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Instructor’s Manualto accompany

ACCOUNTING FOR DECISION MAKING& CONTROL

EIGHTH EDITION

JEROLD L. ZIMMERMAN

WILLIAME.SIMONGRADUATESCHOOLOF BUSINESS ADMINISTRATION

UNIVERSITY OF ROCHESTER

©2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized Forsale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or postedon a website, in whole or part.

Front Matter

CONTENTS

PREFACE ii

PART I: USING THE TEXTSuggested Course Outlines iii

Chapter Teaching Suggestions vii

Suggested Assignment Problems & Cases xxv

Alphabetical Listing of Problems and Cases xxxiii

PART II: SOLUTIONS TO PROBLEMS AND CASES1. Introduction 1-1

2. The Nature of Costs 2-1

3. Opportunity Cost of Capital and Capital Budgeting 3-1

4. Organizational Architecture 4-1

5. Responsibility Accounting and Transfer Pricing 5-1

6. Budgeting 6-1

7. Cost Allocation: Theory 7-1

8. Cost Allocation: Practices 8-1

9. Absorption Cost Systems 9-1

10. Criticisms of Absorption Cost Systems: Incentive to Over-produce 10-1

11. Criticisms of Absorption Cost Systems: Inaccurate Product Costs 11-1

12. Standard Costs: Direct Labor and Materials 12-1

13. Overhead and Marketing Variances 13-1

14. Management Accounting in a Changing Environment 14-1

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in

whole or part.

Front Matter

PREFACE

This Instructor’s Manual for Accounting for Decision Making & Control contains

three parts. The first part describes how the text can be used in a variety of courses: a

seven week executive MBA, a quarter-length course, and a semester-length course.

Sample class outlines are provided for each type of course. The first part also contains

detailed chapter-by-chapter teaching summaries (including suggested problems and

cases) of how I teach each chapter, what topics to emphasize, and the strategy for

presenting the subject matter. Also included is a classification of the end-of-chapter

problems and cases by level of difficulty and degree of classroom discussion generated,

and an alphabetical index to all problems and cases.

The second part of this Instructor’s Manual contains detailed solutions to the end-

of-chapter problems and cases. Many of these problems developed out of discussions

with students in actual situations at their companies, or are based on my consulting

experience. All of the problems have been used on exams and have been taught in class

several times. However, no amount of prior usage can guarantee that a bright student

will not see a new interpretation or solution. Thought-provoking problems have this

characteristic. I am very interested in receiving feedback on the problems and cases, as

well as the text. Please e-mail me at [email protected].

The third part of this Manual is a test bank, including solutions. Producing good

exam problems and solutions is difficult. Textbook authors are always welcome

recipients and grateful acknowledgers of such material.


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PART I: USING THE TEXT

Suggested Course Outlines

Quarter, Semester, and Executive Courses

Accounting for Decision Making & Control can be used in quarter- and semester-

length introductory MBA managerial accounting courses and 7-8 week executive MBA

courses. The following three tables suggest course outlines for quarter, semester, and

executive MBA courses. None of the outlines cover capital budgeting (Chapter 3).

Quarter-length courses. Table 1 presents a ten-week quarter course. The text contains too much material to cover it all comfortably in a ten week quarter course. Chapter 3 on capital budgeting, and all the appendices must be omitted. This allows time for covering the crucial problems and a few supplemental cases, but limited opportunity for outside readings.

Semester-length courses. Table 2 presents a thirteen-week semester course. A semester format gives the instructor added flexibility for covering Chapter 3 on capital budgeting, appendices, outside readings, additional topics, or cases. Depending on the instructor’s interest and program demands, the book complements additional topics on ethics, international examples, new manufacturing advances, quality management, 6 sigma, ABC and ABM, balanced score card, lean manufacturing, etc. These topics fit naturally toward the end of the course after developing the underlying framework and an understanding of the evolution of costing systems.

Executive MBA courses. Table 3 presents the outline for a seven-week executive course. The book works well with executive MBA students. In a seven week, one-day-a-week setting with three hours of lectures per week, the course is fast paced. Executive students, having encountered similar situations, find the problems very realistic, and are especially receptive to integrating the accounting, economics, and organizational aspects of the material. However, much of the material must be pared back. Delete all of the appendices, Chapter 3 on capital budgeting, and Chapters 12 and 13 on standard costs and variances.


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TABLE 1: Ten-Week Quarter Course(Two 90 minute lectures per week)

(No coverage of Material in Appendices)

Class No. Chapter Topic

1 1 Introduction

2 2 Nature of Costs

3 2 Nature of Costs

4 4 Organizational Architecture

5 5 Responsibility Accounting and Transfer Pricing

6 5 Responsibility Accounting and Transfer Pricing

7 6 Budgets and Budgeting


9 7 Cost Allocation: Theory

10 8 Cost Allocation: Practices

11 MIDTERM

12 9 Absorption Cost Systems


14 10 Criticisms of Absorption Cost Systems: Incentive to Overproduce

15 11 Criticisms of Absorption Cost Systems: Inaccurate Product Costs

16 12 Standard Costs: Direct Labor and Materials


18 13 Overhead and Marketing Variances

19 14 Management Accounting in a Changing Environment


Notes:Each class can present some of the material in the chapter and cover 2-3 homework problems.

Assigning a longer case every 2-3 weeks also breaks up the pace of the course and allows the students to apply the concepts to longer, more difficult problems.

This format does not allow much time for outside readings. To read and understand the chapter and work 2-3 problems requires about 5-6 hours of preparation time per class.


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TABLE 2: Thirteen-Week Semester Course(Two 90 minute lectures per week)

Week Chapter Topic

1 12

IntroductionNature of Costs

2 22

Nature of CostsAppendix: Estimating Fixed and Variable Costs

3 3 Opportunity Cost of Capital and Capital Budgeting

4 45

Organizational ArchitectureResponsibility Accounting and Transfer Pricing

5 56

Responsibility Accounting and Transfer PricingBudgets and Budgeting

6 67

Budgets and BudgetingCost Allocation: Theory

7 78

Cost Allocation: TheoryCost Allocation: Practices Appendix — Reciprocal Method for Allocating Service Department Costs

89

MIDTERM Absorption Cost Systems

9 9 Absorption Cost SystemsAppendix — Process Costing

10 1011

Criticisms of Absorption Cost Systems: Incentive to OverproduceCriticisms of Absorption Cost Systems: Inaccurate Product Costs


12 13 Overhead and Marketing VariancesOutside readings & cases (new manufacturing systems, ABC, Target costing, etc.)

13 14 Management Accounting in a Changing EnvironmentOutside readings & cases (new manufacturing systems, TQM, JIT, ABM, etc.)

Notes:Each class can present some of the material in the chapter and cover 2-3 homework problems.

Assigning a longer case to be handed in every 2-3 weeks also breaks up the pace of the course and allows the students to apply the concepts to longer, more difficult problems.

The semester format allows time for outside readings to supplement the text. Chapter 3 on capital budgeting is not covered, Chapter 14 can be increased to two weeks and a capstone case added..


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TABLE 3: Seven-Week Executive MBA Course(3 hours of lecture per week)

(No coverage of Material in Appendices)

Week Chapter Topic

1 12

IntroductionNature of Costs

2 45

Organizational ArchitectureResponsibility Accounting and Transfer Pricing


4 78

Cost Allocation: TheoryCost Allocation: Practices


6 10

11

Criticisms of Absorption Cost Systems: Incentive to OverproduceCriticisms of Absorption Cost Systems: Inaccurate Product Costs


Notes:The fast paced coverage of the material works especially well with executives, most of whom have confronted work situations similar to the assignments. They relate quite well to the end-of-chapter material and there are usually lively class discussions. In fact, many of the problems in the text resulted from discussions with executive students outside of class describing a job experience. This course works best if the students have had a microeconomics course.

There is no midterm exam.

