What are the important factors in determining the appropriate cost driver to use in allocating a cost?
> When the operating costs for Bill Smith’s production department were released, he was sure that he would be getting a raise. His costs were $20,000 less than the planned cost in the master budget. His supervisor informed him that the results look good bu
> What is the difference between a static budget and a flexible bud
> What are the three types of responsibility centers? Explain how each differs from the others.
> Is it true that the manager with the highest residual income is always the best performer?
> How can a residual income approach to performance evaluation reduce the likelihood of sub optimization?
> Carmen Douglas claims that her company’s performance evaluation system is unfair. Her company uses return on investment (ROI) to evaluate performance. Ms. Douglas says that even though her ROI is lower than another manager’s, her performance is far supe
> Minnie Divers, the manager of the marketing department for one of the industry’s leading retail businesses, has been notified by the accounting department that her department experienced an unfavorable sales volume variance in the preceding period but a
> How are flexible budget variances determined? What causes these variances?
> With respect to fixed costs, what are the consequences of the actual volume of activity exceeding the planned volume?
> Ken Shilov, manager of the marketing department, tells you that “budgeting simply does not work.” He says that he made budgets for his employees and when he reprimanded them for failing to accomplish budget goals, he got unfounded excuses. Suggest how M
> Gaines Company recently initiated a post audit program. To motivate employees to take the program seriously, Gaines established a bonus program. Managers receive a bonus equal to 10 percent of the amount by which actual net present value exceeds the proj
> What are the advantages of budgeting?
> What are the three levels of planning? Explain each briefly.
> Why does preparing the master budget require a committee?
> What information does the pro forma income statement provide? How does its preparation depend on the operating budgets?
> The primary reason for preparing a cash budget is to determine the amount of cash to include on the budgeted balance sheet. Do you agree or disagree with this statement? Explain.
> What are the components of the cash budget? Describe each.
> How does the level of inventory affect the production budget? Why is it important to manage the level of inventory?
> Budgets are useful only for small companies that can estimate sales with accuracy. Do you agree with this statement?
> A local bank advertises that it offers a free non interest-bearing checking account if the depositor maintains a $500 minimum balance in the account. Is the checking account truly free?
> What is an opportunity cost? How does it differ from a sunk cost?
> Webb Publishing Company is evaluating two investment opportunities. One is to purchase an Internet company with the capacity to open new marketing channels through which Webb can sell its books. This opportunity offers a high potential for growth but inv
> Carmon Company invested $300,000 in the equity securities of Mann Corporation. The current market value of Carmon’s investment in Mann is $250,000. Carmon currently needs funds for operating purposes. Although interest rates are high, Carmon’s president
> Describe the relationship between relevance and accuracy.
> Identify the four hierarchical levels used to classify costs. When can each of these levels of costs be avoided?
> Are variable costs always relevant? Explain.
> Why would a supervisor choose to continue using a more costly old machine instead of replacing it with a less costly new machine?
> The managers of Wilcox, Inc. are suggesting that the company president eliminate one of the company’s segments that is operating at a loss. Why may this be a hasty decision?
> Identify some qualitative factors that should be considered in addition to quantitative costs in deciding whether to outsource.
> Chris Sutter, the production manager of Satellite Computers, insists that the floppy drives used in the company’s upper-end computers be outsourced since they can be purchased from a supplier at a lower cost per unit than the company is presently incurri
> Identify two qualitative considerations that could be associated with special order decisions.
> What is a direct cost? What criteria are used to determine whether a cost is a direct cost?
> Obtain Shake Shack, Inc.’s Form 10-K for the fiscal year ending on December 31, 2014. To obtain the Form 10-K, you can use the EDGAR system (see Appendix A at the back of this text for instructions), or it can be found under the “Investor Relations” li
> Why is cost accumulation imprecise?
> Define the term cost pool. How are cost pools important in allocating costs?
> Respond to the following statement: “The allocation base chosen is unimportant. What is important in product costing is that overhead costs be assigned to production in a specific period by an allocation process.”
> On January 31, the managers of Integra Inc. seek to determine the cost of producing their product during January for product pricing and control purposes. The company can easily determine the costs of direct materials and direct labor used in January pro
> What is the objective of allocating indirect manufacturing overhead costs to the product?
> Why are some manufacturing costs not directly traceable to products?
> If Company A has a projected margin of safety of 22 percent while Company B has a margin of safety of 52 percent, which company is at greater risk when actual sales are less than budgeted?
> How does a contribution margin income statement differ from the income statement used in financial reporting?
