Lohnson
"recall that the Cassette di'ision can produce as many head mechanisms as demanded !y e&ternal
suppliers, !ut their demand will fall if the Cassette 7i'ision supplies the Assem!ly 7i'ision with
tape players%. ,hus, the total opportunity cost to the Cassette 7i'ision of supplying tape players
to Assem!ly is ?13 I ?> A ?1> per unit.
Nsing the general guideline,
+inimum transfer
price per tape player
A
ncremental cost per (pportunity cost per
tape player up to the tape player to the
point of transfer selling di'ision
+
A ?)> I ?1> A ?53
,hus, the minimum transfer price that the Cassette 7i'ision will accept for each tape player is
?53. Mote that at a price of ?53, (rsilo is indifferent !etween manufacturing tape players in2
house or purchasing them from an e&ternal supplier.
5a. ,he transfer price is set to ?53 I ?1 A ?51 and Lohnson is offering the tape players for
?53.>3 each. Mow, for an outside price per tape player !elow ?51, the Assem!ly 7i'ision would
prefer to purchase from outsideB a!o'e it, the Assem!ly 7i'ision would prefer to purchase from
the Cassette 7i'ision. So, the Assem!ly di'ision will !uy from Lohnson at ?53.>3 each and the
Cassette 7i'ision will !e forced to sell its output on the outside market.
5!. <ut for (rsilo, as seen from re9uirements 1 and ), an outside price of ?53.>3, which is
greater than the ?53 cut2off price, makes inhouse manufacture the optimal choice. So, a
mandated transfer price of ?51 causes the di'ision managers to make choices that are su!2
optimal for (rsilo.
5c. =hen selling prices are uncertain, the transfer price should !e set at the minimum
accepta!le transfer price. t is only if the price charged !y the e&ternal supplier falls !elow ?53
that (rsilo Corporation as a whole is !etter off purchasing from the outside market. Setting the
transfer price at ?53 per unit achie'es goal congruence. ,he Cassette di'ision will !e willing to
sell to the Assem!ly 7i'ision, and the Assem!ly 7i'ision will !e willing to !uy in2house and
this would !e optimal for (rsilo, too.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1))
CHAPTER 20
20-19 "33 min.% R<#, co*arisons of three co*anies.
1. ,he separate components highlight se'eral features of return on in'estment not re'ealed
!y a single calculation-
a. ,he importance of in'estment turno'er as a key to income is stressed.
!. ,he importance of re'enues is e&plicitly recognized.
c. ,he important components are e&pressed as ratios or percentages instead of dollar
figures. ,his form of e&pression often enhances compara!ility of different di'isions,
!usinesses, and time periods.
d. ,he !reakdown stresses the possi!ility of trading off in'estment turno'er for income
as a percentage of re'enues so as to increase the a'erage 8( at a gi'en le'el of
output.
). "*illed2in !lanks are in !old face.%
Co*anies in 6ae #nd!stry
A A C
8e'enue
ncome
n'estment
ncome as a J of re'enue
n'estment turno'er
8eturn on in'estment
?1,333,333
? 133,333
? >33,333
10=
2.0
20=
?
>33,333
?
>3,333
>5,000,000
10=
0.1
1J
>10,000,000
>
50,000
?
>,333,333
3.>J
).3
1=
ncome and in'estment alone shed little light on comparati'e performances !ecause of
disparities in size !etween Company A and the other two companies. ,hus, it is impossi!le to say
whether <as low return on in'estment in comparison with A.s is attri!uta!le to its larger
in'estment or to its lower income. *urthermore, the fact that Companies < and C ha'e identical
income and in'estment may suggest that the same conditions underlie the low 8(, !ut this
conclusion is erroneous. < has higher margins !ut a lower in'estment turno'er. C has 'ery small
margins "1;)3th of <% !ut turns o'er in'estment )3 times faster.
I&M&-& 0eport *o& 12 "page 3>% states-
0ntroducing re'enues to measure le'el of operations helps to disclose specific areas for
more intensi'e in'estigation. Company < does as well as Company A in terms of income margin,
for !oth companies earn 13J on re'enues. <ut Company < has a much lower turno'er of
in'estment than does Company A. =hereas a dollar of in'estment in Company A supports two
dollars in re'enues each period, a dollar in'estment in Company < supports only ten cents in
re'enues each period. ,his suggests that the analyst should look carefully at Company <.s
in'estment. s the company keeping an in'entory larger than necessary for its re'enue le'elX Are
recei'a!les !eing collected promptlyX (r did Company A ac9uire its fi&ed assets at a price le'el
that was much lower than that at which Company < purchased its plantX1
0(n the other hand, C.s in'estment turno'er is as high as A.s, !ut C.s income as a
percentage of re'enue is much lower. =hyX Are its operations inefficient, are its material costs
too high, or does its location entail high transportation costsX1
0Analysis of 8( raises 9uestions such as the foregoing. =hen answers are o!tained, !asic
reasons for differences !etween rates of return may !e disco'ered. *or e&ample, in Company <.s
case, it is apparent that the emphasis will ha'e to !e on increasing turno'er !y reducing
in'estment or increasing re'enues. Clearly, < cannot apprecia!ly increase its 8( simply !y
increasing its income as a percent of re'enue. n contrast, Company C.s management should
concentrate on increasing the percent of income on re'enue.1
20-20 ")> min.% &inancial and nonfinancial *erforance eas!res, "oal con"r!ence.
1. (perating income is a good summary measure of short2term financial performance. <y
itself, howe'er, it does not indicate whether operating income in the short run was earned !y
taking actions that would lead to long2run competiti'e ad'antage. *or e&ample, Summit.s
di'isions might !e a!le to increase short2run operating income !y producing more product while
ignoring 9uality or rework. Harrington, howe'er, would like to see di'ision managers increase
operating income without sacrificing 9uality. ,he new performance measures take a !alanced
scorecard approach !y e'aluating and rewarding managers on the !asis of direct measures "such
as rework costs, on2time deli'ery performance, and sales returns%. ,his moti'ates managers to
take actions that Harrington !elie'es will increase operating income now and in the future. ,he
nonoperating income measures ser'e as surrogate measures of future profita!ility.
). ,he semiannual installments and total !onus for the Charter 7i'ision are calculated as
follows-
Charter $i3ision Aon!s Calc!lation
&or 8ear Ended $ece'er 01, 2009
Fan!ary 1, 2009 to F!ne 00, 2009
$rofita!ility "3.3) ?5D),333% ? F,)53
8ework "3.3) ?5D),333% 4 ?11,>33 "),)D3%
(n2time deli'ery Mo !onusKunder FDJ 3
Sales returns ["3.31> ?5,)33,333% 4 ?@5,333\ >3J "13,>33%
Semiannual installment
Semiannual !onus awarded
? "3,>)3%
? 3
F!ly 1, 2009 to $ece'er 01, 2009
$rofita!ility "3.3) ?553,333% ? @,@33
8ework "3.3)
?553,333% 4 ?11,333 "),)33%

