Question: In a company that engages in a

> What is meant by the term time value of money? Why is a present value always less than the future value to which it relates? Appendix 1: The time value of money can be discussed in relation to either its future or its present value. Future value (FV) re

> How is sensitivity analysis used in capital budgeting?

> How is risk defined in capital budgeting analysis? List several aspects of a project in which risk is involved and how risk can affect a project’s net present value.

> What four questions should managers ask when choosing the investment proposals to fund?

> What is the balanced scorecard? What perspectives are considered in selecting performance measures for the balanced scorecard, and why is each of these perspectives important?

> In designing a performance measurement system, why should managerial rewards be linked to performance measures? Why would an effective compensation strategy treat top managers, middle managers, and other workers differently?

> What is residual income, and how is it used to measure divisional performance? How is it similar to, and different from, the return on investment measure? How is residual income similar to, and different from, economic value added? How is economic value

> The president of Toys for Boys evaluates the performance of Annie and Andy, the divisional managers, on the basis of a variety of net income measures. Drew, the controller, informs the president that such measures could be misleading. What are the major

> How can cash flow be used as a performance measure? In what ways is cash flow a relatively stronger or weaker performance measure than accrual measures such as segment income?

> Michigan Mfg. makes electronic products. Because the employees of one of the company’s plants are on strike, the Chicago plant is operating at peak capacity. It makes two electronic products: MP3 players and PDAs. Presently, the company

> On what basis should the performance of a responsibility center be measured? What are the traditional financial performance measures for each type of responsibility center? Why can the same quantitative measures of performance not be used for all types o

> What benefits can be gained by allowing a manager to participate in developing the performance measures that will be used to assess that manager’s performance?

> Why is performance measurement important to the success of businesses? Should performance measures be qualitative, quantitative, or both? Justify your answer. For performance measurements to be meaningful, why is it necessary to establish benchmarks?

> What are some of the important equity issues in designing reward structures? Why is the achievement of equity in the reward structure important?

> Many pay structures involve compensation combining both cash and stock. Why do firms want employees to be holders of the firm’s common stock? What additional performance measurement and reward issues are created when managers are not shareholders in the

> How can feedback, both positive and negative, be used to improve managerial performance? How is feedback used in a performance-based reward system?

> Why should different missions for two subunits result in different performance reward structures for the managers of those subunits? How does the mission of an organizational subunit affect the mix of financial and nonfinancial, and short-term and longte

> How does the time perspective of a performance-based plan affect the selection of performance measures?

> If worker performance measures used in a pay-for-performance plan are not highly correlated with corporate goals, what is the likely result for the organization? For the workers?

> Why is the trend in U.S. business away from automatic pay increases and toward increased use of incentive compensation plans?

> A local businesswoman, Jane Aire, has hired you and a colleague, Joanna, from your cost accounting class to advise her regarding her small manufacturing business that makes leather valises. The business was organized just two years ago and has failed to

> What are the benefits of organizational mission and values statements? How are organizational missions and strategies related to performance measures?

> What problems might be encountered when attempting to implement a cost-based transfer pricing system? A market-based transfer pricing system?

> What are transfer prices, and why do companies use them? How could the use of transfer prices improve or impair goal congruence?

> Compare and contrast the direct, step, and algebraic methods of allocating support department costs. What are the advantages and disadvantages of each method?

> The four criteria for selecting an allocation base for support department costs should be applied equally.” Discuss the merits of this statement.

> Why are support department costs often allocated to operating departments? Is such an allocation process always useful from a decision-making standpoint? How might support department cost allocation create a feeling of cost responsibility among managers

> What is suboptimization, and what factors contribute to it in a decentralized firm?

> Why are responsibility reports prepared? Is it appropriate for a single responsibility report to be prepared for a division of a major company? Why or why not?

> Explain why the determination of transfer prices is more complex in a multinational, rather than in a domestic, setting.

> How can support departments use transfer prices, and what advantages do transfer prices have over cost allocation methods?

> Identify which of the CVP assumptions is violated in each of the circumstances described below. a. Price per unit declines as the volume of sales and production increase. b. Labor productivity increases as the volume of production declines. c. The sales

> What type of transfer price would you recommend be used in each of the following selling and buying responsibility centers: cost, revenue, profit, and investment? How and why would such prices be set?

> Wayne Litcomb is the president and chief operating officer of Litcomb Electronics. He founded the company and has led it to its prominent place in the electronics field. He has manufacturing plants or retail outlets in 40 states. Litcomb is finding, howe

> In the present highly competitive environment, why has cost management risen to such a high level of concern whereas price management has declined in importance?

> How does a product’s life cycle stage influence the nature of information required to successfully manage costs of that product?

> How could an organization’s culture be used as a control mechanism?

> What information could be generated by a cost management system that would help an organization manage its core competencies?

> How does the choice of organizational form influence the design of a firm’s cost management system?

> Why does a cost management system necessarily have both a short-term and longterm focus?

