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CHAPTER4

COVERAGEOFLEARNINGOBJECTIVES

LEARNINGOBJECTIVE

FUNDA-

MENTALASSIGN-MENT

MATERIAL

CRITICALTHINKINGEXERCISESANDEXERCISES

PROBLEMS

CASES,EXCEL,COLLAB.&INTERNETEXERCISES

LO1:Describethepurposesofcostmanagementsystems.

31,34

50

LO2:Explaintherelationshipbetweencost,costobject,costaccumulation,andcostassignment.

45

56

LO3:Distinguishbetweendirectandindirectcosts.

A1,B1

36,37,38,39,44

45,49

56

LO4:Explainthemajorreasonsforallocatingcosts.

B2

33,41

46

54

LO5:Identifythemaintypesofmanufacturingcosts:directmaterials,directlabor,andindirectproductioncosts.

36,37,38,39

LO6:Explainhowthefinancialstatementsofmerchandisersandmanufacturersdifferbecauseofthetypesofgoodstheysell.

A2

57,60,61

LO7:Understandthemaindifferencesbetweentraditionalandactivity-basedcostingsystemsandwhyABCsystemsprovidevaluetomanagers.

A3,A4,B3,B4

33,40,41,42

48,49,50

55,56,57,58,59,60,61

LO8:Useactivity-basedcostinformationtomakestrategicandoperationalcontroldecisions.

A4,B4

32,37,43

48,49,50

55,56,60

CHAPTER4

CostManagementSystemsandActivity-BasedCosting

4-A1 (20-30min.)

SeeTable4-A1onthefollowingpage.

4-A2(25-30min.)

1. MerchandiseInventories,1,000devices@$97 $97,000

2. Directmaterialsinventory $40,000

Work-in-processinventory 0

Finishedgoodsinventory 97,000

Totalinventories $137,000

3.

NILEELECTRONICSPRODUCTS

StatementofOperatingIncome

FortheYearEndedDecember31,20X9

Sales(9,000unitsat$170) $1,530,000

Costofgoodssold:

Beginninginventory $0

Purchases 970,000

Costofgoodsavailableforsale $970,000

Lessendinginventory 97,000

Costofgoodssold(anexpense) 873,000

Grossmarginorgrossprofit $657,000

Lessotherexpenses:selling&administrativecosts 185,000

Operatingincome(alsoincomebeforetaxes

inthisexample) $472,000

TABLE4-A1

STATEMENTOFOPERATINGINCOME OPERATINGINCOMEBYPRODUCTLINE

EXTERNALREPORTINGPURPOSE INTERNALSTRATEGICDECISIONMAKINGPURPOSE

Custom Large Small

DetailedStd.Std.CostType,AssignmentMethod

Sales $155,000$30,000$45,000$80,000

Costofgoodssold:

Directmaterial 40,000 5,000 15,000 20,000Direct,DirectTrace

Indirectmanufacturing 41,00028,0001 5,0008,000Indirect,Alloc.–Mach.Hours

81,00033,00020,00028,000

Grossprofit 74,000(3,000)25,00052,000

Sellingandadministrativeexpenses:

Commissions 15,000 1,500 3,500 10,000Direct,DirectTrace

Distributiontowarehouses 10,4001,0002 3,0006,400Indirect,Allocation-Weight

Totalsellingandadmin.expenses 25,4002,5006,50016,400

Contributiontocorporateexpenses

andprofit48,600$(5,500)$18,500$35,600

Unallocatedexpenses:

Administrativesalaries 8,000

Otheradministrativeexpenses 4,000

Totalunallocatedexpenses 12,000

Operatingincomebeforetax $36,600

1Totalmachinehoursis1,400+250+400=2,050.Indirectmanufacturingcostpermachinehouristhen$41,000÷2,050=$20.Theallocationtocustomdetailedis$20×1,400machinehours=$28,000.

2Totalweightshippedis25,000kg+75,000kg+160,000kg=260,000kg.Indirectdistributioncostsperkilogramisthen$10,400÷260,000kg=$0.04.Theallocationtocustomdetailedis$0.04×25,000kg=$1,000.

