Chapter 15

Problems
The Nature of Management
Accounting
Problem 15-1
Following is a management accounting report for the Anders Ford
Company. Contrast this report with a financial accounting report
according to the list of differences given in the text.
ANDERS FORD COMPANY
Service Department Report
November
Planned Actual Difference *
Number of jobs completed 400 366 (34)
Number of employee days 740 736 4
Expenses:
Employee Wages $ 22,000 $ 22,772 $(772)
Parts Used 16,000 12,574 3,426
Supplies used 5,000 4,824 176
Other Expenses 6,000 6, 624 (624)
Total Expenses 49,000 46,794 2,206
Revenue 60,000 54, 468 (5,532)
Profit $ 11, 000 $ 7,674 $ (3, 326)
*( ) = unfavorable
Problem 15-1
MA FA
Information
Content
nonmonetary
information (jobs
& number of
employees)
Monetary form
Time
orientation
Has future
(planned)
information as
well as past
(actual)
Reports financial
history
Necessity
Optional Must be done
Report
Entity
Focuses on a
segment (service
department)
Describes the
organization as a
whole
Information
Precision
Less emphasis on
precision (planned
numbers are
rounded)
Emphasis on
precision
Users
useful only as
manager uses it
Relatively large
groups and mostly
unknown to
managers
ANDERS FORD COMPANY
Service Department Report
November
Planned Actual
Difference
*
Number of jobs completed 400 366 (34)
Number of employee days 740 736 4
Expenses:
Employee Wages $ 22,000 $ 22,772 $(772)
Parts Used 16,000 12,574 3,426
Supplies used 5,000 4,824 176
Other Expenses 6,000 6, 624 (624)
Total Expenses 49,000 46,794 2,206
Revenue 60,000 54, 468 (5,532)
Profit $ 11, 000 $ 7,674 $ (3, 326)
Problem 15-2
As controller of Patriot Steel, you have been asked to provide information to
management that would be helpful in answering a variety of questions.

Required:

a. For each of the questions below, classify the needed information as being an
example of either full cost accounting, differential accounting, or responsibility
accounting.

(1) Should the company own and operate its own iron ore mines or buy the one from
another firm?

(2) As a result of a new labor contract with the United Steel Workers Union, what will be
the profit margin on a ton of steel at current prices?

(3) Is the supervisor of the maintenance shop doing a good job?

Differential accounting
Responsibility accounting
Full-cost accounting
Problem 15-2
As controller of Patriot Steel, you have been asked to provide information to
management that would be helpful in answering a variety of questions.

Required:
(4) How much money does the company have invested in finished goods inventory?

(5) Should the company consider replacing its old open-hearth furnaces with news
ones?

(6) Which district sales manager is doing the best job?

b. In addition to management accounting information, what other types of information
might be useful in attempting to answer each of the above questions?

Full-cost accounting
Differential accounting
Responsibility accounting
Nonquantitative, nonaccounting, operating, and financial
accounting
Problem 15-3
As controller of the city of Oakly Heights, you have been asked to provide
information to the mayor and city council that would be helpful in answering a
variety of questions.

Required:
For each of the questions bellow, classify the needed information as an example of full
cost accounting, differential accounting, or responsibility accounting.

(1) As a result of a recent wage increase for airport workers, what does it now cost to
operate the municipal airport?

(2) Should the city continue to own and operate its own garbage trucks or contract with
a private firm?

(3) What does it cost to prepare and mail annual tax notices to property owners?

Full-cost accounting
Differential accounting
Full-cost accounting
Problem 15-3
As controller of the city of Oakly Heights, you have been asked to provide
information to the mayor and city council that would be helpful in answering a
variety of questions.

Required:
For each of the questions bellow, classify the needed information as an example of full
cost accounting, differential accounting, or responsibility accounting.

(4) Is the new police chief doing a better job than the former one?

(5) Should the city close its jail and contract with the country for detention of prisoners?

(6) Which department head is doing the best job of staying within his or her budget?

b. In addition to management accounting information, what other types of information
might be useful in attempting to answer each of the questions above?


Responsibility accounting
Differential accounting
Responsibility accounting
Nonquantitative, nonaccounting, operating, and financial accounting.
Problem 15-4
FINEST NATIONAL BANK
Eastside Branch Office Report
October 1
Planned Actual Difference
Number of new
accounts opened
225 180 (45)
Number of
prospect calls
made
113 84 (29)
Increase in
deposit volume
$100,000 $80,000 $(20,000)
Increase in loan
volume
$80,000 $90,000 $10,000
Expenses:
Wages and
salaries
$15,000 $12,800 $2,200
Utilities 1,450 1,420 30
Rent on building 3,675 3,675 0
Supplies 225 230 (5)
Advertising 450 338 112
Other expenses 75 76 (1)
Total expenses: 20,875 18,539 2,336
Revenue from
interest and
service charges
20,500 20,000 (500)
Profit (loss) $(375) $1,461 $1,836
Following is a monthly report for a
new branch office that the Finest
National Bank recently opened in a
rapidly developing section of the
city. The branch manager is
pleased that the report shows a
$1,461 profit instead of the
expected loss of $375.

