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 incurring to produce the drives. Jane Meyers, his assistant, insists that if sales growth continues at the current levels, the company will be able to produce the drives in the near future at a lower cost because of the company’s predominately fixed cost structure. Does Ms. Meyers have a legitimate argument? Explain.
> What is the normal starting point in developing the master budget?
> A manager is faced with deciding whether to replace machine A or machine B. The original cost of machine A was $20,000 and that of machine B was $30,000. Because the two cost figures differ, they are relevant to the manager’s decision. Do you agree? Expl
> Mary Hartwell and Jane Jamail, college roommates, are considering the joint purchase of a computer that they can share to prepare class assignments. Ms. Hartwell wants a particular model that costs $2,000; Ms. Jamail prefers a more economical model that
> What level(s) of costs is (are) relevant in special order decisions?
> Why would a company consider outsourcing products or services?
> What does the term breakeven point mean? Name the two ways it can be measured.
> What two factors should be considered in deciding how to allocate shelf space in a retail establishment?
> Which of the following would not be relevant to a make-or-buy decision? (a) Allocated portion of depreciation expense on existing facilities. (b) Variable cost of labor used to produce products currently purchased from suppliers. (c) Warehousing costs fo
> With 2014 sales and revenues of $55.184 billion, Caterpillar is the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, industrial gas turbines and diesel electric locomotives.
> “It all comes down to the bottom line. The numbers never lie.” Do you agree with this conclusion? Explain your position.
> Are all fixed costs unavoidable?
> In a manufacturing environment, which costs are direct and which are indirect in product costing?
> How is an allocation rate determined? How is an allocation made?
> Explain the risk and rewards to a company that result from having fixed costs.
> Give an example of why the statement “All direct costs are avoidable” is incorrect.
> Explain the limitations of using operating leverage to predict profitability.
> What is the primary factor that distinguishes the three different levels of planning from each other?
> When would variable cost volume variances be expected to be unfavorable? How should unfavorable variable cost volume variances be interpreted?
> Joan Mason, the marketing manager for a large manufacturing company, believes her unfavorable sales volume variance is the responsibility of the production department. What production circumstances that she does not control could have been responsible fo
> Candice Sterling is a veterinarian. She has always been concerned for the pets of low-income families. These families love their pets but frequently do not have the means to provide them proper veterinary care. Dr. Sterling decides to open a part-time ve
> 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.
> 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?
> What are the important factors in determining the appropriate cost driver to use in allocating a cost?
> 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.