This format requires that the appendices be omitted. If it is necessary to cover standard costs and variances, assign Chapter 12 on direct labor and material standards. Standard costs can be added to the first half of lecture number 7.

Very little outside reading should be used unless it is optional. Reading the chapters and working a few homework problems each week will quickly consume the student’s available study time.


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Chapter Teaching Suggestions

My teaching approach is to require the students not only to read the assigned chapter, but also to prepare and submit a few problems at the beginning of class. This not only provides a foundation for constructive class discussion, but also ensures that students do not fall behind.

Throughout the course I emphasize that students of managerial accounting will develop the very valuable skill of knowing how to take a diverse set of facts and figures and reduce them to a cogent financial analysis. They will become more skilled in constructing spreadsheets and doing financial analysis. I remind them of the oft-heard analogy, “Accounting is the language of business.” Developing the understanding of accounting and how to communicate via financial analysis is akin to learning a foreign language, and similarly requires constant practice. The daily assignments provide this discipline.

Chapter 1. Introduction

Chapter 1 summarizes the course and contains a number of important concepts, including: internal versus external accounting; the trade-off between using the accounting system for decision making versus using it for control; single versus multiple accounting systems; the role of the controller; and economic Darwinism.

A good way to begin the first lecture is to hand out a copy of the Vortec problem statement (Chapter 1, section F) and give the students five minutes to sketch out the solution. Then ask them, how many would accept the special order? This is a good way to generate class discussion the first day. By following the text’s analysis of Vortec in Chapter 1, several questions naturally arise, including:

• What additional information is required?• What is the difference between variable and average costs?• How do the incentives of various managers to accept the order differ?

Vortec is a good ice breaker which allows the students to see that the accounting costs are being used for a variety of purposes; in particular, they are being used for both decision making and control. Since the trade-off between decision making and control is an important organizing feature of the text, it is useful to introduce this key pedagogy early in the course. (Point out that Chapter 2 elaborates on decision making and Chapters 4 and 5 describe the general issues involving control.)

I also like to reinforce the multiple roles of accounting using Figure 1-1. Finally, it is important to spend a few minutes discussing the importance of Economic Darwinism. Many of the topics we discuss (cost allocations, budgeting, product costing) have survived in competitive industries for long periods of time. For the average firm, these accounting procedures must be yielding benefits at least as large as their costs. This does not mean that these procedures are cost beneficial for every firm. Nor does it mean


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that these accounting systems operate at zero costs (including the costs of dysfunctional decision making).

Chapter 2. The Nature of Costs

I begin this lecture by defining opportunity costs, “The sacrifice forgone from a specific decision.” Students find this definition too abstract to have much meaning. Plan on spending 20 - 30 minutes giving examples and working through text problems. A good example to use to illustrate opportunity costs is: “How do you decide what to do this Saturday night?” First you think about the opportunities (movie, concert, watching TV, studying managerial accounting). (The last gets a good laugh.) Then you think about what you give up if you do a particular activity. You forgo cash in some cases as well as the opportunity to do something else. If your managerial accounting final exam is on Monday, going to a concert precludes studying for the final. If you fail the final and have to repeat the course in the summer, this can impose large costs, especially if you are unable to get a good summer internship. This simple example illustrates all the key points of opportunity costs:

• opportunity costs involve both pecuniary and non-pecuniary considerations,• opportunity costs are forward looking,• opportunity costs vary with the opportunity set (e.g., which movies are

playing and when assignments are due).

Two problems in the text are very good at driving home the concept of opportunity costs:

P2-9 Emrich ProcessingP2-26 Eastern University Parking

Emrich (P2-9) always generates a 15 minute discussion. Ask the students what cost of the remaining acid should be considered in setting the price for the new contract. Possible answers will be $700, $500, $0, and -$400. The correct answer is -$400. In this case opportunity costs are negative because the firm can avoid the disposal costs. This then leads into a question of what price to charge. Since we don’t know the customer’s demand curve, we can’t set a price, but the discussion helps illustrate the relation between costs and pricing (a point that arises throughout the course). Appendix A discusses the relation between costs and pricing.

Eastern University Parking (P2-26) can generate as much as 20 to 30 minutes of discussion. Parking is a universal problem on all campuses, and hence, this problem hits a strong emotional nerve. Most students initially overlook the opportunity cost of land in setting the parking fees and will discuss other problems with the parking system for five minutes or so before someone hits on the problem of how land is being valued. It isn’t. And this creates the bias towards surface lots. Once everyone understands this, then ask, “Why has the University systematically priced its land at zero?” “Are the administrators dumb?” Most students are willing to stop here and say yes. But prompt them by asking,


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“What are the organizational consequences of including land costs in parking fees?” The solution describes the organizational issues. This problem illustrates dramatically how accounting costs have both decision making and organizational implications.

Mastich Counters (P2-28) is a great problem for student discussion, especially for executive students because it involves primarily a human resources question that they have all encountered – should firms adopt a take-it or lose-it policy for vacation accruals?

At this point I usually compare opportunity and accounting costs. The key point is that most accounting costs are historical in nature and hence backward-, not forward-looking.

The final point to emphasize is that estimating opportunity costs is itself a costly process. Much analysis is usually required to define the opportunity set and to estimate the benefits forgone from each alternative. Because opportunity costs are costly to estimate, proxies are often used, such as accounting costs.

After introducing opportunity costs, I spend the rest of the time on cost variability and review total, average, fixed, variable, and marginal costs. Students will remember these terms from their economics course, and are reassured when told that we simplify the economics treatment by assuming cost curves are straight lines, thus eliminating derivatives from this course. This discussion is very important because it is one of the first times in the curriculum that two courses are integrated with and build on each other.

A good break-even problem is Amy’s Boards (P2-44), which illustrates that the snow boards are a variable cost before they are purchased, but become a fixed cost once purchased. In later chapters, students have difficulty knowing how to handle fixed costs. Amy’s Boards provides a simple, intuitive example of how fixed costs arise from making the capacity decision.

Another good problem, especially if the students have had a finance course is Candice (P2-34). It is a simple breakeven problem whether the question asks to find the breakeven of two alternative technologies, one has high fixed costs and low variable costs and the other technology is the opposite. To select the optimum technology depends on expected volume, which is not given. So the first punch line is the optimum technology is based on profit maximization, not breakeven. The second punch line is that the firm’s operating leverage arises from prior firm-value-maximizing decisions.


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Recommended Problem Assignment 2-8 Taylor Chemicals 2-9 Emrich Processing2-14 Home Auto Parts2-17 Easton Diagnostics2-22 iGen32-25 Oppenheimer Visuals2-26 Eastern University Parking2-28 Mastich Counters2-31 News.com2-34 Candice2-41 Happy Feet2-42 Digital Convert2-43 APC Electronics2-44 Amy’s BoardsCase 2-1 Old Turkey Mash

Chapter 3. Opportunity Cost of Capital and Capital Budgeting

This chapter is a fairly traditional treatment of capital budgeting. It can be omitted without interrupting the flow of the material, or it can be postponed until later in the course. The later chapters and problems do not rely on this material. Like other managerial accounting texts, to simplify the analysis, topics in Chapters 4–14 are treated as single-period decision problems.

As our students have already taken a basic corporate finance and capital budgeting course, I do not cover this chapter in my managerial accounting course. Teaching this chapter depends on the students’ prior exposure to discounting, and the instructor’s objectives.