(n2time deli'ery FDJ to F@J ),333
Sales returns ["3.31> ?5,533,333% 4 ?E3,333\ >3J "),333%
Semiannual installment
? D,D33
? D,D33
,otal !onus awarded for the year ? D,D33
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1)>
,he semiannual installments and total !onus for the +esa 7i'ision are calculated as follows-
)esa $i3ision Aon!s Calc!lation
&or 8ear Ended $ece'er 01, 2009
Fan!ary 1, 2009 to F!ne 00, 2009
$rofita!ility
8ework
(n2time deli'ery
Sales returns
"3.3)
?35),333%
"3.3)
?35),333% 4 ?D,333
('er F@J
["3.31>
?),@>3,333% 4 ?55,E>3\
>3J
? D,@53
3
>,333
"1,333%
Semiannual !onus installment
?13,@53
?13,@53
F!ly 1, 2009 to $ece'er 01, 2009
$rofita!ility
8ework
(n2time deli'ery
Sales returns
"3.3)
?53D,333%
"3.3)
?53D,333% 4 ?@,333
Mo !onusKunder FDJ
["3.31>
?),F33,333% 4 ?5),>33\ which is

greater than zero, yielding a !onus
? @,1)3
3
3
3,333
Semiannual !onus installment
?11,1)3
?11,1)3
,otal !onus awarded for the year ?)1,FD3
3. ,he manager of the Charter 7i'ision is likely to !e frustrated !y the new plan, as the
di'ision !onus has fallen !y more than ?)3,333 compared to the !onus of the pre'ious year.
Howe'er, the new performance measures ha'e !egun to ha'e the desired effect44!oth on2time
deli'eries and sales returns impro'ed in the second half of the year, while rework costs were
relati'ely e'en. f the di'ision continues to impro'e at the same rate, the Charter !onus could
appro&imate or e&ceed what it was under the old plan.
,he manager of the +esa 7i'ision should !e as satisfied with the new plan as with the
old plan, as the !onus is almost e9ui'alent. (n2time deli'eries declined considera!ly in the
second half of the year and rework costs increased. Howe'er, sales returns decreased slightly.
Nnless the manager institutes !etter controls, the !onus situation may not !e as fa'ora!le in the
future. ,his could moti'ate the manager to impro'e in the future !ut currently, at least, the
manager has !een a!le to maintain his !onus with showing impro'ement in only one area
targeted !y Harrington.
<en Harrington.s re'ised !onus plan for the Charter 7i'ision fostered the following
impro'ements in the second half of the year despite an increase in sales-
An increase of 1.FJ in on2time deli'eries.
A ?>33 reduction in rework costs.
A ?15,333 reduction in sales returns.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1)D
Howe'er, operating income as a percent of sales has decreased "11J to 13J%.
,he +esa 7i'ision.s !onus has remained at the status 9uo as a result of the following
effects-
An increase of ).3 J in operating income as a percent of sales "1)J to 15J%.
A decrease of 3.DJ in on2time deli'eries.
A ?),333 increase in rework costs.
A ?),)>3 decrease in sales returns.
,his would suggest that re'isions to the !onus plan are needed. $ossi!le changes include-
increasing the weights put on on2time deli'eries, rework costs, and sales returns in the
performance measures while decreasing the weight put on operating incomeB
a reward structure for rework costs that are !elow )J of operating income that would
encourage managers to dri'e costs lowerB
re'iewing the whole year in total. ,he !onus plan should carry forward the negati'e
amounts for one si&2month period into the ne&t si&2month period incorporating the
entire year when calculating a !onusB and
de'eloping !enchmarks, and then gi'ing rewards for impro'ements o'er prior periods
and encouraging continuous impro'ement.
20-21 ")> min.% 7oal incon"r!ence and R<#.
1. <leefl would !e !etter off if the machine is replaced. ts cost of capital is DJ and the 88 of
the in'estment is 11J, indicating that this is a positi'e net present 'alue pro/ect.
). ,he 8(s for the first fi'e years are-
8ear 1 8ear 2 8ear 0 8ear 4 8ear 5
(perating income
1
?),333 ?),333 ?),333 ?),333 ?),333
6nd of year net assets )E,333 )5,333 )1,333 1@,333 1>,333
A'erage net assets )@,>33
)
)>,>33 )),>33 1F,>33 1D,>33
8( E.3)J E.@5J @.@FJ 13.)DJ 1).1)J
1
ncome is cash sa'ings of ?>,333 less ?3,333 annual depreciation e&pense.
)
"?33,333 I ?)E,333% C ) A ?)@,>33
,he manager would not want to replace the machine !efore retiring !ecause the di'ision is
currently earning a 8( of 11J, and replacement of the machine will lower the 8( e'ery year
until the fifth year, when the manager is long gone.
3. <leefl could use long term rather than short term 8(, or use 8( and some other long term
measures to e'aluate the $atio *urniture di'ision to create goal congruence. 6'aluating the
managers on residual income rather than 8( would also achie'e goal congruence. *or e&ample,
replacing the machine increases residual income in Hear 1.
8esidual income A (perating income b "DJ G A'erage net assets%
A ?),333 b "DJ G )@,>33%