> What is a control system? What purpose does a control system serve in an organization?

> What is CAM-I, and why is it organized? Appendix: Most companies combine many materials and various classes of direct labor to produce goods. In such settings, the material and labor variance computations presented in this chapter are insufficient. Whe

> Niobrara Pesticide Company’s new president has learned that, for the past four years, the company has been dumping its industrial waste into the local river and falsifying reports to authorities about the levels of suspected carcinogens in that waste. Th

> Why must not-for-profit organizations determine when it is appropriate to allocate any cost for a joint activity among fund-raising, program, and administrative activities?

> When is by-product/scrap cost considered in setting the predetermined overhead rate in a job order costing system? When is cost not considered?

> Which of the two common approaches used to account for by-product/scrap provides better information to management? Discuss the rationale for your answer.

> Why are approximated, rather than actual, net realizable values at split-off sometimes used to allocate joint cost?

> Compare the advantages and disadvantages of the two primary methods used to allocate joint cost to joint products.

> Why is cost allocation necessary in accounting? Why is it necessary in a joint process?

> How does management determine how to classify each type of output from a joint process? Is this decided before or after production?

> What is the objective of managing the sales mix of products? What are the major factors that influence sales mix?

> What is a scarce resource? Why is an organization’s most scarce resource likely to change from time to time?

> Compute the answers to each of the following independent situations. a. Orlando Ray sells liquid and spray mouthwash in a sales mix of 1:2, respectively. The liquid mouthwash has a contribution margin of $10 per unit; the spray’s CM is $5 per unit. Annua

> What is outsourcing? Why is the practice heatedly debated in the United States?

> What are opportunity costs and why are they often the most difficult costs to analyze in decision making?

> How does the passage of time affect the set of costs that is relevant to a decision?

> What is segment margin? How is segment margin used in the quantitative analysis of a decision to drop or keep a product line?

> What is a special order decision? Under what circumstances would a company refuse to accept a special order?

> Define and explain the relationship between margin of safety and degree of operating leverage.

> A multiproduct company has a sales mix of nine widgees to three squigees. Widgees have a contribution margin ratio of 45 percent, and squigees have a contribution margin ratio of 80 percent. If the sales mix changes to six widgees to six squigees, will t

> How is the “bag” assumption used in CVP analysis for a multiproduct firm? What additional assumption must be made in multiproduct CVP analysis that doesn’t pertain to a single-product CVP situation?

> Why is CVP analysis generally used as a short-run tool? Would CVP ever be appropriate as a long-run model?

> What is the contribution margin ratio? How is it used to calculate the break-even point?

> A friend of yours, attending another university, states she learned that CVP is a short-run-oriented model and is, therefore, of limited usefulness. Your professor, however, has often discussed CVP in presentations about long-run planning to your cost ac

> How is “break-even point” defined? What are the differences among the formula, graph, and income statement approaches for computing breakeven?

> What information provided by a variable costing income statement is used in computing the break-even point? Is this information on an absorption costing income statement? Explain your answer.

> How is the accounting rate of return computed? How does this rate differ from the discount rate and the internal rate of return? Appendix 2: Accounting Rate of Return The accounting rate of return (ARR) measures the rate of earnings obtained on the aver

> Wayne Coyle, the controller of PEI Potato Co., is disillusioned with the company’s system of evaluating the performance of divisional profit centers and their managers. The present system focuses on a comparison of budgeted to actual income from operatio

> Many domestic companies have chosen to “offshore” their production operations to countries with lower wage rates. Some of the countries being used have been accused of allowing sweatshops, child labor, and polluting conditions that would not be allowed d

> Assume you are the newly appointed CFO of an international engineering services firm. As one of your first assignments you need to appoint a new controller for the branch of your firm located in Buenos Aires. You have identified an assistant controller i

> Family Fun Vehicle Co. (FFV), a subsidiary of Drummondville Automotive, manufactures go-carts and other recreational vehicles. Family recreational centers that feature go-cart tracks, miniature golf, batting cages, paint ball wars, and arcade games have

> Anthem Manufacturing has just initiated a formula bonus plan that rewards plant managers for various achievements. One of the current criteria for bonuses is the improvement of asset turnover. The plant manager of the Eastern Plant asked Sam Jensen, his

> A recent survey of U.S. chief financial officers provides compelling evidence that managers are willing to take extraordinary measures to achieve financial earnings targets. For example, the survey found 26 percent were willing to sacrifice some long-ter

> San Francisco Sea Salt’s controller prepared the following cash flow statements (in thousands of dollars) for the past two years, the current year (2010), and the upcoming year (2011): After preparation of the budgeted cash flow statem

> A group of prospective investors has asked for your help in understanding the comparative advantages and disadvantages of starting a company that is either labor intensive or, in contrast, one that uses significant cutting-edge technology and is therefor

> In 2010, the lead story in your college newspaper reports the details of the hiring of the current football coach. The previous football coach was fired for failing to win games and attract fans. In his last season, his record was 1 win and 11 losses. Th