Chapter 4. Organizational Architecture

Since Rochester students have had two managerial economics courses that cover the basic topics in Chapter 4, this chapter largely constitutes a review and is presented in conjunction with Chapter 5, with Chapter 5 being used to reinforce and illustrate the general theoretical issues raised in Chapter 4. The key points to emphasize include: the importance of agency problems: how the organizational architecture can reduce these problems, and the accounting system as an integral part of the performance evaluation system in most organizations. I spend a few minutes reviewing the major concepts and terminology used later in the course:

• Organizational architecture (three-legged stool)Performance evaluationRewards and punishmentsPartitioning decision rights


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• Importance of linking decision rights and knowledge

• Administrative devices for the three-legged stoolSeparation of decision management and decision control

Initiation - decision managementRatification - decision controlImplementation - decision managementMonitoring - decision control

Hierarchies

An important question to ask students is “Where do you get the information for the initiation, ratification, implementation, and monitoring decisions?” They should understand that initiation and implementation require forward looking information about opportunity costs, where decision control decisions rely more on historical performance. In other words, accounting data tends to be more useful for managers who are exercising decision control rights than for managers exercising decision management rights. Emphasize that “one size doesn’t fit all.” Accounting data is very useful, but it is more useful in some situations than in others.

Recommended Problem Assignment 4-5 Voluntary Financial Disclosure4-11 Formula 4094-15 Tipping 4-21 Repro CorporationCase 4-2 Woodhaven Service

Chapter 5. Responsibility Accounting and Transfer Pricing

Chapter 5 illustrates the role of the accounting system in the firm’s organizational architecture. Two examples are used: performance evaluation of responsibility centers, and accounting-based transfer pricing.

The first part of the chapter on responsibility accounting is a good example of the linkage between the assignment of decision rights and performance evaluation. I review Table 5-1 and point out that evaluating cost centers based on minimizing average cost does not necessarily maximize firm profits. I also like to spend a few minutes discussing EVA and asking the question, “How does EVA differ from residual income?” Except for some measurement refinements in the cost of capital and accounting income, the two are the same. They differ in that some EVA consultants emphasize linking EVA to compensation.

The second topic of the chapter is transfer pricing. Traditional managerial accounting courses cover transfer pricing towards the end of the course. I believe it is best covered at the beginning as part of the topic of organizational architecture. Cost allocations and cost recharges pervade all organizations. To understand the incentive


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issues of cost allocations, the general topic of transfer pricing provides an underlying theoretical foundation for cost allocations in general.

I do not lecture extensively on transfer pricing. Our students have had the economics of transfer pricing in their managerial economics course. Instead, I emphasize several key points:

• Accounting-based transfer prices are prevalent, even when market prices are available.

• The ideal transfer price is opportunity cost.

• Transfer pricing is not a zero-sum game, and all transfer pricing methods have both advantages and disadvantages (no method is best in all situations).

• With variable cost transfer pricing, someone must have the decision rights to determine which costs are fixed and which costs are variable. Since lower-level managers usually have more specialized knowledge of the cost behavior patterns, they can use this knowledge opportunistically to reclassify “fixed” costs as “variable” for calculating the variable cost transfer price. This same argument also arises again in Chapter 10 when discussing variable costing.

I usually start class with Royal Resort and Casino (Case 5-3) to illustrate the interdependencies among divisions and how difficult it is for accounting systems to capture these interdependencies. It is important for students to understand the conundrum of divisional performance measurement. Firms decentralize to take advantage of local knowledge. But to provide incentives (and overcome free rider problems) they create a fiction that the firm can be separated into distinct silos (divisions) to measure performance. But these silos (and the accounting systems) are unable to capture and assign the synergies that gave rise to the multiproduct firm.

Next, I spend about 15 minutes reviewing Executive Inns (C5-2). The punch line here is: “The devil is in the details.” It’s not where you pay for performance, but precisely how you measure performance. Small changes in the details of the performance metric can create very different incentives. The remainder of class time is used discussing assigned problem material. A number of our students are marketing majors, so Stale-Mart (P5-17) always goes over well in class. XBT Keyboards (P5-24) provides a good example for demonstrating the incentives of managers operating under a variable costing transfer pricing rule to outsource those production methods with high fixed costs, thereby converting them into variable costs. I always assign Celtex (Case 5-1), which is a shortened and simplified version of the old Birch Paper case. The students never suggest my solution, which always produces a lively and interesting class discussion.


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Recommended Problem Assignment5-11 Cogen5-12 University Lab Testing5-14 WBG5-15 CJ Equity Partners5-17 Stale-Mart5-19 Flat Images5-20 Premier Brands5-23 Transfer Price Company5-24 XBT Keyboards5-25 InfantinoToyota5-27 ServiflowCase 5-1 CeltexCase 5-2 Executive InnCase 5-3 Royal Resort and Casino

Chapter 6. Budgeting

I begin the topic of budgeting by having the students prepare solutions to Potter-Bowen (P6-10) and Madden International (P6-24). These problems, drawn from actual company histories, use their budgeting systems in two very different ways. Potter-Bowen’s is a top-down decision control system, whereas Madden International’s is a bottom-up decision management scheme, designed to stimulate the assembly of specialized knowledge within the firm. These two polar extremes illustrate some key points:

• Firms make trade-offs involving decision management versus decision control in designing their budgeting system.

• Budgeting systems, like other parts of the firm’s organizational architecture, must be matched and coordinated to the other parts of the architecture. There are complementarities among the various components.

These two problems also highlight the multiple roles served by budgeting systems. I emphasize that virtually all firms use budgets and that budgeting has survived for centuries. Thus, budgets are important financial mechanisms used by managers. To help illustrate what budgets do, use the simple dichotomy of decision management and decision control. Decision management versus control also helps explain a number of budgeting phenomena, such as long-term budgets, budget lapsing, line-item budgets, and zero-based budgets.

A useful feature of this topic is that budgeting may be used to illustrate the ability of organizational architecture to explain observed institutional practices, such as why some firms use line item budgets and others do not.

I like to teach the budgeting material right after introducing organizational architecture because, although not a technically demanding topic, it directly reinforces


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the organizational architecture material and allows some good examples of how to use the theoretical material in Chapter 4 to analyze actual company practice.

Recommended Problem Assignment6-5 DMP Consultants6-7 Golf World6-8 Coating Department6-10 Potter-Bowen6-15 International Telecon6-17 Panarude Airfreight6-20 Webb &Drye6-21 Spa Ariana6-22 Picture Maker6-24 Madden International6-25 Brehm Vineyards

Chapter 7. Cost Allocation: Theory

I begin this chapter by having the students discuss their solutions to the Corporate Jet problem (P7-4). This is an example from an actual company that quickly piques the students’ interests in cost allocations. This problem also illustrates quite nicely that cost allocations are really just questions of transfer pricing. After about 15 minutes of student discussion, I review the major points from the first part of the chapter: the pervasiveness of cost allocations and some reasons for allocating costs. Since corporate income taxes and third-party reimbursements cannot explain the pervasiveness of allocations, issues of motivation and control must also be important considerations in those cases where taxes and reimbursement do not apply (e.g., non-profits).

The analysis in this chapter is used to demonstrate how cost allocations can be used to affect behavior. Reviewing this material requires about 30 minutes of class time. The isoquants and budget lines in the Appendix are standard topics covered in every economics text. Using these microeconomic tools in the managerial accounting course helps to integrate the curriculum for the students. Applying the concepts they learned in economics reinforces the earlier material and shows them the benefits of how microeconomic tools can be applied to understand other management practices such as cost allocations. World Imports (P7-19) is a simple problem that nicely illustrates how cost allocations can change managers’ operating decisions.

The topic of insulating versus noninsulating allocations again illustrates the inter-relations between performance measurement and other parts of the firm’s organizational architecture. For example, a firm might sometimes choose a noninsulating allocation scheme to foster cooperation.I like to assign Symmetric (P7-29), Avid Pharmaceuticals (P7-7), Encryption Inc. (P7-12), or Scanners Plus (P7-21) to illustrate how noninsulating cost allocations induce risk sharing. This discussion works to integrate the finance course with managerial accounting.

Numerous problems highlight how cost allocation schemes affect behavior. My favorite problems are listed below. Students find this material very engaging. Plan to


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spend at least two hours of class time on this chapter, and make sure you assign enough class time to cover at least four or five problems. I always assign BFR ship Building (P7-30) because it illustrates that cost-plus pricing in government contracting induces a bias against outsourcing and Durango Plastics (C7-2) because it nicely illustrates how cost allocations can distort relative profitability. Finally, continue to stress that cost allocations represent nothing more than transfer pricing problems.