A ?),333 b ?1,E13 A ?)F3
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1)E
20-05 ")> min.% Ethics, ana"erNs *erforance e3al!ation "A. Spero, adapted%.
1a. :aria!le manufacturing cost per unit A ?)
*i&ed manufacturing cost per unit A ?F,333,333 >33,333 A ?1@
,otal manufacturing cost per unit A ?) I ?1@ A ?)3
8e'enues, ?)3 >33,333 ?13,333,333
:aria!le manufacturing costs, ?) >33,333 1,333,333
*i&ed manufacturing costs, ?1@ >33,333 F,333,333
*i&ed marketing costs 533,333
,otal costs 13,533,333
(perating loss ? "533,333%
6nding in'entory- ?3
1!. :aria!le manufacturing cost per unit A ?)
*i&ed manufacturing cost per unit A ?F,333,333 D33,333 A ?1>
,otal manufacturing cost per unit A ?) I ?1> A ?1E
8e'enues, ?)3 >33,333 ?13,333,333
:aria!le manufacturing costs, ?) >33,333 1,333,333
*i&ed manufacturing costs, ?1> >33,333 E,>33,333
*i&ed marketing costs 533,333
,otal costs @,F33,333
(perating income ? 1,133,333
6nding in'entory A ?1E per unit 133,333 units A ?1,E33,333
). t would not !e ethical for Lones to produce more units /ust to show !etter operating
results. $rofessional managers are e&pected to take !etter operating actions that are in the !est
interests of their shareholders. Lones.s action would !enefit him at the cost of shareholders.
Lones.s actions would !e e9ui'alent to 0cooking the !ooks,1 e'en though he may achie'e this !y
producing more in'entory than was needed, rather than through fictitious accounting. Some
students might argue that Lonesas !eha'ior is not unethical44he simply took ad'antage of the
faulty contract the !oard of directors had gi'en him when he was hired.
3. Asking distri!utors to take more products than they need is also e9ui'alent to 0cooking
the !ooks.1 n effect, distri!utors are !eing coerced into taking more product. ,his is a particular
pro!lem if distri!utors will take less product in the following year or alternati'ely return the
e&cess in'entory ne&t year. Some students might argue that Lones.s !eha'ior is not unethicalKit
is up to the distri!utors to decide whether to take more in'entory or not. So long as Lones is not
forcing the product on the distri!utors, it is not unethical for Lones to push sales this year e'en if
the e&cess product will sit in the distri!utors. in'entory.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1)@
20-09 "1> min.% Ethics, le3ers of control.
1. f Amy Sim!ell 0turns a !lind eye1 toward what she has /ust o!ser'ed at the N*$ log
yard, she will !e 'iolating the competence, integrity, and o!/ecti'ity standards for management
accountants.
!ompetence
$erform professional duties in accordance with technical standards
Integrity
Communicate unfa'ora!le as well as fa'ora!le information and professional
/udgments or opinions
8efrain from engaging in or supporting any acti'ity that would discredit the
profession
!redibility
Communicate information fairly and o!/ecti'ely
7isclose fully all rele'ant information that could reasona!ly !e e&pected to influence
an intended user.s understanding of the reports, comments, and recommendations.
Sim!ell should-
a. ,ry to follow esta!lished N*$ policies to try to !ring the issue to the attention of N*$
management through regular channelsB then, if necessary,
!. 7iscuss the pro!lem with the immediate superior who is not in'ol'ed in the
understatement of 9uality and costs.
c. Clarify rele'ant ethical issues with an o!/ecti'e ad'isor, prefera!ly a professional
person outside N*$.
d. f all the a!o'e channels fail to lead to a correction in the organization, she may ha'e
to resign and !ecome a 0whistle2!lower1 to !ring N*$ to /ustice.
). N*$ is clearly emphasizing profit, dri'ing managers to find ways to keep profits strong
and increasing. ,his is a diagnostic measure, and o'er2emphasis on diagnostic measures can
cause employees to do whate'er is necessaryKincluding unethical actionsKto keep the
measures in the accepta!le range, not attract negati'e senior management attention and possi!ly
impro'e compensation and /o! re'iews.
,o a'oid pro!lems like this in the future, N*$ needs to esta!lish some strong !oundary
systems and codes of conduct. ,here should !e a clear message from upper management that
unethical !eha'ior will not !e tolerated. ,raining, role2plays, and case studies can !e used to
raise awareness a!out these issues, and strong sanctions should !e put in place if the rules are
'iolated. An effecti'e !oundary system is needed to keep managers 0on the right path.1
N*$ also needs to articulate a !elief system of core 'alues. ,he goal is to inspire managers
and employees to do their !est, e&ercise greater responsi!ility, take pride in their work, and do
things the right way.
+anagerial 0Cost1 Accounting "Acctg. 311% Homework solutions 1)F