> Larry Kwang insists that the costs of his school’s fund-raising project should be determined after the project is complete. He argues that only after the project is complete can its costs be determined accurately and that it is a waste of time to try to
> Verna Salsbury tells you that she thinks the terms fixed cost and variable cost are confusing. She notes that fixed cost per unit changes when the number of units changes. Furthermore, variable cost per unit remains fixed regardless of how many units a
> Espada Real Estate Investment Company (EREIC) purchases new apartment complexes, establishes a stable group of residents, and then sells the complexes to apartment management companies. The average holding time is three years. EREIC is currently investig
> All costs are variable because if a business ceases operations, its costs fall to zero. Do you agree with the statement? Explain.
> The president of Bright Corporation tells you that he sees a dim future for his company. He feels that his hands are tied because fixed costs are too high. He says that fixed costs do not change and therefore the situation is hopeless. Do you agree? Expl
> Which cost structure has the greater risk? Explain.
> How is the relevant range of activity related to fixed and variable cost? Give an example of how the definitions of these costs become invalid when volume is outside the relevant range.
> Are companies with predominately fixed cost structures likely to be most profitable?
> If volume is increasing, would a company benefit more from a pure variable or a pure fixed cost structure? Which cost structure would be advantageous if volume is decreasing?
> Why are the terms direct cost and indirect cost independent of the terms fixed cost and variable cost? Give an example to illustrate.
> How is operating leverage calculated?
> Define the term operating leverage and explain how it affects profits.
> In recent years, there has been a lot of media coverage about the funding status of pension plans for state employees. In many states, the amount of money invested in employee pension plans is far less than the amount estimated to be needed to pay them t
> The following events apply to Pearson Service Co. for 2018, its first year of operation: 1. Received cash of $50,000 from the issue of common stock. 2. Performed $90,000 worth of services on account. 3. Paid $64,000 cash for salaries expense. 4. Purchase
> How can knowing cost behavior relative to volume fluctuations affect decision making?
> Define fixed cost and variable cost and give an example of each.
> How can present value “what-if” analysis be enhanced by using software programs?
> Why are present value tables frequently used to convert future values to present values?
> If you wanted to have $500,000 one year from today and desired to earn a 10 percent return, what amount would you need to invest today? Which amount has more value, the amount today or the $500,000 a year from today?
> How does a company establish its minimum acceptable rate of return on investments?
> Define the term return on investment. How is the return normally expressed? Give an example of a capital investment return.
> “A dollar today is worth more than a dollar in the future.” “The present value of a future dollar is worth less than one dollar.” Are these two statements synonymous? Explain.
> What is a post audit? How is it useful in capital budgeting?
> How do capital investments affect profitability?
> Melody Lovelady is the most highly rewarded sales representative at Swift Corporation. Her secret to success is always to understate her abilities. Ms. Lovelady is assigned to a territory in which her customer base is increasing at approximately 25 perce
> What are three reasons that cash is worth more today than cash to be received in the future?
> What is the relationship between desired rate of return and internal rate of return?
> Paul Henderson is a manager for Spark Company. He tells you that his company always maximizes profitability by accepting the investment opportunity with the highest internal rate of return. Explain to Mr. Henderson how his company may improve profitabili
> Which is the best capital investment evaluation technique for ranking investment opportunities?
> Two investment opportunities have positive net present values. Investment A’s net present value amounts to $40,000 while B’s is only $30,000. Does this mean that A is the better investment opportunity? Explain.
> Maria Espinosa borrowed $15,000 from the bank and agreed to repay the loan at 8 percent annual interest over four years, making payments of $4,529 per year. Because part of the bank’s payment from Ms. Espinosa is a recovery of the original investment, wh
> What is a capital investment? How does it differ from an investment in stocks or bonds?
> What factors could lead to an increase in sales revenues that would not merit congratulations to the marketing manager?
> Ritchie Manufacturing Company makes a product that it sells for $150 per unit. The company incurs variable manufacturing costs of $60 per unit. Variable selling expenses are $18 per unit, annual fixed manufacturing costs are $480,000, and fixed selling a
> Arnold Vimka is a venture capitalist facing two alternative investment opportunities. He intends to invest $800,000 in a start-up firm. He is nervous, however, about future economic volatility. He asks you to analyze the following financial data for the
> The following excerpt is from Coca-Cola Company’s 2014 annual report filed with the SEC: Management evaluates the performance of our operating segments separately to individually monitor the different factors affecting financial perform
> Kenton and Denton Universities offer executive training courses to corporate clients. Kenton pays its instructors $5,000 per course taught. Denton pays its instructors $250 per student enrolled in the class. Both universities charge executives a $450 tui
> Franklin Training Services (FTS) provides instruction on the use of computer software for the employees of its corporate clients. It offers courses in the clients’ offices on the clients’ equipment. The only major expense FTS incurs is instructor salarie
> Rita Jekyll operates a sales booth in computer software trade shows, selling an accounting software package, Abacus. She purchases the package from a software company for $210 each. Booth space at the convention hall costs $8,400 per show. Required: a.