Recommended Problem Assignment7-4 Corporate Jet7-6 Avid Pharmaceuticals7-7 Wasley7-8 Hallsite Imaging7-12 Encryption, Inc.7-17 Vorma7-18 Bio Labs7-19 World Imports7-20 Painting Department7-21 Scanners Plus7-25 Allied Adhesives7-26 Plastic Chairs7-27 Woodley Furniture7-30 BFR Ship BuildingCase 7-2 Durango Plastics

Chapter 8. Cost Allocation: Practices

Chapter 8 continues the discussion in Chapter 7, describing some of the practical problems encountered in cost allocations, including allocating service department costs and joint costs. In particular, with reciprocal service flows, the actual mechanics of cost allocation become fairly complicated. I use the allocation of service department costs (e.g., direct vs. step-down) to illustrate that, no matter how complex the calculations appear, in the end a transfer price results which can create incentives for managers to outsource the product or service. In some cases, this can lead to a death spiral. It is important that students understand the mechanical details of the various service department cost allocation methods because it builds their confidence that they can successfully analyze complex algorithms. Ultimately, they must address the joint questions of: do the resulting cost allocations approximate opportunity costs, and what incentives are likely created by the allocations?

Next, I discuss joint cost allocations and make the key point that managers can make profit-maximizing decisions (which joint products to process further and whether to produce the joint products) without making any joint cost allocations, and hence allocating joint costs do not add any further information for optimum decision making. Hence, allocating joint costs are only useful for financial reporting, taxes, and control. Enzymes (P8-9) illustrates how allocating joint costs can lead to sub-optimum decisions.


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I spend about 10 minutes of class time having the students discuss and critique their’ answers to Karsten Mills (P8-20). This is a real company death-spiral example which demonstrates that there are no simple solutions to many cost allocation/transfer pricing problems. I end this topic with Carlos Sanguine Winery (Case 8-1). This is another actual company. Several interesting aspects of this case include:

• This is a joint cost problem that the company did not recognize;

• Allocating grape costs based on gallons was distorting the relative profitability of the product lines;

• They were about to close a product line because it appeared unprofitable;

• Before they could change accounting systems, they were acquired in an unfriendly takeover (and my involvement with the firm ended).

Recommended Problem Assignment8-4 Mystic Herbals8-9 Enzymes8-10 Sunder Toys8-11 WWWeb Marketing8-14 Vigdor Wood Products8-15 Advanced Micro Processors8-19 RBB Brands8-20 Karsten Mills8-21 Beckett Manufacturing8-22 Littleton Medical Center8-24 Grove City Broadcasting8-30 IVAXCase 8-1 Carlos Sanguine Winery

Chapter 9. Absorption Cost Systems

This chapter is a straightforward presentation of a traditional absorption costing system, focusing on the mechanics of absorption costing and leaving most of the analysis to the next two chapters. This chapter is kept simple and descriptive to insure that the students have a thorough grounding and understanding of the mechanics before a detailed analysis is presented in Chapters 10 and 11.

I like to give the students the “big picture” of the accounting system by presenting the usual cost flows through the accounts (Figure 9-1). This helps tie the managerial accounting course back to their financial accounting course. It also demonstrates that all manufacturing costs eventually flow through to the income statement.

Tables 9-3 and 9-4 on costs and pricing in an oil change outlet is a unique way to introduce the idea of normal volume and tie it into the pricing decision. This material again allows the integration of the managerial economics and managerial accounting


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courses. This example provides a nice vehicle to illustrate how shifts in the demand curve cause volume and price changes, but as long as marginal cost is constant, prices should not be raised when demand falls (and average costs rise). Appendix B presents this material in more rigorous fashion.

I begin the class by reviewing the mechanics for 15 minutes: the job order cost sheet and cost flows through the accounts (Figure 9-1). I then have the class discuss Hurst Mats (9-26), which illustrates how focusing on decision management versus decision control affects the choice of the allocation base to make sure everyone understands the technical details. The balance of class time is spent having the students discuss their answers to Pool Scrubbers (P9-5), MacGiver Brass (P9-4), or Welding Robots (P9-18). MacGiver Brass involves a bank loan decision, which provides the finance majors with an illustration of the importance of understanding cost accounting. Welding Robots integrates and reviews a number of key concepts: opportunity costs, fixed and variable costs, and job order costing.

I do not cover the mechanics of process costing (Appendix A). Most of the students in the course are non-accounting majors and find the technical aspects of process costing dull. Instead, I make a few brief remarks that parallel the material in the last section of the chapter and refer them to Appendix A if they are interested.

Recommended Problem Assignment9-4 MacGiver Brass9-5 Pool Scrubbers9-6 Thermalloy9-12 Simple Plant9-18 Welding Robots9-21 Pebble Beach Sandals9-26 Hurst Mats9-28 Amalfi Texts9-29 Pyramid Products

Chapter 10. Criticisms of Absorption Cost Systems: Incentive to Over-produce

Having introduced the mechanics of absorption costing in Chapter 9, Chapters 10 and 11 analyze these systems. Chapter 10 discusses the incentives to overproduce, which leads to variable costing. Chapter 11 discusses the assertion that an absorption costing system inaccurate product costs, which leads to a discussion of activity-based costing. Both of these chapters increase the students’ understanding of how traditional, absorption cost systems work.

I begin the class with either Zipp Cards (P10-6) or Medford Mug Company (P10-10). These problems illustrate the incentive to overproduce under an absorption costing system. Having made sure everyone understands how overproduction lowers average cost (as long as marginal cost is not increasing), I then return to the text and review the numerical example in Tables 10-4 through 10-6. This illustration reintroduces the often overlooked, important question of who has the decision rights to determine fixed and variable cost. Managers still have the incentive to overproduce under a variable costing


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system if, at the end of the year, they can classify cost overruns as variable and thereby inventory them by overproducing.

The incentive to reclassify fixed costs as variable is also present if a variable cost transfer pricing method is chosen. This again is another good opportunity to link absorption costing to transfer pricing. Absorption-based product costs are in fact transfer prices. Hence, the general theoretical issues discussed under transfer pricing also apply to absorption costing. Linking the discussion in Chapter 10 back to that in Chapter 5 helps to unify the course and to demonstrate that managerial accounting is not a set of unrelated computational methods. Kothari Inc. (P 10–11) provides a good example of how variable cost transfer pricing can create incentives to outsource thereby converting fixed costs into variable costs.

Transpacific Bank (P10-5) is another good problem for finance majors.

Recommended Problem Assignment10-4 Zipp Cards10-5 Transpacific Bank10-6 Zeflax Bottles10-8 Aspen View10-9 CLIC Lighters10-10 Medford Mug Company10-11 Kothari Inc.10-12 Mystic Mugs10-14 Taylor Chains10-18 Dim10-20 Weststar Appliances10-23 Sants Brake Co.Case 10-1 Joon

Chapter 11. Criticisms of Absorption Cost Systems: Inaccurate Product Costs

Chapter 11 discusses another criticism of absorption costing systems – inaccurate product costs. The proposed solution, activity-based costing, is also described. I introduce this topic by having the students discuss their solutions to several problems which demonstrate that traditional unit-level allocation bases can produce misleading product costs. Milan Pasta (P11-4) and Toby Manufacturing (P10-15) are good examples of miscosting. Having introduced the topic with this example, I spend about 20 minutes on ABC, describing how it differs from traditional unit-based absorption costing, and its advantages.

I then ask the students, why haven’t more firms fully implemented ABC? Why are product costs for performance evaluation still based on unit-level allocations? These firms have already incurred the cost of calculating ABC product costs. Why don’t more firms change their performance measures to an ABC system?