4. ORINOCO,INC.

StatementofOperatingIncome

FortheYearEndedDecember31,20X9

Sales(9,000unitsat$170)$1,530,000

Costofgoodsmanufacturedandsold:

Beginningfinishedgoodsinventory $0

Costofgoodsmanufactured:

BeginningWIPinventory $0

Directmaterialsused 530,000

Directlabor 290,000

Indirectmanufacturing150,000

Totalmfg.coststoaccountfor $970,000

Lessendingwork-in-

processinventory 0970,000

Costofgoodsavailableforsale $970,000

Lessendingfinishedgoodsinventory 97,000

Costofgoodssold(anexpense) 873,000

Grossmarginorgrossprofit $657,000

Lessotherexpenses:sellingandadministrativecosts 185,000

Operatingincome(alsoincomebeforetaxes

inthisexample) $472,000

5. Thebalancesheetforthemerchandiser(Nile)hasjustonelineforinventories,theendinginventoryoftheitemspurchasedforresale.Thebalancesheetforthemanufacturer(Orinoco)hasthreeitems:directmaterialsinventory,work-in-processinventory,andfinishedgoodsinventory.

Theincomestatementsaresimilarexceptforthecomputationofcostofgoodsavailableforsale.Themerchandiser(Nile)simplyshowspurchasesfortheyearplusbeginninginventory.Incontrast,themanufacturer(Orinoco)showsbeginningwork-in-processinventoryplusthethreecategoriesofcostthatcomprisemanufacturingcost(directmaterialsused,directlabor,andfactory(ormanufacturing)overhead)andthendeductstheendingwork-in-processinventory.Themanufacturerthenaddsthebeginningfinishedgoodsinventorytothiscostofgoodsmanufacturedtogetthecostofgoodsavailableforsale.

6. Thepurposeisprovidingaggregatemeasuresofinventoryvalueandcostofgoodsmanufacturedforexternalreportingtoinvestors,creditors,andotherexternalstakeholders.

4-A3(10-15min.)

Therecanbemanyjustifiableanswersforeachitemotherthanthelistedcostdriverandbehavior.ThepurposeofthisexerciseistogenerateanactivediscussionregardingthosechosenbyFirstBank’smanagers.Onepointthatshouldbeemphasizedisthatmanytimesmanagerschoosecostdriversthatarenotthemostplausibleorreliablebecauseoflackofdataavailability.Costdriversarealsousedasabasistoallocateactivityandresourcecostsandsotheavailabilityofdataisoftenanimportantconsideration.

Activity

Or Cost

ResourceCostDriverBehavior

a.* R Numberofsquarefeet F

b.** R Numberofpersonhours F

c. R Numberofcomputertransactions V

d. A Numberofschedules

e. R Numberofpersonhours F

f. R Numberofloaninquiries V

g.*** A Numberofinvestments

h. A Numberofapplications

i. R Numberofpersonhours V

j. R Numberofminutes V

k. R Numberofpersonhours F

l. A Numberofloans

*Anargumentcanbemadethatmaintenanceofthebuildingisanactivity.Ifthiswasthecase,resourcessuchassuppliesandlaborwouldberesourcesconsumed,andseveralresourcecostdriverswouldbeneeded.Inaddition,aseparateresourceandassociatedcostdriverwouldbeneededforinsurancecosts.However,thecompanyhadacontractformaintenance(fixedprice),sothiswasafixed-costresourcethatwasaddedtootheroccupancycostssuchasinsurance.Thecostdriverchosenforalltheseoccupancycostswassquarefeetoccupiedbythevariousdepartments.

**Normally,thecostdriverusedforanylaborresourceispersonhours.Itisassumedthatthestaffpersonhoursusedareregularhoursratherthanovertimeortemporarylaborhours.Thus,thecostisfixedwithrespecttochangesinhoursused.Asthehoursusedincreases(decreases)theutilizationoftheresourcesincreases(decreases)andeventually,managementwillneedtomakeadecisionwhethertoexpandcapacity(orwhethertocutbackonlabor).Thisisanexampleofastepcostthatisfixedoverwiderangesofcost-driverlevel.

***Studentsmaytrytodeterminethecostbehaviorofactivitieseventhoughtheproblemrequirementsdonotaskforit.Pointoutthatactivitiesalmostalwayshavemixedcostbehaviorbecausetheyconsumevariousresources.Someofthesearefixed-costandothersvariable-costresources.Forexample,theactivity“researchtoevaluatealoanapplication〞consumessuchfixed-costresourcesasmanagerlabortimeandcomputers(assumedownedbythebank).Thisactivityalsoconsumesvariable-costresourcessuchastelecommunicationstimeandexternalcomputingservices.