Required:
What questions can be raised
about the performance of the
Eastside Branch and its
manager based on information
in the report?


*( ) = unfavorable
Problem 15-4
FINEST NATIONAL BANK
Eastside Branch Office Report
October 1
Planned Actual Difference
Number of new
accounts opened
225 180 (45)
Number of
prospect calls
made
113 84 (29)
Increase in
deposit volume
$100,000 $80,000 $(20,000)
Increase in loan
volume
$80,000 $90,000 $10,000
Expenses:
Wages and
salaries
$15,000 $12,800 $2,200
Utilities 1,450 1,420 30
Rent on building 3,675 3,675 0
Supplies 225 230 (5)
Advertising 450 338 112
Other expenses 75 76 (1)
Total expenses: 20,875 18,539 2,336
Revenue from
interest and
service charges
20,500 20,000 (500)
Profit (loss) $(375) $1,461 $1,836
1. Why did the manager fail to make the
planned number of prospect calls?



*( ) = unfavorable
2. Was this the reason for the failure to obtain
the planned number of new accounts and
increase in deposit volume?

3. Could the savings in advertising expense
have contributed to the failure to achieve the
planned growth in new accounts and deposit
volume?
4. Was the $2,200 savings in wages and
salaries the result of operating with one
employee less than needed? If so, could this
have helped prevent the manager from
making the planned number of prospect calls?

5. Why was revenue lower than planned?
Did the manager emphasize loans more
than deposits?

Chapter 16
Problems
The Behavior of Costs
Problem 16-1
The following graphs relate to the behavior of certain costs involved in the
operation of a mechanical arts course offered by a local corporation in a
program of adult education.



Required:

a. Title each graph to show the type of
cost it describes (fixed, variable,
semivariable, etc.)

b. From the list of costs on the next
page, select those that each graph
describes.

Costs
1. Cost of raw materials used by
students.
2. Depreciation of machinery and
equipment used.
3. Cost of blueprints and manuals.
Extra copies must be acquired for
every 6 students who enroll over the
minimum number of 24.
4. Utilities and maintenance. Utilities
remain constant each month, but
maintenance tends to vary with the
usage of machinery and equipment.


Fixed cost
Variable cost
Semivariable
cost
Semivariable
cost
2. Depreciation of machinery and
equipment used.

1. Cost of raw materials
used by students.
4. Utilities and
maintenance. Utilities
remain constant each
month, but maintenance
tends to vary with the
usage of machinery and
equipment.

3. Cost of blueprints and manuals.
Extra copies must be acquired for
every 6 students who enroll over
the minimum number of 24.

Problem 16-2
Doyle's Candy Company is a wholesale distributor of candy. The company services groceries,
convenience stores, drugstores in a large metropolitan area. Small but steady growth in sales has
been achieved over the past few years while candy prices have been increasing. The company is
formulating its plan for the coming fiscal year. Presented below are the data used to project the current
year's after-tax net income of $264,960.

Manufacturers of candy have
announced that they will
increase prices of their
products an average 15
percent in the coming year due
to increases in raw materials
(sugar, cocoa, peanuts, etc.)
and labor costs. Doyle's Candy
Company expects that all other
costs will remain at the same
rates or levels as the current
year.
Problem 16-2
Required:

a. What is Doyle's Candy Company's break-even point in boxes of candy
for the current year?
Break-even volume
= Fixed costs / Unit contribution
= $1,056,000 / $9.60 - $5.76
= $1,056,000 / $3.84 = 275,000 boxes
b. What selling price per box must Doyle's Candy Company charge to
cover the 15 percent increase in variable production costs of candy and
still maintain the current contribution margin percentage?
Current contribution margin percentage = $3.84 / $9.60 = 40%.

UR
UVC UR
CMP

Solving for UR (Selling Price):

CMP 1
UVC
UR

With a l5% increase in variable production costs (to

$5.52, giving total UVC of $6.48), the selling price
per box is:
80 . 10 $
60 .
48 . 6 $
40 . 1
48 . 6 $
UR

Problem 16-2
c. What volume of sales in dollars must Doyle's Candy Company achieve
in the coming year to maintain the same net income after taxes as
projected for the current year if the selling price of candy remains at
$9.60 per box and the variable production costs of candy increase 15
percent?
Problem 16-3: Mike Solids
Pizzeria
Mike Solid started a pizzeria in 1999. For
this purpose he rented a building for
$1,800 per month. Two persons were
hired to work full-time at the restaurant
and six college students were hired to
work 30 hours per week delivering pizza.
An outside accountant was hired for tax
and bookkeeping purposes at a cost of
$900 per month. The necessary
restaurant equipment and delivery cars
were purchased with cash. Mr. Solid has
noticed that expenses for utilities and
supplies have been rather constant.