The ensuing discussion inevitably raises organizational issues. When you change the product costing system, some managers are made better off and some are made worse off, which leads to high influence costs. Some key points that should be made are:


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Front Matter

• Adopting ABC constitutes a change in performance measures, requiring compensating changes in the performance reward system in order to keep the three-legged stool from becoming unbalanced. Tie this point back to Chapter 4.

• Lower-level managers with specialized knowledge of cost drivers must be given the decision rights over choice of the cost drivers. These decision rights can be exercised opportunistically.

• Exercising this discretion over choice of cost drivers imposes control costs on the firm. Usually decision control is harder under ABC than under a more centrally-managed absorption costing system.

• Again, we see that the decision to use ABC versus absorption costing involves a trade-off between decision management and decision control. ABC is likely better for decision management, but worse for decision control. As with budgeting, a trade-off must be made between decision management and decision control. Figure11-4 illustrates there is an optimum number of cost drivers.

Finally, I end the lecture by discussing Friendly Grocer (P11-9), Sanchez Gadgets (P11-11),Goodstone Tires (P11-17), or Familia Insurance Company (P11-20). The marketing majors like these problems. The key point of these problems is that while ABC may give you a better understanding of your costs, it does not help in understanding revenues and the interdependencies among demand for various products offered by the firm. In Friendly Grocer (P11-9), even with ABC, shelf space costs are based on the historical cost of occupancy. Yet, the opportunity cost of shelf space is not the historical cost, it is the contribution margin of not stocking some other item and the effect of that item on the sales of other items stocked. If the grocery store did not stock milk, the sales of other products would fall. Neither an absorption costing nor an ABC system can capture these demand-side interdependencies.

SnapOn Fasteners (Case 11-2) is based on the Mueller-Lehmkuhl case, but is shorter. It contains the essential features of Mueller-Lehmkuhl, but with a very different solution.

Recommended Problem Assignment11-4 Milan Pasta11-6 Astin Car Stereos11-8 True Cost Manufacturing, Inc.11-9 Friendly Grocer11-11 Sanchez Gadgets11-15 Toby Manufacturing11-16 Kay Enterprises11-17 Goodstone Tires11-20 Familia Insurance Company


whole or part.

Front Matter

Case 11-2 SnapOn Fasteners

Chapter 12 Standard Costs: Direct Labor and Materials

This chapter describes the mechanics and incentives of standard costs and variances. To prevent the lecture from becoming overly mechanical and dry, I continually emphasize the organizational issues and incentive effects of standard cost variances. I remind the class that agency problems require control mechanisms and that standard costs provide that control. By splitting the total direct material variance into a price variance and a quantity variance, the purchasing department is controlled by the price variance, and the production department is controlled by the quantity variance. But these are noisy measures of performance. Moreover, there are substantial interaction effects (externalities) among the various departments. And so while it is important that students understand the computation of the variances, they should also be able to analyze the incentive effects of standard costs.

I like to begin the lecture by discussing Great Southern Furniture (P12-15). The production setting being very intuitive and simple illustrates quite nicely how standards can be used for decision making (in this case how much to bid on the job) and decision control (a benchmark to evaluate actual performance). This problem also illustrates how a time study is used to set standards – a few sets of furniture are assembled and the time to assemble them is used as the standard.

One of the more interesting issues in standard costing involves determining who has the decision rights to set and revise the standards and how frequently standards are revised. This involves the usual trade-off between decision management and decision control described in Chapter 6 (Budgets and Budgeting). The frequency of standard revisions also involves trading off decision management and decision control.

One company has the policy, “We never, never revise the standards, except when we have to”(Changing Standards, P12-6). While this statement sounds silly on the surface, it really does have content. I use the 1970s example of the Hunt brothers, who tried to corner the silver market. In less than a year, silver prices roughly tripled. Silver is a major input to making photographic materials because silver compounds are light sensitive. If Kodak did not change its standard costs when silver prices tripled, poor decisions would result. For example, higher silver prices dictate that more resources should be expended in reclaiming spent silver from manufacturing and film processing. But managers will only expend more resources in silver reclamation if the standard price of silver is raised. Thus, the rule, “We never change our standards, except when we have to” makes sense in the following way. Changing standards involves a trade-off between decision management and decision control. Frequent standard changes reduce the ability of a standard cost system to hold managers accountable and reduce the control value of standard costs. However, if standards are not revised after very large changes, dysfunctional decision making occurs. Starling Coatings (P12-20) illustrates these concepts.

Students should understand that standard costs and budgeting are closely related. To help reinforce this understanding, I use Oaks Auto Supply (P12-4) to introduce the topic of target costing. After working this problem and discussing target costing in


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Front Matter

general, I ask the students a couple of questions: With target costing, is the knowledge at the top or at the bottom of the organization? Is target costing a bottom-up or top-down system? What about standard costing? How do incentives change with target costing as opposed to standard costing?

I then refer back to Chapter 6 on budgeting and remind them that some budgeting processes are top-down and others are bottom-up (participative budgeting). The best system for the firm is determined by the firm’s goals and other parts of the organizational architecture. Emphasize that “one size doesn’t fit all.”

Covering the mechanics of calculating material and labor variances takes about an hour of class time. While the students generally understand the formulas after reading the chapter, a little class review reduces their anxiety level. I like to emphasize that all material and labor variances are unfavorable, in the sense that they indicate a deviation from plan. “Favorable” labor and material variances could indicate lower quality products are being produced.

I usually discuss either AN7-X1 (P12-5) or Zinc Faucets (P12-11) to justify why price variances are calculated when materials are purchased. This allows timely reporting of price variances instead of waiting until raw materials enter the manufacturing process. Hence, price (and wage rate) variances are computed based on actual quantities, not standard quantities. Since price changes of raw materials are useful data for pricing and production decisions, the timely reporting of price variances is useful for decision making, as well as control.

I end the lecture by having the students discuss Domingo Cigars (Case 12-1). This problem provides a good combination of calculations and analysis of the incentive effects of the manufacturing process.

Recommended Problem Assignment12-1 Medical Instruments12-4 Oaks Auto Supply12-5 AN7-X112-6 Changing Standards12-8 Smythe and Yves 12-9 Healing Touch12-11 Zinc Faucets12-15 Great Southern Furniture12-16 Cibo Leathers12-20 Starling CoatingsCase 12-1 Domingo Cigars

Chapter 13. Overhead and Marketing Variances

Chapter 13 illustrates how standard costs and variances can be defined in a variety of different contexts. The first part of the chapter concludes the calculation of manufacturing by computing overhead variances introduced in Chapter 12. A simple three overhead variance structure illustrates most of the substantive issues. I have found that more complicated four and five fixed and variable overhead variance systems add


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Front Matter

few insights to justify the additional computational complexity. The second half of the chapter describes marketing variances.

I devote some time to discussing standard volume and how it differs from budgeted and actual volumes, an issue, which requires clarification for most students. I then spend 15 minutes discussing marketing variances, which marketing majors find more interesting than the manufacturing variances. I try to cover Chapter 13 in about an hour of class time.

Recommended Problem Assignment3-5 Oneida Metal13-9 Western Sugar13-10 Soldering Department13-11 Commando Force13-14 Turow Trailers13-18 Ultrasonic13-20 MRI Department

Chapter 14. Management Accounting in a Changing Environment

Chapter 14 is the most important chapter in the book, providing not only a conclusion (in contrast to other managerial accounting texts), but also a framework for understanding how managerial accounting changes in a dynamic world. The chapter also contains some end-of-chapter problems that review major topics discussed in the book.

I spend at least two hours of class time on Chapter 14. I begin the lecture by discussing Figure 14-1, a simplified version first introduced in Chapter 1. This important figure provides a framework that describes:

• How the internal accounting system is part of the firm’s organizational architecture;

• How the architecture is related to the firm’s business strategy;

• How the firm’s business strategy depends on aspects of the external environment, such as technology, market competition, and government regulation.

