Managerial Accounting in The Information Age: Questions
Managerial Accounting in The Information Age: Questions
Managerial Accounting in The Information Age: Questions
Chapter 1
Managerial Accounting in the Information Age
QUESTIONS
1. The goal of managerial accounting is to provide information needed for planning,
control, and decision making.
2. Budgeted performance is a useful benchmark for evaluating current period
performance.
3. This question asks students to identify three differences between financial and
managerial accounting. In the text, five differences are noted:
a) Managerial accounting is directed at internal rather than external users of
accounting information.
b) Managerial accounting may deviate from generally accepted accounting
principles (GAAP).
c) Managerial accounting may present more detailed information.
d) Managerial accounting may present more nonmonetary information.
e) Managerial accounting places more emphasis on the future.
10. A legal action is not necessarily ethical. Ethical actions involve “what’s right” while
legal actions involve operating within boundaries of the law.
EXERCISES
E2. [LO 2] The only costs that are relevant to a decision are incremental costs—that
is, costs that change when an action is taken. The cost of the old copier is a sunk
cost and will not change. Therefore, it is irrelevant to Rachel’s decision.
E3. [LO 4] The code suggests that Guthrie clarify the ethical issue by confidential
discussion with an objective advisor (this might be the IMA Ethics Counseling
service) to obtain a better understanding of possible courses of action.
Guthrie should then discuss the problem with the manager to whom his boss
reports (since his boss is involved in the ethical dilemma). Unless required by law,
communication of the problem to authorities or individuals outside the organization
is not appropriate.
The CRM system notes that a customer makes significant wine purchases at
dinners. At her next stay, the hotel provides a complimentary bottle of a limited
release high-end wine resulting in increased customer loyalty.
The CRM system notes that a customer has had three bookings in the last year.
When the customer checks in, the hotel offers a complimentary room upgrade
which results in increased customer loyalty.
The CRM system identifies the top 1,000 guests in terms of annual billings and
does a direct mailing of certificates that can be redeemed for a free night's stay
resulting in increased customer loyalty.
The CRM system notes that a customer has traveled with a small dog and wants
the staff to walk the dog in the park in the early morning. The reservationist asks if
Chapter 1 Managerial Accounting in the Information Age 1-3
this service is needed when booking an upcoming stay and makes sure a staff
person is available.
E5. [LO 1] Megan can prepare a profit budget for each store (planning). At the end of
the accounting period, she can compare actual profit to the budget for each store
(control). Significant differences from the budget should be investigated to
determine their causes.
E6. [LO 1] “c” is false. There are many possible reasons, other than lack of effective
management, why actual costs are greater than planned. Typically, performance
reports only suggest areas that should be investigated.
E7. [LO 1] Deidre should not be concerned that cost of sales has increased. Cost of
sales is a variable cost and it is expected that it will increase when sales increase.
In the budget, cost of sales ($400,000) is 67% of sales ($600,000). Actual cost of
sales ($425,000) is 61% of actual sales ($700,000). Thus, while cost of sales has
increased, it has not increased disproportionate to the increase in sales.
E8. [LO 1]. Managerial accounting focuses on accounting information for internal
decision-making. This focus differs from financial accounting in a number of ways.
For example managerial accounting: 1) focuses on internal users, 2) can deviate
from generally accepted accounting principles (GAAP), 3) presents more detailed
information, 4) presents more nonmonetary information, and 5) places emphasis
on the future.
E9. [LO 1] For purposes of awarding bonuses, it may be advisable to record sales
when orders are placed so that the sales force is rewarded on a timely basis. If the
company waited until the order was delivered, the sales force might be rewarded
more than a year after obtaining a customer order. The point is that for internal
reporting purposes, companies need not follow GAAP.
E10. [LO 2]
a. variable
b. fixed
c. variable
d. fixed
E11. [LO 2]
a. variable
b. variable
c. fixed
d. fixed
e. variable
1-4 Jiambalvo Managerial Accounting
E12. [LO 2] A cost is controllable by a manager whose actions affect the cost. Thus,
for example, advertising may be a controllable cost for a store manager (who
decides how much to spend on advertising) but it would be a non-controllable cost
for the manager of a department at the store (who is not consulted about the
amount to spend on advertising).