4-A4 (20-30min.)

1. Thefirststepistodeterminethecostpercost-driverunitforeachactivity:

Monthly Cost- Costper

Manufacturing Driver Driver

Activity[Costdriver] Overhead Activity Unit

MaterialHandling[Directmaterialscost] $12,000 $200,000 $0.06

Engineering[Engineeringchangenotices] 20,000 20 1,000.00

Power[Kilowatthours] 16,000 400,000 0.04

TotalManufacturingOverhead $48,000

Next,thecostsofeachactivitycanbeallocatedtoeachofthethreeproducts:

PHYSICALFLOW/ALLOCATEDCOST

Cost Senior Basic Deluxe

MaterialHandling $.06×25,000=$1,500 $.06×50,000=$3,000 $.06×125,000=$7,500

Engineering $1,000×13=13,000 $1,000×5=5,000 $1,000×2=2,000

Power $.04×50,000=2,000 $.04×200,000=8,000 $.04×150,000=6,000

Total $16,500$16,000$15,500

2. Overheadratebasedondirectlaborcosts:

Rate=Totalmanufacturingoverhead÷Totaldirectlaborcost

=$48,000÷$8,000=$6.00/DL$

Overheadallocatedtoeachproductis:

Senior: $6.00×4,000 = $24,000

Basic: $6.00×1,000= 6,000

Deluxe: $6.00×3,000 = 18,000

Total $48,000

NoticethatmuchlessmanufacturingoverheadcostisallocatedtoBasicusingdirectlaborasacostdriver.Why?BecauseBasicusesonlyasmallamountoflaborbutlargeamountsofotherresources,especiallypower.

3. Theproductcostsinrequirement1aremoreaccurateifthecostdriversaregoodindicatorsofthecausesofthecosts--theyarebothplausibleandreliable.Forexample,kilowatthoursiscertainlyabettermeasureofthecostofpowercoststhanisdirectlaborhours.Therefore,theallocationofpowercostsinrequirement1iscertainlybetterthaninrequirement2.Materialshandlingandengineeringarelikewisemoreplausible.Amanagerwouldbemuchmoreconfidentinthemanufacturingoverheadallocatedtoproductsinrequirement1.Remember,however,thatthereareincrementalcostsofdatacollectionassociatedwiththemoreaccurateABCsystem.Thebenefit/costcriteriamustbeappliedindecidingwhichcostingsystemis“best.〞

4-B1 (20-30min.)

SeeTable4-B1onthefollowingpage.

4-B2 (25-30min.)

1. $1,080,000÷45,000hours=$24perdirect-laborhour

2. (a) $585,000÷15,000hours=$39perdirect-laborhour

(b) $495,000÷30,000hours=$16.50perdirect-laborhour

3. (a) $585,000÷97,500hours=$6permachinehour

(b) $495,000÷30,000hours=$16.50perdirect-laborhour

4. (a) $24×(1.0+14.0)=$360.00

$24×(1.5+3.0)=$108.00

$24×(1.3+8.0)=$223.20

(b) ($39×1.0)+($16.50×14.0)=$39.00+$231.00=$270.00

($39×1.5)+($16.50×3.0)=$58.50+$49.50=$108.00

($39×1.3)+($16.50×8.0)=$50.70+$132.00=$182.70

(c) ($6×12.0)+($16.50×14.0)=$72.00+$231.00=$303.00

($6×17.0)+($16.50×3.0)=$102.00+$49.50=$151.50

($6×14.0)+($16.50×8.0)=$84.00+$132.00=$216.00

(d) Firstconsiderusingdepartmentalinsteadoffirm-widerates(partbvs.parta).Departmentalratesthatusedirect-laborhoursasthebasedecreasethecostappliedtounitsofAandCandleaveBunaffected.Otherproductsthatuserelativelylessassemblytimewillincreaseincost.Nowexaminechangingtoabaseofmachinehoursinmachining(partcvs.parta).ProductBistheonlyonewithanincreaseincostin(c)comparedto(a).Why?BecauseB'susesonly16%ofthedirectlaborhoursusedforA,B,andC,soitisisallocatedonly16%ofthecostsallocatedonthebasisofdirectlaborhours.Butituses40%ofthemachinehours,andthereisallocated40%ofcoststhatareallocatedonthebasisonmachinehours.Therefore,itreceivesrelativelymorecostswithabaseofmachinehoursthanwithabaseofdirect-laborhours.

