Chapter 18: Accounting and Engineering Economy

18-1 Engineers and managers make better decisions when they understand the dollar impact of their decisions. Accounting principles guide the reporting of cash flows for the firm. Engineers and managers can access this information through formal and informal education means, both within and outside the firm. 18-2 The accounting function is the economic analysis function within a company it is concerned with the dollar impact of past decisions. It is important to understand, and account for, these past decisions from management, operational, and legal perspectives. Accounting data relates to all manner of activities in the business. 18-3 alance !heet " picture of the firm#s financial worth at a specific point in time. Income !tatement " synopsis of the firm#s profitability for a period of time. 18-4 !hort$term liabilities represent e%penses that are due within one year of the balance sheet, while long$term liabilities are payments due beyond one year of the balance sheet. 18-5 The two primary general accounting statements are the balance sheet and the income statement. oth serve useful and needed functions. 18-6 Today#s weather is not a good basis to pack for a &$month trip, and local and recent financial data is not a complete basis for 'udging a firm#s performance. (istorical and seasonal trends and a conte%t of industry standards are also needed. 18-7 )ot necessarily. The current ratio will provide insight into the firm#s solvency over the short term and although a ratio of less than * historically indicates there could be problems, it doesn#t mean the company will go out of business. The same is true with the acid$test ratio. If the company has a low ratio, then it probably doesn#t have the ability to instantly pay off debt. That doesn#t necessarily indicate the firm will go bankrupt. oth tests should be used as an indicator or warning sign.

18-8 Assets + ,-,...,... Total liabilities + ,-*/,... 0 *-.,... + ,&&/,... E1uity + assets " liabilities + ,-,...,... " &&/,... + ,22&,... 18-9 2 days3week 4 5* weeks3year + &-* days3year in operation ,-... profit3day 4 &-* days3year + ,&-*,... profit3year 6evenues " e%penses + ,5..,... " &-*,... + ,-77,... 18-10 a. 8orking capital + current assets $ current liabilities + ,5,...,... " *,...,... + ,&,...,... b. 9urrent ratio + :current assets 3 current liabilities; + ,5,...,...3*,...,... + *.5 18-11 )et profit :loss; + revenues " e%penses + ,-..,... " 2.,... + ,<.,... 18-12 a. 8orking capital + :,=.,... 0 -/5,... 0 *-.,...; " :&**,... 0 7/,...; + ,</5> " <.=> + ,22,... b. 9urrent ratio + :,</5>3<.=>; + -.-2c. Acid test ratio + :,=.,... 0 -/5,...;3<.=,... + ..2<7

18-13 ?perating 6evenues and E%penses e!enue !ales Total E"pen#e# Administrative 9ost of goods sold @evelopment !elling Total Total operating income */5. -7,... =.. <5.. *2,-5. &,75. &.,... &.,...

)on$operating revenues A e%penses Interest paid Income before ta%es Ta%es :B*/C; )et profit :loss; 18-14

*.. &25. =75.5. *22<.5.

Assets + ,-..,... 0 <5,... 0 -5.,... 0 *..,... 0 7,... + ,5.&,... Diabilities + ,&-5,... 0 =.,... + ,<.5,... a. 8orking capital + ,5.&,... " <.5,... + ,=7,... b. 9urrent ratio + ,<=5,...3<.5,... + -.** c. Acid test ratio + ,*=5,...3<.5,... + ../& 18-15 a. 8orking capital + current assets " current liabilities + :,--.> 0 <.> 0 -.> 0 *5.>; " :<<*>; + ,--7,... b. 9urrent ratio + current assets 3 current liabilities + ,52.>3<<*> + -.*/ c. Acid test ratio + 1uick assets 3 current liabilities + ,&-.>3<<*> + ../.A good current ratio is * or above, and a good acid test ratio is - or above. This company is in ma'or trouble unless they move inventory 1uickly. 18-16 Total revenues + ,5- 0 &5 + ,72 million Total e%penses + ,/. 0 / + ,// million a. )et income before ta%es + revenue " e%penses + ,72 " // + ,= million b. )et profit + net income before ta%es " ta%es + ,= " - + ,7 million Interest coverage + :total revenues " total e%penses; 3 interest + :,72 " /.;3/ + *.*7 This interest coverage is not acceptable because it should be at least &.. for industrial firms. 18-17 Erofit + ,5.,... " &.,... " 5,... + ,-5,... )et income + profit " ta%es + ,-5,... " *,... + ,-&,... 18-18 a. 9urrent ratio + current assets 3 current liabilities + :-.5million;35.,... +&. b. Acid test ratio + 1uick assets 3 current liabilities + :-.. million;35.,...+ *.

