2013-14 S2

ACCT112 Management Accounting: WEEK 1 (Textbook Suggested Solution)

1.23

An absurd outcome of the directive to minimize costs might be that no department does any
work and avoids acquiring or using any resources. That, however, ignores the opportunity
costs of lost outputs. Since opportunity costs almost never show up on accounting reports, it
is easy for managers to ignore or be unaware of them. A less extreme but possibly damaging
outcome could be for each department to minimize the costs of its assigned work, but
ignore its impacts on other just the right amounts of output when needed), then minimizing
the cost of each process will minimize overall costs. Most organizations are not perfectly
balanced, however, and minimizing the costs of each process may impair the ability of
another process to meet its objectives. Thus, one process may produce too much output,
leading to waste. Another process may produce too little output, leading to missed
opportunities for other processes that depend on the former process output. Unexpected or
changed demands from internal and external customers may require changes in schedules
and outputs in many parts of the company. To not meet those changes could result in
significant opportunity costs for the company as a whole. Thus, encouraging managers to
focus only on their process(es) may be a myopic management policy. Companies also need
to encourage cooperation among departments.

1.27

Many routine, number-crunching accounting tasks have been automated. Although

understanding how the numbers are crunched is important (and we will crunch numbers
in this text), it is important to understand why certain facts and figures are measured and
reported and whether they are the right information to support important decisions. If one
learns only how to crunch numbers and not why, one is limited in how much one can help an
organization improve.

1.40

Benefit-cost analysis.

(Note: Costs in tables are rounded to two decimals, but solutions use exact decimals. Transactions in
column D are rounded up.)
a.

Number of transactions
A

a. Number of transactions,
CAS Accounting Operation

CAS cost per year

CAS cost per

transaction

CAS number of
transactions per year

Accounting operation
Accounts receivable

50,000

12.00

General ledger

23,000

7.00

3,286

Accounts payable

35,000

9.00

3,889

Payroll

20,000

6.00

3,334

9,000

11.00

819

Credit & collections

b.

(D = B/C)
(rounded up)
4,167

Other companies in the same industry may have lower average costs for several reasons.
One reason may be that other companies have more efficient accounting operations and
personnel (e.g., require less data entry or manual processing) and, therefore, use fewer
resources to accomplish the same level of work. This can happen if resources necessary to
1

process transactions (e.g., personnel) are hired at fully-employed costs (e.g., salaries) but are
not fully used. Another reason may be that CAS operates its accounting functions at a lower
volume of transactions than other companies but has comparable spending (e.g., employee
salaries) for the types of accounting transactions the same level of cost divided by fewer
transactions yields a higher average cost than the association average.
c.

There are two types of cost savings possible out-of-pocket savings of resources that are
not needed and freed-up resources that can be used elsewhere and they may not be the
same amounts. Because we do not know how CAS obtains and pays for accounting
resources, this solution assumes that computed savings are out-of-pocket savings.
B

A
Accounting Operation
Accounting Operation
Accounts receivable
General ledger
Accounts payable
Payroll
Credit & collections
d.

CAS Number of
Transactions

D
Association cost per
transaction

4,167
3,286
3,889
3,334
819

E
CAS Cost Savings per
Year (rounded) (E =
BD)

Cost Saving per

Transaction

$ 8.00
4.00
5.00
2.50
6.00

$ 4.00
3.00
4.00
3.50
5.00

$ 16,668
9,858
15,556
11,669
4,095

Competitors cost advantage:

A

SDC

SDC Number of
Transactions
(same as CAS)

SDC Cost
Advantage per
Year (D = B x C)
(rounded)
$ 23,335

Accounts receivable

4,167

SDC Cost Advantage per

Transaction
[CAS Cost (0.80 x Association
Cost)]
$5.60

General ledger

3,286

3.80

12,487

Accounts payable

3,889

5.00

19,445

Payroll

3,334

4.00

13,336

819

6.20

5,078

Accounting Operation

Credit & collections

Total cost advantage

73,681

It is important to know the amount of cost advantage because this represents resources that
the competitor does not have to use on accounting procedures. This reduced resource use
can be a cost saving or it can be applied to more productive uses. In either case, the
competitor can be more profitable.
e.

Companies in competitive industries seek to generate the most return from their resources.
If a company has a cost disadvantage in any of its operations that is not offset by greater
benefits, the company will steadily lose ground to competitors. Thus, companies compare
(or benchmark) their operations against competitors. It may be possible to gain an
advantage over competitors if a company can achieve performance comparable to the best
practices in the world, which may be practiced by companies not in the same industry.

1.41

Benefit-cost analysis: Outsourcing.

a.