Figure 14-1 illustrates that the internal accounting system is not isolated from other policies of the firm. Based on Figure 14-1, several important insights are emphasized:

• Changes in the accounting system rarely occur in a vacuum. Accounting system changes generally occur at the same time as changes in the firm's business strategy and other organizational changes, particularly with regard to the partitioning of decision rights and the performance evaluation and reward systems.


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Front Matter

• Alterations in the firm's organizational architecture, including changes in the accounting system, are likely a response to changes in the firm's business strategy caused by external shocks from technology and shifting market conditions.

• Before implementing an accounting or other organizational change, it is important to understand what is driving the change.

• An accounting system should not be adopted merely because other firms are doing so; they may have different external shocks causing their previous systems to become obsolete.

• An accounting system should not be changed without concurrent, consistent changes in the way decision rights are partitioned as well as in the performance reward systems. All three parts of the organization's architecture must be internally consistent and coordinated.

After describing Figure 14-1, I demonstrate how it applies to various organizational innovations: total quality management, JIT, 6 sigma and lean manufacturing, and the balanced score card. An assigned problem for each innovation is worked in class to ensure the students understand the basics. Then each innovation is analyzed, including the accounting system changes. For example, Fiedler International (P14-3) illustrates how balanced scorecards can be gamed as does

Recommended Problem Assignment14-2 Chateau Napa14-3 Fiedler International14-4 Guest Watches14-8 Software Development, Inc.14-9 Stirling Acquisition14-11 Warren City Parts Manufacturing14-12 Secure Servers Inc.Case 14-1 Global Oil


whole or part.

Front Matter

Suggested Assignment Problems & Cases

This table contains a listing of the best problems in each chapter. Problems and cases are classified as “basic problems,” “more challenging problems,” and “extensions to text.” Basic problems review the essential material in the text in a straightforward fashion. More challenging problems go beyond the basic material and require the student to exercise some judgment and conduct some analysis. These problems are either more unstructured or require some further application of topics covered in the text. Extensions to the text are problems that introduce new topics not discussed in the text.


whole or part.

Front Matter

Suggested Assignment Problems

Chapter Basic Problems More Challenging Problems Extensions to Text1 Introduction P1-1 MBA Students

P1-2 One Cost System Isn't EnoughP1-4 Using Accounting for PlanningP1-6 Golf SpecialtiesP1-8 Montana Pen

P1-3 U.S. and Japanese Tax LawsP1-5 Budgeting

P1-4 Managers Need Accounting Information

P1-7 Parkview Hospital

Suggested Assignment Problems

Chapter Basic Problems More Challenging Problems Extensions to Text2 Nature of Costs P2-1 Darien Industries

P2-2 Negative Opportunity CostsP2-4 Silky Smooth LotionsP2-5 J. P. Max Dept. StoresP2-6 Vintage CellarsP2-7 ETBP2-8 Taylor ChemicalsP2-15 MeaserP2-16 Affording a HybridP2-19 MedViewP2-20 Manufacturing Cost

ClassificationP2-24 Exotic RosesP2-33 Littleton Imaging

P2-3 NPRP2-9 Emrich* P2-10 Gas Prices*P2-12 Volume and ProfitsP2-13 American CinemaP2-17Easton DiagnosticsP2-21 Australian Shipping*P2-22 iGen3P2-25 Oppenheimer VisualsP2-26 Eastern University Parking*P2-29Optometry PracticeP2-31 News.comP2-34 Candice CompanyP2-35 Mat MachineryP2-36 Cost Behavior PatternsP2-37 Royal Holland LineP2-38 Roberts MachiningP2-39 Doral RentalsP2-41 Happy FeetP2-42 Digital ConvertP2-43 APC Electronics

P2-11 Penury CompanyP2-14 Home Auto Parts*P2-18Spa SalonP2-23 Adapt, Inc.P2-27 GRCP2-28 Mastich Counters*P2-30 JLE ElectronicsP2-32 Kinsley & SonsP2-40 Fuller AerosolsP2-44 Amy’s Boards*P2-45 Blue Sage MountainC2-1 Old Turkey Mash*C2-2 Mowerson DivisionC2-3 Puttmaster

*Problem generates much classroom discussion.

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Front Matter

Suggested Assignment Problems (cont.)

Chapter Basic Problems More Challenging Problems Extensions to Text3 Opportunity Cost of

Capital and Capital Budgeting

P3-1 IRRP3-2 Accelerated DepreciationP3-3 Jasper, Inc.P3-4 Just One, Inc.P3-7 Northern Sun, Inc.P3-9 Lottery P3-10 Mr. Jones’ RetirementP3-11 NPV vs. PaybackP3-13 New Car P3-16South American MiningP3-17 House MortgageP3-19 Toledo StadiumP3-24 Housing Markets

P3-5 Equity CorpP3-8 Ab LandlordP3-12 Clean ToothP3-14National Taxpayers UnionP3-15 Federal Dam ProjectP3-18 Flower City GroceryP3-20PQR CoalP3-21Student Loan ProgramP3-22 GeicoP3-25 Mortgage DepartmentP3-27 Dakota Mining

P3-6 Declining Market, IncP3-23 Depreciation Tax ShieldP3-26 Electric GeneratorP3-28 Overland Steel

4 Organizational Architecture

P4-1 EmpowermentP4-2 Pay for PerformanceP4-3 Course PacketsP4-4 Allied Van LinesP4-6 University Physician

CompensationP4-7 American InterConnect IP4-9 Vanderschmidt’sP4-10 Sales CommisionsP4-11 Formula 409P4-13 Theory X – Theory Y

P4-5 Voluntary Financial DisclosureP4-12 Pratt & WhitneyP4-14 American InterConnect IIP4-15 Tipping*P4-16 White’s Department StoreP4-17 Coase FarmP4-18 RothwellInc.P4-19 Gong-Fen*

P4-8 RaisesP4-20 International Computer Co.P4-21 Repro Corporation*C4-1 Christian Children’s FundC4-2 Woodhaven Service*

*Problem generates much classroom discussion


Front Matter


Chapter Basic Problems More Challenging Problems Extensions to Text5 Responsibility

Accounting and Transfer Pricing

P5-1 Canadian SubsidiaryP5-2 Phipps ElectronicsP5-3 Sunder PropertiesP5-4 Economic EarningsP5-7 ICB, IntlP5-9 MicroelectronicsP5-15 CJ Equity Partners*P5-16 Sunstar AppliancesP5-22 Evergreen Nursery and

Landscape

P5-6 Metal PressP5-11 CogenP5-13 Beckett Automotive GroupP5-17 Stale-Mart*P5-18 R&D Inc.P5-19 Flat ImagesP5-20 Premier BrandsP5-23 Transfer Price CompanyP5-25 InfantinoToyota*P5-27 ServiflowC5-2 Executive Inn*

P5-5 Performance TechnologiesP5-8 Shop and Save*P5-10 US Copiers*P5-12 University Lab TestingP5-14 WBG*P5-21 Easton Electronics*P5-24 XBT KeyboardsP5-26 WujoC5-1 Celtex*C5-3 Royal Resort & Casino*

6 Budgeting P6-1 G. Bennett Stewart*P6-4 Budget LapsingP6-5 DMP ConsultantsP6-6 Federal InsuranceP6-8 Coating DepartmentP6-9 Marketing PlanP6-11 Feder Purchasing DepartmentP6-12 Access.ComP6-13 VidexP6-14 New York FashionsP6-16 Adrian PowerP6-19 Madigan ModemsP6-28 Troika Toys

P6-2 Investment BanksP6-7 Golf World*P6-10 Potter-Bowen*P6-15 International Telecon*P6-17 Panrude AirfreightP6-20 Webb &Drye*P6-21 Spa ArianaP6-22 Picture MakerP6-23 City Hospital Nursing*P6-25 Brehm VineyardsP6-27 M&S MortgageP6-29 Cellular FirstC6-1 Artisans Shirtcraft