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Solutions for Homework ** Accounting 311 Cost **

>33 attendees% ?13,333

>33% >33 >,>33

1,333 attendees% ?)3,333

1,333 attendees% ?13,333

1,333% 1,333 11,333

1,333 A ?)>3 per round2trip

1,)33 A ?133,333 I ?333,333 A ?533,333

?D3 A 1>,333 units

?>33% ?3,333,333 ?3,333,333

D,333 desks per year @53,333 5@3,333

53B >3B >

?D5,333 3.D)> 3.3E>

?D5,333 3.D)> 3.3E>

?3.>3\, !ringing a!out an

>33,333 l!s A ?D.>3 per l!.

>)>,333 l!s. A ?3,51),>33

>33,333 l!s. A ?3.>3

>)>,333 l!s. A ?1,@3E,>33

?1.>3 per meter A ?13,@F3

1) meters per lot

?1.>3 per meter A ?F,F33

?@.33 per hour A ?@,3D3

) hours per lot

?@ per hour A ?@,@33

"Actual dir. mat. price in +ay )33F

?1.>3 per meter A ?13,DE).)3

Actual dir. la!or price in )33F

?@.13 per hour

?@.13 per hour A ?@,)F>.)1

?@.33 per hour A ?@,1F).@3

?553,333% 4 ?11,333 "),)33%

?),F33,333% 4 ?5),>33\ which is

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Solutions for Homework Accounting 311 Cost