If ValOil outsources its tax planning and tax return preparation operations, it could save at
least the following amounts:
2

ValOil Tax Operation

Tax planning
Tax return preparation
Total savings

Cost per year

7,800,000kr
15,000,000
22,800,000kr

ValOil could save more than this amount if some portion of the information systems cost
(personnel, hardware, and software) also could be eliminated by outsourcing tax operations.
Therefore, Dinosaur should be inclined to pay anything less than 22,800,000kr for tax
services, or more, depending on how much additional information systems cost could be
saved by outsourcing.
b.

ValOil must be concerned about the quality of the tax services as well as the price paid (now
and in the future). The external service provider must be thoroughly familiar with the tax
regulations in each of the areas where the company must report. Quality of service is
especially important for tax planning since these services must be timely and in tune with
company goals and competitive pressures.

c.

The first-year cost of the package of outsourced services is 33 million kr (21 + 12 million kr),
and thereafter is only 21 million kr. Expected annual savings = 7,800,000 + 15,000,000 +
2,4000,000 kr = 25,200,000 kr.

Year

Outsourced Service
Costs

Cost Savings of Outsourcing

Tax and Information System
Improvements

Net Savings

1
(33,000,000kr)
25,200,000kr
(7,800,000kr)
2
(21,000,000)
25,200,000
4,200,000
3
(21,000,000)
25,200,000
4,200,000
4
(21,000,000)
25,200,000
4,200,000
5
(21,000,000)
25,200,000
4,200,000
Total
9,000,000kr
This appears to be a favorable outsourcing arrangement (given concerns in part b).
1.47

Ethical issuefraud
This situation is based on an actual case where a manager and an accountant conspired to
overstate sales and profits. Why would they do this? Perhaps the managers compensation depended
on sales or profits. Perhaps they wanted the companys financial performance to look better. In any
case, these were criminal fraudulent activities.
In the actual case, the fraudulent activities were discovered by people who worked in the
accounting department who discovered the invoices and shipping documents tucked away in the desk
drawer of the accountant who colluded to commit the fraud. The friend was among those charged
with the fraud because she knew about it and was suspected to be involved. She was eventually cleared
of wrongdoing, but not until after several years of defending herself against the charges. She lost her
job, and she lost a lot of time. If she were faced with similar circumstances again, she says she would
immediately inform the head of the accounting department, and at least two other people in the
organization who were higher than her boss. Her initial contact would not be to accuse the alleged
perpetrators of committing fraud, but would inquire as to the propriety of their actions in view of the
companys accounting and sales policies. In this way, she would avoid accusing someone of misbehavior
before she had proof that what they did was wrong. If her inquiries were ignored, she would begin
looking for a new job.

2.17

Our preference for committed cost is more than semantic. Cost managers should be
challenging the existence of any cost or use of resources in an organization. Unfortunately,
labeling some costs as fixed may deflect scrutiny. In some organizations, so-called fixed
costs are growing faster than sales. How does one account for that if these are fixed costs?
Most costs in organizations lie somewhere between committed and discretionary, and these
costs can be changed. Whether they should be changed is a matter of applying cost-benefit
analysis tools. Note: changing methods or estimates of lives and salvage values can change
even depreciation, a so-called fixed cost.

2.20 Statement of income; Schedule of cost of goods manufactured and sold

a. The statement of income and schedule of cost of goods manufactured and sold are as follows:
ZODIAC COOPERATIVE
Statement of income
For the Year Ended December 31
Sales revenue ....................................................................
Cost of sales (see following schedule) ..............................
Gross margin .....................................................................
Less
Marketing costs ..........................................................
Administrative costs ...................................................
Operating profit ................................................................

2,036,000
1,239,000
797,000
272,000
304,000
221,000

Schedule of Cost of Goods Manufactured and Sold

For the Year Ended December 31
Beginning work in process inventory, January 1
Manufacturing costs during the year
Direct material:
Raw-material inventory, 1/1...
Add purchases ........................
Raw material available for use
Less inventory, 12/31 .............
Direct material put into production
Direct labour .....................................
Manufacturing overhead
Supervisory andindirect labour
Supplies andindirect material .
Heat, light andpowerplant ..
Plant maintenance and repairs
Depreciationmanufacturing
Miscellaneous manufacturing costs
Total manufacturing overhead
Total manufacturing costs incurred during the year
Total cost of work in process during the year
Less ending work in process inventory, December 31
Costs of goods manufactured during the year
Beginning finished goods inventory, January 1
Finished goods inventory available for sale
Less ending finished goods inventory, December 31
Cost of sales

135,000

102,000
313,000
415,000
81,000
334,000
482,000
127,000
14,000
87,000
74,000
103,000
12,000
417,000
1,233,000
1,368,000
142,000
1,226,000
160,000
1,386,000
147,000
1,239,000
4

2.22

Basic cost concepts

Fixed (F)

Period (P)

Variable (V)

Product (R)

a. Sales commissions ...................................................................................

b. Sales personnel office rent ......................................................................

c. Sales supervisory salaries ........................................................................

d. Cost-management staff office rental.......................................................

e. Administrative office heat and air conditioning ......................................