TABLE4-B1

STATEMENTOFOPERATINGINCOMEOPERATINGINCOMEBYPRODUCTLINE

ThousandsofDollars Lawn Hand

Scooter Mower Tool CostType,

PartsPartsPartsAssignmentMethod LawnMowerParts HandToolParts CostType,AssignmentMethod

Sales $990$350$380$260

Costofgoodssold:

Directmaterial 400 175 125 100Direct,DirectTrace

Indirectmanufacturing 94681 1412Indirect–Mach.Hrs

494243139112

Grossprofit 496107241148

Sellingandadministrativeexpenses:

Commissions 55 25 20 10Direct,DirectTrace

Distributiontowarehouses 150202 8050Indirect-Weight

Totalsellingandadministrativeexpenses 2054510060

Contributiontocorporateexpensesandprofit291$62$141$88

Unallocatedexpenses:

Corporatesalaries 11

Othergeneralexpenses 17

Totalunallocatedexpenses 28

Operatingincomebeforetax $263

1Totalmachinehoursis8,500+1,750+1,500=11,750.Indirectmanufacturingcostpermachinehouristhen$94,000÷11,750=$8.Theallocationtoscooterpartsis$8×8,500machinehours=$68,000.

2Totalweightshippedis100,000kg+400,000kg+250,000kg=750,000kg.Indirectdistributioncostsperkilogramisthen$150,000÷750,000kg=$0.20.Theallocationtoscooterpartsis$0.20×100,000kg=$20,000.

4-B3(30-35min.)

Theexistingsystemallocatesallcostsbasedondirectlaborcost.Therateforallocatingindirectproductioncostsis:

Estimatedindirectproductioncost÷Estimateddirectlaborcost

=￥24,500,000÷￥35,000,000=70%

Thatis,eachtime￥1isspentondirectlabor,Watanabeadds￥0.7ofindirectproductioncosttothecostoftheproduct.

2.UnderanABCsystem,Watanabewouldallocateindirectproductioncostsseparatelyforeachactivity.Thiswouldresultinthefollowingfourallocationrates:

Receiving: Receivingcosts÷Directmaterialcost

=￥4,800,000÷60,000,000=￥0.08per￥1ofdir.mat.

Assembly: Assemblycosts÷Numberofcontrolunits

=￥13,800,000÷92,000=￥150percontrolunit

Qual.Control: Qualitycontrolcost÷QChours

=￥1,800,000÷600=￥3,000perQChour

Shipping: Shippingcost÷#ofboxesshipped

=￥4,100,000÷8,200=￥500perboxshipped

3.(a)Thecostwillcontain3components(inthousandsofyen):

Directmaterial ￥8,000

Directlabor 2,000

Indirectproductioncost(￥2,000×.7=1,400) 1,400

Totalcost ￥11,400

Price(￥11,400×1.3) ￥14,820

(b)Thecostwillhave7components,4ofthemallocatingindirectproductioncosts(totalsinthousandsofyen):

Directmaterials ￥8,000

Directlabor 2,000

Receiving(￥0.08×8,000) ￥640

Assembly(￥150×5,000) 750

Qualitycontrol(￥3,000×50) 150

Shipping(￥500×600) 300

Totalindirectproductioncost 1,840

Totalcost ￥11,840

Price(11,840×1.3) ￥15,392

4.TheorderfromNissanrequiresarelativelylargeamountofreceiving,qualitycontrol,andshippingresourcescomparedtotherelativeamountoflaborrequired.Thismakesitsindirectproductioncostsarerelativelyexpensiverelativetothelaborrequired.Thefollowingillustrateswhyanallocationonthebasisoflaborcostresultsinlesscoststhanallocationsbasedonthefouractivities:

BudgetedCost- NissanCost- Nissan

ActivityAllocationBaseAllocationBasePercentage

Directmaterials 60,000,000 8,000,000 13.3%

Directlabor 35,000,000 2,000,000 5.7

Receiving 60,000,000 8,000,000 13.3

Assembly 92,000 5,000 5.4

Qualitycontrol 600 50 8.3

Shipping 8,200 600 7.3

Usingthesingledirect-laborcost-allocationbase,thisorderwouldreceive5.7%ofallindirectproductioncosts.ThemainreasonthatindirectproductioncostsforthisorderundertheABCsystemarerelativelyhighisthelargerelativecostofmaterialsthatdrivesalargeallocation(13.3%)ofreceivingcoststothisorder.Theallocationsofbothqualitycontrolandshippingcostsareslightlylargerthattheywouldbeusingadirect-laborcost-allocationbase,whiletheallocationofassemblycostsisslightlysmaller.

4-B4 (50-60min.)

1.Asummaryoftheanalysesfollows.

Pen Cell-Phone

CasingsCasingsCompany

BaseGrossProfitPercentage* 1.25% 38.75% 8.07%

PlanGrossProfitPercentage** 10.80% 37.20% 17.40%

SupportofProductManager? Strong None

SupportofPresident? Moderate

*SeeExhibit4-6onp.136ofthetext.

**SeePanelBofExhibit4-B4thatfollows.

Exhibit4-B4,PanelsAandBonthefollowingpagescanbeusedtoexplaintheimpactofthecontroller’sideausingtheprocessmapofthetraditionalcostingsystemandtherelatedfinancialreports.Noticethatthe$80,000annualdecreaseinthecostofengineersneedstobeconvertedtoa$20,000quarterlysavings.Thecontroller’sideawillresultinanincreaseof9.55%inthegrossprofitofthepen-casingslinebutadecreaseof1.55%inthecell-phoneline.Theproductmanagerofpencasingswouldprobablygivestrongsupporttotheideabutthecell-phonecasingsmanagerwouldmostlikelynotsupporttheidea.

Althoughthecompany-levelgrossprofitmarginimproves,thepresident’ssupportmaynotbestrong.Why?Thereisnotastrongconsensusamongproduct-linemanagers.Topmanagementisnormallyhesitanttosupportactionsthatdonothavetheunanimoussupportamongproduct-linemanagersunlessthereissolidevidenceofmaterialimprovementinprofitability.Whilethecurrentlosswouldbereversed,thereturnonsalesisstillnominalat3,500÷$480,000=.73%.

Exhibit4-B4:PanelA

ProcessMapofTraditionalCostSystem

Unallocated

$80,000

DirectMaterialsforPenCasings$22,500

DirectLaborforPenCasings$135,000

DirectMaterialsforCellPhoneCasings$24,000

DirectLaborforCellPhoneCasings$15,000

PenCasings

Sales$360,000

CellPhoneCasings

Sales$120,000

AllIndirectResources$200,000

AllUnallocatedValueChainCosts

$80,000

CostDriver

[DirectLaborHours=4,500+1,000=5,500]

Exhibit4-B4:PanelB

PRO-FORMAFINANCIALREPORTS:

TRADITIONALCOSTALLOCATIONSYSTEM

Statementofopertingincome contributiontocorporatecosts

andprofit

[externalreportingpurpose] [internalstrategicdecisionmaking

ANDOPERATIONAL-CONTROLPURPOSE]

PenCasings CellPhoneCasings

Sales $480,000$360,000$120,0001

Costofgoodssold:

Directmaterial 46,500 22,500 24,0002

Directlabor 150,000 135,000 15,000

Indirectmanufacturing 200,000163,636336,3644

Costofgoodssold 396,500321,13675,364

Grossprofit 83,500 $38,864$44,636

Corporateexpenses(unallocated) 80,000

Operatingincome$3,500

Grossprofitmargin 17.40%510.80% 37.20%

1.$80,000×.75×2

2.$12,000×2

3.$200,000×[4,500/(4,500+1,000)]

4.$200,000×[1,000/(4,500+1,000)]

5.$83,500/$480,000

Perhapsthemostimportantfactorbearingonthepresident’ssupportislackofconfidenceintheaccuracyofthecostandhencegrossmarginfigures.Sheprobablywillinquirewhethertheshiftintheconsumptionpercentagesbythetwoactivitiesiscapturedbythetraditionalcostingsystem.Doesthechangeinallocationratesfrom90:10to82:18basedondirectlaborhourchangesaccuratelycapturetheimpactoftheoperationalchanges?Aninformalanalysisofthecontroller’sideamightlooklikethefollowingtable.

