Principles of Cost - CHAPTER 1 QUESTIONS 1. The function of cost acc...

Principles of Cost Accounting 17e Edward Vanderbeck, Maria Mitchell (Solutions Manual Download link at the end of this file) 1 / 4

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CHAPTER 1

QUESTIONS

• The function of cost accounting is to provide

the cost accounting information that is the basis for planning and controlling current and future operations. It provides the cost figures and analyses that management needs in order to find the most efficient methods of operating, achieving control of costs, and determining selling prices.

• Originally issued for companies marketing

products in Europe, a set of international standards for quality management, known as ISO 9000 was designed by the Interna- tional Organization for Standardization. Ob- taining ISO 9000 certification is important because many companies will only contract with ISO 9000 suppliers.

• The ISO 14000 family of standards ad-

dresses various aspects of environmental management. It is based upon the premise that environmental benefits, such as re- duced consumption of resources and en- ergy, recycling and reduced waste may also result in economic benefits for the compa- nies that implement it.

• Reasons given by U.S. companies for “re-

shoring” their manufacturing operations in- clude (1) rising Chinese wages and labor unrest, (2) higher energy and shipping costs, (3) the desire to bring production managers and assembly-line workers closer to engi- neers, suppliers, and customers, (4) an ef- fort to protect a company’s intellectual prop- erty, (5) increased productivity in the United States, and (6) less favorable foreign ex- change rates.

• Manufacturers convert purchased materials

into finished goods by using labor, technol- ogy, and facilities. Merchandisers purchase completed products for resale. Service busi- nesses or agencies sell or provide services rather than products.

• A manufacturer differs from a merchandiser

in these ways:

• The merchandiser buys items to sell

while the manufacturing business must make the items it markets.

• Usually the manufacturer has a greater

investment in physical facilities.

• The manufacturer will incur some costs

peculiar to this type of industry, such as machine maintenance, materials handling, and inspection of manufactured goods.The two types of operations are similar in that they are both concerned with purchas- ing, storing, and selling goods; they must have efficient management and adequate sources of capital; and they may employ many workers.

• Cost accounting information is used by

management in the following ways:

• Determining product costs which are

necessary for: determining cost of

goods sold and valuing inventories; de- termining product selling price; meeting competition; bidding on contracts; and analyzing profitability.

• Planning by providing historical costs

that serve as a basis for projecting data.

• Controlling operations by providing cost

data that enable management to peri- odically measure results, to take correc- tive action where necessary, and to search for ways to reduce costs.

• Unit cost information is important to man-

agement because the unit costs of one pe- riod can be compared with those of other periods, and significant trends can be identi- fied and analyzed. Unit costs are also used in making important marketing decisions re- lated to selling prices, competition, and bid- ding.

• For a manufacturer, the planning process

involves the selection of clearly defined ob- jectives of the manufacturing operation and the development of a detailed plan to guide the organization in reaching the objectives.Cost accounting provides historical cost in- formation that is used as the basis for plan- ning future operations.

• In a manufacturing concern, effective control

is achieved in the following ways:

• Responsibility must be assigned for each

detail of the master production plan.

• There must be a periodic measurement

of the actual results as compared with predetermined objectives.c.Management must take corrective action as necessary to improve or eliminate inef- ficient and unprofitable operations. 2 / 4

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• Responsibility accounting is the assigning of

accountability for costs or production results to those individuals who have the authority to influence costs or production. It involves and information system that traces these data to the managers who are responsible for them.

12. The criteria for a cost center are:

• A reasonable basis on which manufac-

turing costs can be allocated.

• A person who has control over and is

accountable for many of the costs

• The requirements for becoming a CMA in-

clude a four-year college degree, two years of relevant work experience, and passing a rigorous two-part examination.

• The four major categories of ethical conduct

that must be adhered to by management accountants include competence, confiden- tiality, integrity, and credibility.

• The steps that should be taken by the man-

agement accountant include:

• Discuss the problem with the immediate

supervisor except when it appears that the supervisor is involved, in which case it should be taken to the next higher management level.

• Clarify relevant ethical issues by confi-

dential discussion with an objective ad- visor.

• Consult your own attorney as to legal

obligations and rights.

• Corporate governance is the means by which

a company is directed and controlled. Good corporate governance is important to all stakeholders because, due to recent account- ing scandals, the need for ethical conduct in managing corporate affairs has never been greater.

• The recent accounting scandals where

management, including controllers and chief financial officers, has “cooked the books” to make reported financial results seem better than actual created the need for the Sar- banes-Oxley Act. To help curb future abus- es, the act provides oversight to the public accounting profession and establishes guidelines for publicly traded companies in managing their relationships with their inde- pendent accountants.