F*

f. Transportation-in costs on material purchased..

g. Assembly line workers wages .................................................................

h. Property taxes on office buildings for administrative staff .....................

i.

Salaries of top executives in the company ..............................................

j.

Overtime pay for assembly workers ........................................................

Cost Item

*Fixed with respect to activity. Utility costs vary, however, with respect to the weather.
2.32
a.

b.

c.

(40 min) Find unknown account balances

Material
beginning inventory

Purchases

Material
used

Material
ending inventory

8,000

Purchases

15,000

12,400

Purchases

19,400 (=12,400 8,000 + 15,000)

Finished goods
beginning inventory

Cost of goods
manufactured

254,200

679,200

Cost of sales =

760,000

173,400

Finished goods
ending inventory
Finished goods
ending inventory
Finished goods
ending inventory

Direct
material used

Direct
labour

Manufacturing
overhead

Total
manufacturing costs

Direct
material used

173,000

240,000

679,600

Direct
material used

266,600*

(=679,600 173,000 240,000)

*Also can be found from the Raw-Material Inventory account: 24,600 + 262,000 = 20,000 + direct
material used. Direct material used = $266,600
d.

e.

f.

Material beginning
inventory

Purchases

Material
used

Material
ending inventory

45,000

248,400

234,200

Material
ending inventory

59,200

Material
ending inventory

Work in process
beginning inventory

Total manufacturing
costs

Cost of goods
manufactured

Work in process
ending inventory

Work in process
beginning inventory

1,526,800

1,518,220

85,200

Work in process
beginning inventory

76,620

(=85,200 1,526,800 + 1,518,220)

Revenue Cost of sales = Gross margin

3,359,900 Cost of sales = 1,874,600
Cost of sales = 1,485,300 (=3,359,900 1,874,600)

g.

Direct material
used

Direct
labour

Manufacturing
overhead

Total
manufacturing costs

234,200

Direct
labour

430,600

1,526,800

Direct
labour

862,000

(=1,526,800 234,200 430,600)

Although not required in the problem, some instructors may require the companies Statements of
Cost of Sales, which we include here. (Note: Superscript letters cross-reference to missing amounts
in the problem.)

Company 1
Work in process, January 1 ........................

12,560

Manufacturing costs:
Direct material:
Raw material inventory, January 1 .....
Raw material purchased .....................
Raw material available for use ........
Less material inventory, December 31

8,000
19,400(a)
27,400
12,400

Direct material used ........................

15,000

Direct labour...........................................

23,200

Manufacturing overhead........................

19,800

Total manufacturing costs ...........

58,000

Total costs of work in process for the year

70,560

Less work in process, December 31 .......

12,560

Cost of goods manufactured this year

58,000

Add finished goods, January 1 ...................

2,800

Cost of goods available for sale .................

60,800

Less finished goods, December 31 .............

4,600

Cost of sales ...............................................

56,200

Company 2
Work in process, January 1 ........................

11,600

Manufacturing costs:
Direct material:
Raw material inventory, January 1 ..... 24,600

Raw material purchased ..................... 262,000

Raw material available for use ........286,600
Less material inventory, December

20,000

31
Direct material used ........................

266,600(c)

Direct labour...........................................

173,000

Manufacturing overhead........................

240,000

Total manufacturing costs ...........

679,600

Total costs of work in process for the

year ............................................................

691,200

Less work in process, December 31 .......

12,000

Cost of goods manufactured this

year ............................................................

679,200

Add finished goods, January 1 ...................

254,200

Cost of goods available for sale .................

933,400

Less finished goods, December 31 .............

Cost of sales ...............................................

173,400(b)
760,000

2.32

(Continued)
Company 3

Work in process, January 1

76,620(e)

Manufacturing costs:
Direct material:
Raw-material inventory, January 1 ............................ 45,000
Raw material purchased ............................................ 248,400
Raw material available for use ............................... 293,400
Less raw-material inventory, December 31 ...........
Direct material used ...............................................

59,200(d)
234,200

Direct labour..................................................................

862,000(g)

Manufacturing overhead...............................................

430,600

Total manufacturing costs ..................................

1,526,800

Total costs of work in process during the year .................

1,603,420

Less work in process, December 31 ..............................

85,200

Cost of goods manufactured this year.......................

1,518,220

Add finished goods, January 1 ..........................................

334,480

Cost of goods available for sale ........................................

1,852,700

Less finished goods, December 31 ....................................

367,400

Cost of sales ......................................................................

1,485,300(f)

2.36 CHARACTERISTICS OF COST

(NB out-of-pocket cost in the question refers to the incremental cost paid by cash or credit to achieve
a particular purpose.)
a. 3, sunk cost
e. 3, sunk cost
b. 1, opportunity cost
f. 5, conversion cost
c. 4, direct cost
g. 2, out-of-pocket cost; 6, average cost
d. 2, out-of-pocket cost; 6, average cost