> Seattle Bank’s start-up division establishes new branch banks. Each branch opens with three tellers. Total teller cost per branch is $96,000 per year. The three tellers combined can process up to 90,000 customer transactions per year. If a branch does no
> Janice Huffman has decided to start Janice Cleaning, a residential housecleaning service company. She is able to rent cleaning equipment at a cost of $600 per month. Labor costs are expected to be $50 per house cleaned and supplies are expected to cost $
> Identify the following costs as fixed or variable: Costs related to plane trips between Boston, Massachusetts, and San Diego, California, follow. Pilots are paid on a per-trip basis. a. Pilots’ salaries relative to the number of trips flown. b. Depreciat
> Barlae Auto Repair, Inc. is evaluating a project to purchase equipment that will not only expand the company’s capacity but also improve the quality of its repair services. The board of directors requires all capital investments to meet or exceed the min
> Harper Electronics is considering investing in manufacturing equipment expected to cost $250,000. The equipment has an estimated useful life of four years and a salvage value of $25,000. It is expected to produce incremental cash revenues of $125,000 per
> Daryl Kearns saved $240,000 during the 30 years that he worked for a major corporation. Now he has retired at the age of 60 and has begun to draw a comfortable pension check every month. He wants to ensure the financial security of his retirement by inve
> Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would
> Obtain the income statements for Target Corporation for the fiscal years ending in 2011, 2012, 2013, 2014, and 2015. Target’s fiscal year ends near the end of January or the beginning of February. The 2013–2015 statem
> Dwight Donovan, the president of Donovan Enterprises, is considering two investment opportunities. Because of limited resources, he will be able to invest in only one of them. Project A is to purchase a machine that will enable factory automation; the ma
> Brett Collins is reviewing his company’s investment in a cement plant. The company paid $12,000,000 five years ago to acquire the plant. Now top management is considering an opportunity to sell it. The president wants to know whether th
> Antonio Melton, the chief executive officer of Melton Corporation, has assembled his top advisers to evaluate an investment opportunity. The advisers expect the company to pay $500,000 cash at the beginning of the investment and the cash inflow for each
> Swift Delivery is a small company that transports business packages between New York and Chicago. It operates a fleet of small vans that moves packages to and from a central depot within each city and uses a common carrier to deliver the packages between
> The manager of the Cranston Division of Wynn Manufacturing Corporation is currently producing a 20 percent return on invested capital. Wynn’s desired rate of return is 16 percent. The Cranston Division has $6,000,000 of capital invested in operating asse
> Helena Corporation operates three investment centers. The following financial statements apply to the investment center named Bowman Division. BOWMAN DIVISION Income Statement For the Year Ended December 31, 2018 Sales revenue ……………………………………………………………..$
> Sorrento Corporation’s balance sheet indicates that the company has $500,000 invested in operating assets. During 2018, Sorrento earned operating income of $50,000 on $1,000,000 of sales. Required: a. Compute Sorrento’s profit margin for 2018. b. Comput
> Use the standard price and cost data supplied in Problem 15-20. Assume that Narcisco actually produced and sold 32,000 books. The actual sales price and costs incurred follow. Actual price and variable costs Sales price………………………………
> Narcisco Publications established the following standard price and costs for a hardcover picture book that the company produces. Standard price and variable costs Sales price…………………………………………………………………………$90.00 Materials cost………………
> Howard Cooper, the president of Glacier Computer Services, needs your help. He wonders about the potential effects on the firm’s net income if he changes the service rate that the firm charges its customers. The following basic data pertain to fiscal yea
> Kemp Tables, Inc. (KTI) makes picnic tables of 2 × 4 planks of treated pine. It sells the tables to large retail discount stores such as Walmart. After reviewing the following data generated by KTI’s chief accountant, the c
> Yalaha National Bank is a large municipal bank with several branch offices. The bank’s computer department handles all data processing for bank operations. In addition, the bank sells the computer department’s expertise in systems development and excess