E13. [LO 2, 3] Takesha should not consider how much he paid for the old machine
because that is a sunk cost. He should consider the value of the old machine in
the used lab machine market—an incremental cash inflow equal to the market
value of the old machine that will result if he buys a new lab machine.
E14. [LO 2]
Rent and depreciation do not enter into the calculation of the opportunity cost
since these costs are not incremental (they will be incurred whether or not Ken
decides to stay open on Saturday).
E15. [LO 2] If Zachary visits his friend, he will incur a $560 (16 hours x $35)
opportunity cost.
E16. [LO 2, 3] The incremental cost per gallon is likely to be less than $6 because part
of the $6 amount relates to fixed costs such as depreciation of equipment. If the
incremental cost per gallon is less than $6, then the incremental cost of 15,000
gallons is less than $90,000.
E17. [LO 3]
a. When a second shift is added, material costs, workers’ salaries, and benefits
are likely to increase.
b. Depreciation of the building will not increase when a second shift is added.
E18. [LO 3] The owner of LA Porsche may link Hulmut’s annual bonus to the average
customer satisfaction rating. Thus, there is a link between the measure and
Hulmut’s financial welfare. Some actions that Hulmut can take that may help
ratings would be to 1) provide a comfortable waiting area for customers, 2) provide
free coffee and snacks in the waiting area, and 3) provide transportation service for
customers while their cars are under repair.
Chapter 1 Managerial Accounting in the Information Age 1-5
E19. [LO 5] The IMA’s Statement of Ethical Professional Practice does not directly
address this issue so students may take either side of this issue.
Shauna does have obligations: Students could argue that the practice of
entertaining customers with lavish vacations is a type of bribe that would violate
the Competence standard (perform duties in accordance with laws and
regulations) or the Integrity standard (refrain from engaging in any conduct that
would prejudice carrying out duties ethically).
Shauna does not have obligations: Students could argue that the practice of
entertaining customers is not against the law and does not reduce one’s ability to
carry out duties ethically.
E20. [LO 5]. Responses will vary. Examples of Controller duties are as follows: Cost
accounting, preparation of financial statements in accordance with GAAP,
budgeting, variance analysis, advisor to senior leadership. Examples of skills are
as follows: BA in Accounting, CPA, 5-10 years accounting experience, 5 years
management experience, excellent written and verbal communication skills.
PROBLEMS
P1. [LO 1, 2]
a. Santiago’s Salsa
Budgeted Production Costs
May 2017
30,000
Production Jars of Salsa
Ingredient cost* $24,000
Labor cost** 14,400
Rent 5,000
Depreciation 6,000
Other 1,000
Total $50,400
b. With a wage rate of $20, 720 hours ($14,400 ÷ $20) will be needed in May. In
April, only 600 hours were needed ($12,000 ÷ $20). Thus, 120 additional hours
will be needed in May. The company can plan on hiring a part-time worker in
May (approximately 30 hours per week) or the additional hours can be
addressed with overtime, which would make the hourly rate higher. In which
case, the hourly rate would be higher.
Unless management anticipates the need for the part-time worker (by preparing
a budget), he or she may not be hired on a timely basis.
c. The actual cost per unit in April was $1.76 ($44,000 ÷ 25,000 units). The cost
per unit in May is anticipated to be only $1.68 ($50,400 ÷ 30,000 units). Unit
cost declines because some costs are fixed and do not increase with increases
in volume.
Chapter 1 Managerial Accounting in the Information Age 1-7
P2. [LO 2, 3]
25,000
Production Jars of Salsa
Ingredient cost $20,000
Labor cost 12,000
Total $32,000
Thus, the incremental cost of producing an extra 50,000 jars of salsa is $64,000
(i.e., $1.28 × 50,000).
c. Yes, the price should be lowered since the incremental cost of this action
($64,000 in part a) is less than the incremental revenue ($100,000 in part b).