OperationalChange

LikelyImpactontheConsumptionofResourcesthatSupport:

PenCasings

Cell-PhoneCasings

Lesspurchasingworktosupplypartsforcell-phonecasings

Lessengineeringdesignworkoncellphonecasings

Lessequipmentusedtosupportcell-phoneproduction

Increaseincell-phoneproduction

Basedontheinformalanalysis,thePresidentprobablywouldexpecttheprofitabilityofcell-phonecasingstoimproveandtheprofitabilityofpencasingstobeunaffected.Thisdisagreeswiththenumericalanalysis.Giventhepropensityofmanagerstoembracenumericalresults,lessweightwilllikelybegiventhisanalysiscomparedtothe“objective〞numbers.Asaresult,shemayquestionthevalidityofthenumericalanalysisaswellasthevalueofthetraditionalcostingsystem!

Finally,thefocusofimprovementeffortsshouldbedirectlyonthepen-casingproductline.Thisinitiativedealsmostlywiththecell-phoneline.Whatcanbedonetoimproveprofitabilityofthepencasings?Canpricesberaisedwithoutlosingtoomuchvolume?Canoperationalimprovementsbemadetolowertheindirectmanufacturingcosts?Thecontroller’sideaisworthyofsomesupportbutitdoesnotaddresstheprofitabilityissueheadon.

2.Exhibit4-B4,PanelConthefollowingpageisaprocessmapthatcanbeusedtoexplaintheimpactofthecontroller’sidea.PanelDattheendofthesolutionprovidesadetailedevaluationofthecontroller’sidea.

Pen Cell-Phone

CasingsCasingsCompany

BaseGrossProfitPercentage* 16.22% (28.63%) 8.07%

PlanGrossProfitPercentage** 17.26% 17.81% 17.40%

SupportofProductManager? Neutral Strong

SupportofPresident? Strong

*Seethetableonp.139ofthetext.

**SeepanelDofExhibit4-B4thatfollows.

Thecontroller’sideawillresultinaslightincreaseinthegrossprofitofthepen-casingslinebutadramaticturnaroundintheprofitabilityofthecell-phoneline.Theproductmanagerofpencasingswouldprobablybeneutralorslightlypositiveabouttheideabecausetheideadoesnotfocusonoperationalimprovementsthatdirectlyaffectthepen-casingsline.Thecell-phonecasingsmanagerwouldgivestrongsupporttotheidea–thismaysavehis/herjob!Thepresidentwouldstronglysupportthisideawhileencouragingallmanagersinvolvedtokeepupthegoodwork.Also,notethatthenumbersagreewiththeinformalanalysis–generatingconfidenceintheintegrityofthecostaccountingsystem.

Exhibit4-B4,PanelC

ProcessMapforABCSystem

Exhibit4-B4:PanelD

PRO-FORMAFINANCIALREPORTSFORLOPEZPLASTICSCOMPANY:

ACTIVITY-BASEDCOSTALLOCATIONSYSTEM

Statementofopertingincome contributiontocorporatecosts

andprofit

[externalreportingpurpose] [internalstrategicdecisionmaking

ANDOPERATIONAL-CONTROLPURPOSE]

PenCasings CellPhoneCasings

Sales $480,000$360,000$120,000

Costofgoodssold:

Directmaterial 46,500 22,500 24,000

Directlabor 150,000 135,000 15,000

Processingactivity 154,000 126,0001 28,0002

Productionsupportactivity 46,00014,375331,6254

Costofgoodssold 396,500297,87598,625

Grossprofit 83,500 $62,125$21,375

Corporateexpenses(unallocated) 80,000

Operatingloss $3,500

Grossprofitmargin 17.40% 17.26% 17.81%

1. $154,000×[4,500laborhours/(4,500laborhours+1,000laborhours)]

2. $154,000×[1,000laborhours/(4,500laborhours+1,000laborhours)]

3. $46,000×[5distinctparts/(5distinctparts+11distinctparts)]

4. $46,000×[11distinctparts/(5distinctparts+11distinctparts)]

3.Asvicepresident,youprobablyarepleasedwiththenewABCsystem.Thecostdriversthatareusedtoallocateactivitycostsappeartobeplausibleandreliableandthusprobablyrepresentasoundcause-effectmodelofoperations.Thiswillimproveboththeaccuracyofproductcostingandoperatingmanagers’controlovercosts.OperatingmanagerswillbepleasedwiththeABCsystembecauseithelpsthemunderstandhowtheirday-to-dayworkimpactscostsandprofits.Fromabehavioralperspective,thisshouldbehighlymotivational.