Mr. Solid increased his business
between 1999 and 2001. Profits have
more than doubled since 1999. Mr. Solid
does not understand why his profits have
increased faster than his volume.

A projected income statement for 2002
has been prepared by the accountant
and is shown below:
Projected Income Statement
For the Year Ended Dec.31, 2002
Sales $308,000
Cost of goods sold $92,400
Wages and fringe benefits of
restaurant help
26,650
Wages and fringe benefits of
delivery persons
54,100
Rent 15,500
Accounting Services 10,900
Depreciation of delivery
equipment
16,000
Depreciation of restaurant
equipment
8,000
Utilities 7,165
Supplies (soap, floor wax, etc.) 10,645 241,360
Income before taxes 66,640
Income taxes 19,992
Net Income $ 45,648
Note: The average pizza sells for $8.50.
Assume that Mr. Solid pays out 30 percent of his income in income taxes.
Problem 16-3: Mike Solids
Pizzeria
Required:

a. What is the break-even point in number of pizzas that must be sold?
Breakeven sales volume
*$308,000 / $8.50 = 36,235 pizzas

Variable Cost / Pizza:
$92,400 / 36,235 = $2.55.
Problem 16-3: Mike Solids
Pizzeria
b. What is the cash flow break-even point in number of pizzas that must be sold?
Cash fixed costs
= total fixed costs depreciation
= $148,960 - ($16,000 + $8,000)
= $148,960 - ($24,000) = $124,960

depreciation tax shield ($24,000 x 30%) = $7,200
Therefore,

Net Cash Fixed Cost = $124,960 - ($7,200)= $117,760.

So,
Break-even volume = $117,760 $5.95 = 19,792 pizzas
Cash Breakeven Point = (fixed costs - depreciation) / contribution margin per unit

Problem 16-3: Mike Solids
Pizzeria
c. If Mr. Solid withdraws $14,400 for personal use, how much cash will be left
from the 2002 income-producing activities?
Cash generated by operations
= net income + noncash expenses
= $46,648 + $24,000 = $70,648

$70,648 - $14,400 = $56,248
Problem 16-3: Mike Solids
Pizzeria
d. Mr. Solid would like an after-tax net income of $60,000, what volume must be
reached in number of pizzas in order to obtain the desired income?
The easiest way to approach this question is to treat the target pretax income as a fixed cost.

target pretax income
= $60,000 70% = $85,713

dollar sales at target pretax income
$85,713 + $148,960 fixed costs = $234,673

So
required volume = (dollar sales at target pretax income) / (unit contribution
margin)
= $234,673 / $5.95
= 39,441 pizzas.
Problem 16-3: Mike Solids
Pizzeria
e. Briefly explain to Mr. Solid why his profits have increased at a faster rate
than his sales.
Most of the expenses are fixed.
Therefore a large volume of sales
is required before any profit is
made. Once this point is reached
(break-even), each sale
contributes $5.95 to profits, a
larger change in profits since
profits begin at zero at this point
while the $8.50 change in sales is
a smaller proportion of sales
because of the large amount of
sales required to reach the break-
even point.


$5.95 Unit contribution margin (SC-VC)
Projected Income Statement
For the Year Ended Dec.31, 2002
Sales $308,000
Cost of goods sold $92,400
Wages and fringe benefits of
restaurant help
26,650
Wages and fringe benefits of
delivery persons
54,100
Rent 15,500
Accounting Services 10,900
Depreciation of delivery equipment 16,000
Depreciation of restaurant
equipment
8,000
Utilities 7,165
Supplies (soap, floor wax, etc.) 10,645 241,360
Income before taxes 66,640
Income taxes 19,992
Net Income $ 45,648
Note: The average pizza sells for $8.50.
Assume that Mr. Solid pays out 30 percent of his income in income
taxes.
Problem 16-3: Mike Solids
Pizzeria
f. Briefly explain to Mr. Solid why his cash flow for 2002 will exceed his
profits.
The cash flow from operations
will exceed his profits because
$24,000 of the expense
(depreciation) is not a current
cash-consuming cost.
Projected Income Statement
For the Year Ended Dec.31, 2002
Sales $308,000
Cost of goods sold $92,400
Wages and fringe benefits of
restaurant help
26,650
Wages and fringe benefits of
delivery persons
54,100
Rent 15,500
Accounting Services 10,900
Depreciation of delivery
equipment
16,000
Depreciation of restaurant
equipment
8,000
Utilities 7,165
Supplies (soap, floor wax, etc.) 10,645 241,360
Income before taxes 66,640
Income taxes 19,992
Net Income $ 45,648
END