P6-3 Ice Storm*P6-18 Veriplex*P6-24 Madden International*P6-26 Republic Insurance*C6-2 Scion*



Front Matter


Chapter Basic Problems More Challenging Problems Extensions to Text7 Cost Allocations:

TheoryP7-1 MRIP7-2 Fair allocationsP7-7 WasleyP7-8 Hallsite ImagingP7-9 JolsenInternationalP7-10 Winterton GroupP7-11 National Training InstituteP7-12 Encryption, Inc.*P7-13 Ball Brothers Purchasing Dept.P7-14 Telstar ElectronicsP7-17 VormaP7-19 World ImportsP7-20 Painting DepartmentP7-26 Plastic Chairs

P7-3 SlawsonP7-4 Corporate Jet*P7-5 Massey ElectronicsP7-6 Avid PharmaceuticalsP7-16 Fuentes SystemsP7-22 Taylor ConnectP7-23 Economic Experts*P7-27 Woodley Furniture*P7-28 TramsmationC7-1 Phonetex*

P7-15 Diagnostic Imaging SoftwareP7-18 Bio Labs*P7-21 Scanners Plus*P7-24 FinsysP7-25 Allied AdhesivesP7-29 SymmerticInc*P7-30 BFR Ship Building*C7-2 Durango Plastics*

8 Cost Allocations: Practices

P8-2 Outback OpalsP8-3 Rose HospitalP8-5 Fidelity BankP8-6 Joint Products, Inc.P8-7 Donovan SteelP8-8 Murray Hill’s Untimely DemiseP8-14 Vigdor Wood ProductsP8-22 Littleton Medical CenterP8-23 Aurora Medical CenterP8-25 Barry’s FashionsP8-28 Columbine Granite

P8-1 Step DownP8-4 Mystic HerbalsP8-11 WWWeb Marketing*P8-12 ITI TechnologyP8-13 Metro Blood BankP8-15 Advanced Micro ProcessorsP8-16 Jason RocksP8-18 Doe CompanyP8-19 RBB Brands*P8-21 Beckett ManufacturingP8-24 Grove City Broadcasting*P8-27 Thompson Instruments*P8-30 IVAXC8-1 Carlos Sanguine Winery*

P8-9 EnzymesP8-10 Sunder ToysP8-17 Ferguson MetalsP8-20 Karsten Mills*P8-26Tariffs IncP8-29 Jones Consortium*C8-2 Wyatt Oil*



Front Matter


Chapter Basic Problems More Challenging Problems Extensions toText9 Absorption Cost

SystemsP9-1 Equivalent Units (appendix)P9-2 IPX PackagingP9-3 Densain WaterP9-5 Pool ScrubbersP9-6 ThermalloyP9-7 Lys WheelsP9-8 Ware Paper BoxP9-9 DeJure ScentsP9-10 Chemtrex (appendix)P9-11 Media DesignsP9-13 Rick’s BagsP9-14 Unknown CompanyP9-15 Wellington P9-23 Bartolotta CompanyP9-25 Frames, Inc.

P9-4 MacGiver Brass*P9-12 Simple PlantP9-16 Advanced MedicalP9-17 Dead Eye PuttersP9-19 DigiEarP9-20 Specialized Surgical InstrumentP9-22 Jacklin StampingsP9-24 Kitchen Rite*P9-27 Mutual Fund Company*P9-28 Amalfi TextsP9-30 Magic Floor

P9-18 Welding Robots*P9-21 Pebble Beach SandalsP9-26 Hurst Mats*P9-29 Pyramid Products*C9-1 Heath Metal Products*C9-2 Portable Phones, Inc.*

10 Criticisms of Absorption Cost Systems: Incentive to Over-produce

P10-1 FederalMixingP10-2 XeroxP10-3 VariluxP10-4 Zipp CardsP10-6 Zeflax BottlesP10-7 Alliance ToolingP10-9 CLIC LightersP10-10 Medford Mug CompanyP10-12 Mystic MugsP10-13 Avant Designs

P10-5 TransPacific Bank*P10-8 Aspen ViewP10-11 Kothari Inc.*P10-14 Taylor ChainsP10-15 Conner Coffees*P10-16 Kathy’s MatsP10-18 DIMP10-21 Blauvelt ProductsP10-22 UniComP10-23 Sants Brake Co.

P10-17 NaviskyP10-19 Easton PlantP10-20 WeststarApplicancesC10-1 Joon*



Front Matter


Chapter BasicProblems More ChallengingProblems Extensions toText11 Criticisms of

Absorption Cost Systems: Inaccurate Product Costs

P11-1 Maui SeminarP11-2 GAMMAP11-3 ABC & Volume ChangesP11-4 Milan PastaP11-5 Implementing ABCP11-15 Toby ManufacturingP11-18 Hospital Admission Office

P11-6 Astin Car Stereos*P11-7 DVDSP11-8 True Cost Manufacturing, Inc.*P11-12 Rextera*P11-13 CB Medical TechnologiesP11-14 Wedig DiagnosticsP11-16 Kay EnterprisesP11-21 Brickley ChainsC11-1 Tilist GolfC11-3 DynaGolf*

P11-9 Friendly Grocer*P11-10 Houston MillingP11-11 Sanchez Gadgets*P11-17 Goodstone Tires*P11-19 ABC and TaxesP11-20 Familia Insurance Company*C11-2 SnapOn Fasteners*

12 Standard Costs: Direct Labor and Materials

P12-1 Medical InstrumentsP12-2 Mickles Ltd.P12-5 AN7-X1P12-6 Changing Standards*P12-7 Standard Cost SystemsP12-8 Smythe and YvesP12-9 Healing TouchP12-10 Marian Health Care SystemP12-11 Zinc FaucetsP12-12 Howard BindingP12-14 Flower City CartridgesP12-15 Great Southern FurnitureP12-17 Jillian Soups

P12-3 Alexander ProductsP12-4 Oaks Auto SupplyP12-13 Fast FaxP12-16 Cibo LeathersP12-18 JLT ChemicalsP12-20 Starling CoatingsC12-2 Rust Belt Mufflers*

P12-19 JuleneIncC12-1 Domingo Cigars*



Front Matter


Chapter Basic Problems More Challenging Problems Extensions to Text13 Overhead and

Marketing VariancesP13-1 On-CallP13-2 Purchasing Department*P13-4 Logical SolutionsP13-5 Oneida MetalP13-7 Printers, Inc.P13-11 Commando ForceP13-12 Wine DistributorsP13-14 Turow Trailers*P13-16 Artco PlantersP13-17 Shady Tree ManufacturingP13-18 UltrasonicP13-20 MRI Department

P13-3 Spectra Inc.*P13-6 Beanie BabiesP13-8 Galt Electric MotorsP13-9 Western Sugar*P13-10 Soldering DepartmentP13-15 Betterton CorporationP13-19 Megan Corp.P13-21 Anpax, Inc.

P13-13 Auden ManufacturingP13-22 Mopart Division*C13-1 Lancaster Chamber Orchestra*

14 Management Accounting in a Changing Environment

P14-1 British AirwaysP14-3 Fiedler InternationalP14-4 Guest Watches*P14-6 Old Town RoastersP14-7 The Pottery StoreP14-10 TQM at Stowbrdidge Div.

