Preview text CHAPTER 2Basic Cost Management ConceptsFOCUS ON ETHICS (Located before the Chapter Summary in the text.)Was WorldCom’s controller just following orders?The WorldCom controller allegedly did not perform his professional duties in accordancewith relevant laws, regulations, and ethical standards for practitioners of managerialaccounting and financial management. The justification that the controller makes for thisalleged unethical duping of investors, that he was ordered to do so by seniormanagement, is an insufficient defense of his actions. He was legally and ethicallyobliged to find and correct accounting errors, and to make an accurate representation ofthe firm’s financial position to his fellow managers, the board of directors, and theinvesting public. Sometimes, because of negligence or conflicts of interest, seniormanagement may accidentally or purposely give unethical instructions. The controller isobliged under these circumstances to uphold his professional integrity and insist on anappropriate treatment of the accounting information.ANSWERS TO REVIEW QUESTIONS2-1Product costs are costs that are associated with manufactured goods until the timeperiod during which the products are sold, when the product costs become expenses.Period costs are expensed during the time period in which they are incurred.2-2Product costs are also called inventoriable costs because they are assigned tomanufactured goods that are inventoried until a later period, when the products aresold. The product costs remain in the Work-in-Process or Finished-Goods Inventoryaccount until the time period when the goods are sold.2-3The most important difference between a manufacturing firm and a service industryfirm, with regard to the classification of costs, is that the goods produced by amanufacturing firm are inventoried, whereas the services produced by a serviceindustry firm are consumed as they are produced. Thus, the costs incurred inmanufacturing products are treated as product costs until the period during which thegoods are sold.

1. Managerial Accounting 11th Edition Solutions
2. Managerial Accounting 10th Edition

Most of the costs incurred in a service industry firm to produceservices are operating expenses that are treated as period costs.2-4Product costs include the backpack’s direct material (e.g., fabric, stitching, zippersand pulls), direct labor involved in production, and various manufacturing overheadcosts (e.g., electricity, insurance on the plant, and depreciation on plant andequipment).Managerial Accounting, 11/e2-1© 2017 by McGraw-Hill Education. All rights reserved. No reproduction or distribution without the priorwritten consent of McGraw-Hill Education.2-5The four types of production processes are as follows: Job shop: Low production volume; little standardization; one-of-a-kindproducts. Examples include custom home construction, feature filmproduction, and ship building. Batch: Multiple products; low volume. Examples include constructionequipment, tractor trailers, and cabin cruisers. Assembly: A few major products; higher volume. Examples include kitchenappliances and automobile assembly. Continuous flow: High production volume; highly standardized commodityproducts.

Examples include food processing, textiles, lumber, and chemicals.2-6The cost of idle time is treated as manufacturing overhead because it is a normal costof the manufacturing operation that should be spread out among all of themanufactured products. The alternative to this treatment would be to charge the costof idle time to a particular job that happens to be in process when the idle time occurs.Idle time often results from a random event, such as a power outage. Charging thecost of the idle time resulting from such a random event to only the job that happenedto be in process at the time would overstate the cost of that job.2-7Overtime premium is included in manufacturing overhead in order to spread the extracost of the overtime over all of the products produced, since overtime often is a normalcost of the manufacturing operation. The alternative would be to charge the overtimepremium to the particular job in process during overtime.

In most cases, suchtreatment would overstate the cost of that job, since it is only coincidental that aparticular job happened to be done on overtime. The need for overtime to complete aparticular job results from the fact that other jobs were completed during regularhours.2-8The phrase “different costs for different purposes” refers to the fact that the word“cost” can have different meanings depending on the context in which it is used. Costdata that are classified and recorded in a particular way for one purpose may beinappropriate for another use.2-9The city of Tampa would use cost information for planning when it developed a budgetfor its operations during the next year.

Included in that budget would be projectedcosts for police and fire protection, street maintenance, and city administration. At theend of the year this budget would be used for cost control. The actual costs incurredwould be compared to projected costs in the budget. City administrators would alsouse cost data in making decisions, such as where to locate a new fire station.2-10A fixed cost remains constant in total across changes in activity, whereas the totalvariable cost changes in proportion to the level of activity.2-2Solutions Manual© 2017 by McGraw-Hill Education.

Managerial Accounting 11th Edition Solutions

All rights reserved. No reproduction or distribution without the priorwritten consent of McGraw-Hill Education.2-17a. Uncontrollable costb. Controllable costc. Uncontrollable cost2-18Out-of-pocket costs are paid in cash at or near the time they are incurred. Anopportunity cost is the potential benefit given up when the choice of one actionprecludes the selection of a different action.2-19A sunk cost is a cost that was incurred in the past and cannot be altered by any currentor future decision. A differential cost is the difference in a cost item under two decisionalternatives.2-20A marginal cost is the extra cost incurred in producing one additional unit of output.The average cost is the total cost of producing a particular quantity of product orservice, divided by the number of units of product or service produced.2-21The process of registering for classes varies widely among colleges and universities,and the responses to this question will vary as well.

Examples of information thatmight be useful include the credit requirements and course requirements to obtain aparticular degree, and a list of the prerequisites for each of the elective courses in aparticular major. Such information could help the student plan an academic programover several semesters or quarters.

An example of information that might createinformation overload is a comprehensive listing of every course offered by the collegein the past five years.2-22The purchase cost of the old bar code scanners is a sunk cost, since it occurred in thepast and cannot be changed by any future course of action. The manager is exhibitinga common behavioral tendency to pay too much attention to sunk costs.2-23a. Direct costb. Direct costc. Indirect costd.

Managerial Accounting 10th Edition

Indirect cost2-4Solutions Manual© 2017 by McGraw-Hill Education. All rights reserved.