8hile it may be tempting to think that a higher ratio is better, this is not always the case. !uch high ratios as these could mean that an e%cessive amount of capital is being kept on hand. E%cess capital does very little for the company if it is 'ust sitting in the bank " it could and3or should be used to make the company more profitable through investing, automation, employee training, etc. 18-19 Total current assets + ,-/<. 0 =.. 0 *5.. " /5 + ,5.25 Total current liabilities + ,-.5. 0 5.. 0 -*5 + ,-2/5 9urrent ratio + ,5.253-2/5 + &..*&7 This company#s financial standing is good because the current ratio is greater than *... 18-20 a. 9urrent ratio + current assets 3 current liabilities + ,*2/.3-<&. + -.7/ This is below the recommended ratio of *.. and may indicate that the firm is not solvent, especially since the height of the nursery business is the spring and summer and this is a Fune balance sheet. b. Acid test ratio + :cash 0 accounts receivable; 3 current liabilities + :,7/. 0 <5.;3-<&. + ..=* This indicates that =*C of the current liabilities could be paid out within the ne%t thirty days, which is not a bad situation, although a little higher would be preferable. 18-21 a. Interest coverage + total income 3 interest payments + :,<55 " &=< 0 **;3** + &.// This is a good ratio, indicating the company#s ability to repay its debts. It should be at least &...

b. )et profit ratio + net profits 3 sales revenue + ,&-3:&=5 " -5; + ...7 This is a very small ratio, indicating that the company needs to assess their ability to operate efficiently in order to increase profits. The company should compare itself to industry standards. 18-22 Acti!ity @irect material cost @irect labor cost @irect labor hours Allocated overhead Total costs Hnits produced 9ost per unit $ode% & ,&,7..,... ,2..,5.. 2<,... 2<,... G -&/ + ,7,/27,... ,-&-,275,... -..,... ,-&* $ode% $ $ode% ' ,-,5&.,... ,*,-.5,... ,&7.,... ,<*.,... *.,... &*,... *.,... G -&/ + &*,... G -&/ + ,*,/<.,... ,<,&7<,... ,<.25.,-.. ,2,=.=,... 5.,... 7*,*5. ,=& ,7<

18-23 a. Total direct labor + 5.,... 0 25,... + ,--5,... Allocation of overhead ?verhead!tandard + :5.,...3--5,...;:&5,...; + ,-5,*-/ ?verhead@elu%e + :25,...3--5,...;:&5,...; + ,-=,/7& Total 9ost!tandard + 5.,... 0 <.,... 0 -5,*-/ + ,-.5,*-/ Total 9ost@elu%e + 25,... 0 </,5.. 0 -=,/7& + ,-&*,*7& )et 6evenue!tandard + -7..:2.; $ -.5,*-/ + ,*/7& )et 6evenue@elu%e + -<..:=5; $ -&*,*7& + ,/-/ b. Total materials + <.,... 0 </,5.. + ,7/,5.. Allocation of overhead ?verhead!tandard + :<.,...37/,5..;:&5,...; + ,-2,... ?verhead@elu%e + :</,5..37/,5..;:&5,...; + ,-=,... Total 9ost!tandard + 5.,... 0 <.,... 0 -2,... + ,-.2,... Total 9ost@elu%e + 25,... 0 </,5.. 0 -=,... + ,-&-,5.. )et 6evenue!tandard + -7..:2.; $ -.2,... + ,*... )et 6evenue@elu%e + -<..:=5; $ -&-,5.. + ,-5.. In both cases the total net revenues e1ual ,&5.., but the delu%e bag appears far more profitable with materials$based allocation. 18-24 a. ,2.,...,...3-*,... hours + ,5...3hour b. Total cost + ,-,...,... 0 ,2..,... 0 *..hours4,5...3hour + ,*,2..,... 18-25 6D8$II will use the A 9 system to understand all of the activities that drive costs in their manufacturing enterprise. ased on the presence and magnitude of the activities, 6D8$II will want to assign costs to each. In doing this, 6D8$II will gain a more accurate view of the true costs of producing their products. Eotential categories of indirect costs that 6D8$II will want to account for include costs forI ordering from and maintaining a relationship with specific vendors3suppliersJ shipping, receiving, and storing raw materials, components and sub$assembliesJ retrieval and all material handling activities from receiving to final shipmentJ all indirect manufacturing and assembly activities that support the direct costsJ activities related to re1uirements for specific and uni1ue machinery, tools and fi%tures, and engineering and technical supportJ all indirect 1uality related activities in areas such as testing, rework and scrapJ activities related to packaging, documentation and final storageJ shipping, distribution and warehousing activities, and customer support3service and warranty activities.

18-26 (irect Co#t# Kachine operator wages Kachine labor ?vertime e%penses 9ost of materials )ndirect Co#t# Insurance costs Htility costs Katerial handling costs Engineering drawings 9ost to market the product 9ost of storage 9ost of product sales force !upport staff salaries 9ost of tooling and fi%tures Kachine run costs