P3. [LO 1, 2]
Sales Department
Budgeted Costs, 2017
(Assuming Sales of $11,000,000)
P4. [LO 1]
b. Electricity would not be a controllable cost for the manager of sporting goods,
and it is doubtful that including it on a performance report for sporting goods
would be useful.
P5. [LO 1, 2]
P6. [LO 1, 2, 3]
a. The information on the income statement, balance sheet and statement of cash
flow is highly summarized for the entity as a whole. Linda needs product level
information which is much more detailed.
b. Examples of nonfinancial measures might be: Web site visits, number of repeat
customers, delivery time, and customer satisfaction.
P7. [LO 3]
a. Managers may focus (too much) on new customers and ignore current
customers who account for most of the company’s sales.
P8. [LO 2, 3]
b. Incremental costs would include, for example, the cost of soap and shampoo,
the cost of cleaning the room, and the cost of cleaning towels and bedding.
c. Most likely, the incremental revenue will exceed the incremental costs, which
are relatively low (e.g., shampoo and soap are inexpensive and cleaning
personnel are paid fairly low wages).
P9. [LO 5]
LOCAL 635
Summary
Union is disputing “cost of meal” charges to hotel employees.
• Makes the point that there is no generally accepted meaning of the term “cost.”
2. What are some examples of variable, fixed, sunk, and opportunity costs in the
context of the Local 635 case?
4. I contend that it is possible that the incremental cost is more than $300. How is this
possible?
5. How should the contract be worded to avoid similar problems in the future?
Discussion
I start this case by asking a student to explain the source of conflict between Local 635
and the Riverside Hotel. The student is likely to explain that while employees are
focused on the incremental cost of a meal, management is focused on various fixed
costs as well as the incremental costs. This leads to a major take away—there is no
generally accepted meaning of the term cost. We know what’s meant by fixed cost,
variable cost, opportunity cost, sunk cost, etc., but there is ambiguity as to what exactly
cost means.
I then ask the class to estimate the incremental cost of an employee meal. Most
students think it is less than $12. I then suggest that it is possible that the incremental
cost is more than $300! When asked to explain how this is possible, students focus on
opportunity costs. Suppose an employee eats the last prime rib just before a steady
Chapter 1 Managerial Accounting in the Information Age 1-11
customer, who always eats prime rib, comes into the restaurant. If this customer
becomes disgruntled and never returns to the restaurant, the hotel could easily be out
$300 or more in the next few months.
How should the contract be rewritten? Students generally recommend that meal
subsidies be based on some percent of menu prices. For example, meals could be free
as long as 70% of the total of menu prices is less than $12.
To wrap up, it should be noted that to ensure quality and customer satisfaction, kitchen
workers must be motivated to do a good job. Thus, the hotel should be motivated to
settle this dispute quickly in a way that seems fair to workers.
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1-12 Jiambalvo Managerial Accounting
• Makes the point that appropriate cost information depends on the manager.
2. Why is Nick’s response “Why do you want to know?” appropriate from the standpoint
of incremental analysis?
3. What cost information would be relevant to a decision to drop the product that would
not be relevant to a decision to increase a production run by 100 units?
Discussion
A senior manager has asked Nick Somner to tell her the cost of the D45 valve. Nick
replies, “Why do you want to know?” This response is appropriate from the standpoint of
incremental analysis. The cost information that the senior manager needs to make a
decision depends on the decision she is facing. Thus, “Why do you want to know?” is
just Nick’s way of asking “What decision are you facing?” If the senior manager is
thinking of dropping the product, Nick should provide information on the incremental
costs that will be saved if the product is dropped. If she is thinking of increasing a
production run, Nick should provide the incremental cost associated with this action.
For example, if the product is dropped, the company may save the cost of setting up the
production line, the cost of ordering materials, and the cost of supervision. None of
these costs are relevant to a decision to increase a production run by 100 units since
none of these costs will change with the addition of 100 units to a planned production
run.