• The Sarbanes Oxley Act impacts a com-

pany’s management in the following ways:

certification by the CEO and CFO that the fi- nancial statements fairly reflect the results of operations; requiring that a company’s an- nual report contain management’s opinion on the effectiveness of its internal controls; and increased criminal penalties for the vio- lation of securities laws.

• Financial accounting focuses upon financial

statements which meet the decision-making needs of external parties, such as investors, creditors, and governmental agencies, and to some extent the needs of management.Management accounting focuses on both historical and estimated data that manage- ment needs to conduct ongoing business op- erations and do long-range planning. Cost ac- counting includes those parts of both finan- cial and management accounting that collects and analyzes cost information. It provides the product cost data required for special reports to management (manage- ment accounting) and for inventory costing in the financial statements (financial accounting).

• With regard to methods for computing the

cost of goods sold, the difference between a manufacturer and a merchandiser is in the determination of the cost of goods available for sale. Since the manufacturing business makes the products it has avail- able for sale, the cost of goods manufac- tured must be determined and added to beginning finished goods inventory to de- termine the cost of finished goods available for sale. Since the merchandiser purchases rather than makes goods to sell, the cost of purchases is added to beginning merchan- dise inventory to compute the cost of goods available for sale.

• Finished Goods—this is an inventory ac-

count reflecting the total cost incurred in manufacturing goods on hand that are ready for sale to customers.Work in Process—this inventory account includes all of the costs incurred to date in manufacturing goods that are not yet com- pleted.Materials—this account represents the cost of materials on hand that will be used in the manufacturing process. 3 / 4

Chapter 01

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• Manufacturers, such as aircraft producers

and home builders, make tangible products by applying labor and technology to raw ma- terials. They may have as many as three in-

ventory accounts: Finished Goods, Work in

Process, and Raw Materials. Merchandisers, such as wholesalers and department stores, purchase tangible products in finished form from suppliers. They have only one inventory account, Merchandise Inventory. Service businesses, such as airlines and sports fran- chises, provide intangible benefits such as transportation and entertainment. They have no inventory account.

• A perpetual inventory system involves main-

taining a continuous record of purchases, is- sues, and new balances of all goods in stock. Under a periodic inventory system no attempt is made to record the cost of mer- chandise sold at the time of sale. At the end of the accounting period a physical inventory is taken for the purpose of determining the cost of goods sold and the ending inventory.

24. The basic elements of production cost are:

• Direct materials.
• Direct labor.
• Factory overhead.
• Direct materials—the cost of those materi-

als which become part of the item being manufactured and can be readily identified with it.Indirect materials—the cost of those items which are necessary for the manufacturing process but cannot be identified specifically with any particular item manufactured, and the cost of those materials which do become a part of the manufactured product but whose cost is too insignificant to track to in- dividual jobs.Direct labor—the labor cost for employees who work directly on the product manufac- tured.Indirect labor—the cost of labor for those employees who are required for the manu- facturing process but who do not work di- rectly on the item being manufactured.Factory overhead— includes all costs re- lated to the manufacturing process except direct materials and direct labor, such as in- direct materials, indirect labor, and all other factory expenses.

• As manufacturing processes have become

increasingly automated, direct labor cost as a percentage of total product cost has de- creased for many companies. In the case of Harley-Davidson, it was only 10% of product cost but required an inordinate amount of time to trace directly to the products being manufactured.

• Prime cost is the cost of direct materials and

direct labor; it represents cost specifically identified with the product.Conversion cost is the cost of direct labor and factory overhead; it is the expense incurred to convert raw materials into finished goods.No, one of the component costs, direct labor, would be added twice. The cost of manufactur- ing includes direct materials, direct labor, and factory overhead. Both prime cost and conver- sion cost include the cost of direct labor.

• Costs for direct materials and direct labor are

charged directly to the work in process ac- count, while the factory overhead costs are first accumulated in the factory overhead ac- count and are then transferred to the work in process account.

• Cost of goods sold represents the total

manufacturing cost of the goods sold during a given accounting period, while the cost of goods manufactured represents the total manufacturing cost of all goods that were finished during the accounting period.

• Non-factory costs are charged to selling or

general administrative expense accounts and do not affect the determination of manu- facturing costs. Costs which benefit both factory and non-factory operations must be allocated in some equitable manner.

• A mark-on percentage is a percentage of the

total manufacturing cost that is added to the manufacturing cost to establish a selling price that covers the product’s share of sell- ing and administrative expenses and earns a satisfactory profit.

• Job order costing is appropriate when the

output of an enterprise consists of custom- made or specially ordered goods. Manufac- turers such as machine shops and ship- builders, merchandisers such as computer retailers, and service firms, such as CPAs and architects, all use job order costing.

• Process costing is appropriate when an en-

terprise’s operations involve the continuous or mass production of large quantities of sub- stantially identical items. Manufacturers such as chemical producers and candy makers, merchandisers such as newspaper publish- ers and agricultural wholesalers, and services

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