Thisproblememphasizestheimportanceofthecost-accountingsystemtomanagers.Differentsystemscanresultinsignificantlydifferentmanagementdecisions.Inthiscase,theproduct-linemanagers’supportforthecontroller’sideachangeswhenanABCsystemisusedtoevaluatetheidea.Althoughthecompany-levelgrossmarginsdonotchange,itispossiblethatthepresidentwouldstronglysupporttheideabasedonABCdata.Why?Neitheroftheproduct-linemanagersisagainsttheidea,andonestronglysupportsit.Inaddition,thepresidentmayhavemoreconfidenceintheaccuracyoftheABCanalysis.Thesubstantiallossesofthecurrentquarterhavebeencompletelyeliminatedandtheseriousprofitabilityproblemofthecell-phonecasingproductlinehasbeenreversed.

Acostmanagementsystemisacollectionoftoolsandtechniquesthatidentifieshowmanagement’sdecisionsaffectcosts.ThethreepurposesofaCMSaretoprovide

costinformationforoperationalcontrol,

costinformationforstrategicdecisions,and

measuresofinventoryvalueandcostofgoodsmanufactured(orpurchased)forexternalreportingtoinvestors,creditors,andotherexternalstakeholders.

4-2a.Theproductionmanagerneedsoperationalcontrolinformation.

b.Settingtheproductmixisastrategicdecision.

c.Thecostofinventorythatappearsonthebalancesheetisinformationthatisusedbyexternalinvestors,creditors,andotherstakeholders.

4-3 Costobjectsareanyitemsforwhichdecisionmakersdesireaseparatemeasurementofcosts.Theyincludedepartments,products,services,territories,andcustomers.

4-4 No.Productsareoneofthemaincostobjectsformostcompanies,butdepartmentsarealsoimportantcostobjectsbecausetheyrepresentalogicalgroupingofactivitiesforwhichmanagersdesireaseparatedeterminationofcosts.

4-5 Themajorpurposeofadetailedcost-accountingsystemistomeasurecostsfordecisionmakingandfinancialreporting.Costaccountingsystemsbecomemoredetailedasmanagementseeksmoreaccuratedatafordecisionmaking.

4-6 Thetwomajorprocessesperformedbyacostaccountingsystemarecostaccumulationandcostassignment.Costaccumulationiscollectingcostsbysome“natural〞classification,suchasmaterialsorlabor,orbyactivitiesperformedsuchasorderprocessingormachineprocessing.Costassignmentisattachingcoststooneormorecostobjects,suchasactivities,processes,departments,customers,orproducts.

4-7 Managersmakeimportantdecisionsonadailybasis.Theybasethesedecisionsinlargepartonfinancialdataprovidedbythecostaccountingsystem.Soitiscriticallyimportantthatthecostaccountingsystemprovideaccurateandreliablefinancialinformation.

4-8Managerscanspecificallyandexclusivelyidentifydirectcostswithagivencostobject(thatis,directlytracethem)inaneconomicallyfeasibleway.Indirectcostscannotbesoidentified.However,managerscanusuallyidentifyaplausibleandreliablecostdrivertousetoallocateresourcecoststocostobjectsthatconsumetheresources.Whendirecttracingisnoteconomicallyfeasibleandaplausibleandreliablecostdrivercannotbefound,costsshouldremainunallocated.

4-9 Yes,thesamecost(forexample,thedepartmentsupervisor'ssalary)canbedirectwithrespecttoadepartmentbutindirectwithrespecttothevarietyofproductsflowingthroughadepartment(e.g.,tables,chairs,andcabinets).

4-10 Somecostscanbephysicallylinkedwithadepartment(oraproduc