> Relative to worker compensation, no topic is more hotly debated than the minimum wage law. Using concepts from this chapter, prepare a report in which you explain why increases in the minimum wage are not desirable and how alternative mechanisms could be

> In September 2010, Lyon Precision Corporation (LPC) decided to launch an expansion plan for some product lines. To finance this expansion, the firm has decided to issue $400,000,000 of new common stock in November 2010. Historically, the firm’s innovativ

> Chesterville Manufacturing makes a variety of glass products having both commercial and household applications. One of its newest divisions, ColOptics, manufactures fiber optic cable and other high-tech products. Recent annual operating results (in milli

> For each of the following items, indicate two performance measurements that could be obtained from a cost management system. Classify each item into one of the four balanced scorecard perspectives. a. Quality b. Cost c. Production line flexibility d. Peo

> Terry Travers is the manufacturing supervisor of the Aurora Manufacturing Company, which produces a variety of plastic products. Some of these products are standard items that are listed in the company’s catalog, whereas others are made to customer speci

> The Mergers & Acquisitions Division (M&A) of Global Financial Services is evaluated by corporate management based on a comparison of budgeted and actual pre-tax income. For 2010, M&A’s budgeted income statement was as follows: Sales ……………………………………………$ 36

> Cardiff Sports sells footballs and shoulder pads. For 2010, company management budgeted the following: At the end of 2010, management was told that actual sales of footballs were 21,000 units and the sales price variance was $63,000 unfavorable. Sales o

> Many companies provide on-site child care facilities for employees’ children. In some situations, this service is provided free of charge; in other situations, employees are charged, usually on a sliding scale basis relative to pay, for such services. a.

> Organizational spending on outsourced contact centers (previously referred to as call centers) continues to increase. Contact centers are critical to organizational success because these units often have primary responsibility for interactions with custo

> Tennessee Tonic makes a high-energy protein drink. The selling price per gallon is $7.20, and variable cost of production is $4.32. Total fixed cost per year is $316,600. The company is currently selling 125,000 gallons per year. a. What is the margin of

> The accounting department at Kerrville College has decided to offer a three-day ethics workshop for local CPAs in March 2010. Rose Morris, a tenured professor, will supervise the seminar’s planning process and has submitted the followin

> Swimmingly Corp. buys raw fish, cooks and processes it, and then cans it in single-portion containers. The canned fish is sold to several wholesalers, who specialize in providing food to school lunch programs in the northwest United States and western Ca

> To respond to increased competition and a reduction in profitability, the nationwide law firm of O’Brien New & Cave recently instituted a responsibility accounting system. One of the several responsibility centers established was th

> Hippolito Inc. manufactures industrial tools and has annual sales of approximately $3.5 million with no evidence of cyclical demand. R&D is very important to Hippolito because its market share expands only in response to product innovation. The compa

> APAs are determined in advance of the time in which they are used. Discuss problems that may be generated in a recessionary business climate for companies that have preapproved APAs.

> Des Moines Industries consists of eight divisions that are evaluated as profit centers. All transfers between divisions are made at market price. I-O-WoW, a division of Des Moines, sells approximately 20 percent of its output externally. The remaining 80

> Rowling Inc. is a decentralized company, and each investment center has its own sales force and production facilities. Top management uses return on investment (income divided by assets) for performance evaluation. Potter Division has just been awarded a

> Eekaydo Inc. is organized on a divisional basis with considerable vertical integration. Mary Sue Oehlke is the new controller of the CarryOn! Division of Eekaydo. CarryOn! Division makes a variety of leather products, including a portfolio. Product sales

> Tobias & Barfield LLC has three revenue departments: litigation (Lit.), family practice (FP), and legal consulting (LC). In addition, the company has two support departments, administration and EDP. Administration costs are allocated to the three rev

> The president of Charlottetown Inc. has given the managers of the company’s three decentralized divisions (O’Leary, Alberton, and Summerside) the authority to decide whether to sell externally or internally at a transfer price the division managers deter

> Racine Tire Co. manufactures tires for all-terrain vehicles. The tires sell for $60 and variable cost per tire is $30; monthly fixed cost is $450,000. a. What is the break-even point in units and sales dollars? b. If Ronnie Rice, the company’s CEO, wants

> Because of a monumental error committed by its purchasing department, Corner Grocery ordered 5,000 heads of lettuce rather than the 1,000 that should have been ordered. The company paid $0.65 per head for the lettuce. Although management is confident tha

> Cookie Delight Company has two divisions: Plain Cookies and Decorated Cookies. Lars Linden is the manager of Plain Cookies Division and Theresa Davis is the manager of Decorated Cookies Division. Company president Marie Strauss wants to develop a transfe

> Worldly Traveler’s Roll-Em-On Division makes computer bags. The bags are sold to another internal division, SkyWheels, for inclusion in a luggage set and to external buyers. During the month just ended, SkyWheels acquired 4,000 bags from the Roll-Em-On D