P14-2 Chateau NapaP14-5 Applying TQM in

Manufacturing versus Administration*

P14-9 Stirling Acquisition*P14-11 Warren City Parts*P14-14 Tagway 4000*

P14-8 Software Development, Inc.*P14-12 Secure Servers Inc.P14-13 Kollel Hospital*C14-1 Global Oil*C14-2 Productivity Measures



Front Matter

ALPHABETICAL LISTING OF PROBLEMS AND CASES

(H DENOTES HEALTH CARE RELATED PROBLEM; S DENOTES SERVICE INDUSTRY RELATED PROBLEM)

Problem/Case Title

Chapter/Problem/Case Number

AAb Landlord (S) Ch. 3, P3-8ABC & Volume Changes Ch. 11, P11-17ABC and Taxes Ch. 11, P11-3Accelerated Depreciation Ch. 3, P3-2Access.Com (S) Ch. 6, P6-12Adapt, Inc. (S) Ch. 2, P2-23Adrian Power Ch. 6, P6-16Advanced Medical (H) Ch. 8, P8-16Advanced Micro Processors Ch. 2, P2-17Affording a Hybrid Ch. 12, P12-3Alexander Products Ch. 10, P10-8Alliance Tooling C. 7, P7-22Allied Adhesives Ch. 4, P4-4Allied Van Lines Ch. 9, P9-27Amalfi Texts Ch. 2, P2-14American Cinema (S) Ch. 4, P4-8American InterConnect I (S) Ch. 4, P4-16American InterConnect II (S) Ch. 2, P2-44Amy’s Boards (S) Ch. 12, P12-5AN7-X1 Ch. 13, P13-22Anpax, Inc. Ch. 2, P2-43APC Electronics Ch. 14, P14-5Applying TQM in Ch. 13, P13-17Artco Planters Ch. 6, Case 6-1Artisans Shirtcraft Ch. 10, P10-9

Problem/Case Title

Case Number

Aspen View P10-8Astin Car Stereos P11-6Auden Manufacturing P13-13Aurora Medical Center (H) P8-23Australian Shipping (S) P2-21Avant Designs (S) P10-13Avid Pharmaceuticals (H) P7-6

BBall Brothers Purchasing Dept. P7-13Barry’s Fashions (S) P8-25Bartolotta Company P9-23Beanie Babies (S) P13-6Beckett Automotive Group (S) P5-13Beckett Manufacturing P8-21Betterton Corporation P13-15BFR Ship Building P7-27Bio Labs (H) P7-18Blauvelt Products P10-21Blue Sage Mountain (S) P2-45Brehm Vineyards P6-25Brickley Chains P11-21British Airways (S) P14-1Budget Lapsing P6-4Budgeting P1-5


Front Matter

Canadian Subsidiary P5-1Candice Company P2-34Carlos Sanguine Winery C8-1CB Medical Technologies P11-13Cellular First P6-29Celtex C5-1Changing Standards P12-6Chateau Napa P14-2Chemtrex (appendix) P9-10Christian Children’s Fund (S) C4-1Cibo Leathers P12-16City Hospital Nursing (H) P6-23CJ Equity Partners (S) P5-15Clean Tooth P3-12CLIC Lighters P10-9Coase Farm (S) P4-17Coating Department P6-8Cogen P5-11Columbine Granite P8-28Commando Force (S) P13-11Conner Coffees P10-15Corporate Jet (S) P7-4Cost Behavior Patterns P2-36Course Packets P4-3

DDakota Mining P3-27Darien Industries P2-1Dead Eye Putters P9-17Declining Market, Inc P3-6DeJure Scents P9-9Densain Water (S) P9-3Depreciation Tax Shield P3-23Diagnostic Imaging Software P7-15DigiEar (H) P9-19Digital Convert P2-42

DIM P10-18DMP Consultants (S) P6-5Doe Company P8-18Domingo Cigars C12-1Donovan Steel P8-7Doral Rentals (S) P2-39Durango Plastics C7-2DVDS P11-7DynaGolf C11-3

EEastern University Parking (S) P2-26Easton Diagnostics P2-17Easton Electronics P5-21Easton Plant P10-19Economic Earnings P5-4Electric Generator P3-26Empowerment P4-1Emrich (S) P2-9Encryption, Inc. P7-12Enzymes P8-9Equity Corp P3-5Equivalent Units (appendix) P9-1ETB P2-7Evergreen Nursery and Landscape (S) P5-22Executive Inn (S) C5-2Exotic Roses P2-24

FFair allocations P7-2Familia Insurance Company (S) P11-20Fast Fax P12-13Feder Purchasing Department (S) P6-11Federal Dam Project P3-15Federal Insurance (S) P6-6


Front Matter

Federal Mixing P10-1Ferguson Metals P8-17Fidelity Bank (S) P8-5Fiedler International (S) P14-3FinSys (S) P7-24Flat Images P5-19Flower City Cartridges P12-14Flower City Grocery P3-18Formula 409 P4-11Frames, Inc. P9-25Friendly Grocer (S) P11-9Fuentes Systems P7-16Fuller Aerosols P2-40

GG. Bennett Stewart P6-1Galt Electric Motors P13-8GAMMA P11-2Gas Prices P2-10Geico P3-22Global Oil C14-1Golf Specialties P1-6Golf World P6-7Gong-Fen (S) P4-19Goodstone Tires P11-17GRC P2-27Great Southern Furniture (S) P12-15Grove City Broadcasting (S) P8-24Guest Watches P14-4

HHallsite Imaging P7-8Happy Feet P2-41Healing Touch P12-9Heath Metal Products C9-1

Home Auto Parts P2-14Hospital Admission Office (H) P11-18House Mortgage (S) P3-17Housing Markets P3-24Houston Milling P11-10Howard Binding P12-12Hurst Mats P9-26

IICB, Intl (S) P5-7Ice Storm P6-3iGen3 P2-22Implementing ABC P11-5Infantino Toyota (S) P5-25International Computer Co. P4-20International Telecon P6-15Investment Banks (S) P6-2IPX Packaging P9-2IRR P3-1ITI Technology P8-12IVAX P8-30

JJ. P. Max Dept. Stores (S) P2-5Jacklin Stampings P9-22Jason Rocks P8-16Jasper, Inc. P3-3Jillian Soups P12-17JLE Electronics P2-30JLT Chemicals P12-18Joint Products, Inc. P8-6Jolsen International P7-9Jones Consortium (S) P8-29Joon C10-1JuleneInc P12-19


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KKarsten Mills P8-20Kathy’s Mats P10-16Kay Enterprises P11-16Kinsley & Sons (S) P2-32Kitchen Rite P9-24Kollel Hospital P14-13Kothari Inc. P10-11

LLancaster Chamber Orchestra (S) C13-1Littleton Imaging P2-33Littleton Medical Center P8-22Logical Solutions (S) P13-4Lottery P3-9Lys Wheels P9-7

MM&S Mortgage (S) P6-27MacGiver Brass P9-4Madden International P6-24Madigan Modems P6-19Magic Floor P9-30Managers Need Accounting Information P1-4Manufacturing Cost Classification P2-20Marian Health Care System (H) P12-10Marketing Plan P6-9Massey Electronics P7-5Mastich Counters P2-28Mat Machinery P2-35Maui Seminar P11-1MBA Students P1-1Measer P2-15Medford Mug Company P10-10

Media Designs (S) P9-11Medical Instruments P12-1MedView (H) P2-19Megan Corp. P13-19Metal Press P5-6Metro Blood Bank (H) P8-13Mickles Ltd. P12-2Microelectronics P5-9Milan Pasta P11-4Montana Pen P1-8Mopart Division P13-22Mortgage Department (S) P3-25Mowerson Division C2-2Mr. Jones’ Retirement P3-10MRI P7-1MRI Department P13-20Murray Hill’s Untimely Demise P8-8Mutual Fund Company (S) P9-27Mystic Herbals P8-4Mystic Mugs P10-12

NNational Taxpayers Union P3-14National Training Institute (S) P7-11Navisky P10-17Negative Opportunity Costs P2-2New Car P3-13New York Fashions (S) P6-14News.com (S) P2-31Northern Sun, Inc. P3-7NPR P2-3NPV vs. Payback P3-11

OOaks Auto Supply (S) P12-4


Front Matter

Old Town Roasters (S) P14-6Old Turkey Mash C2-1On-Call (S) P13-1One Cost System Isn't Enough P1-2Oneida Metal P13-5Oppenheimer Visuals P2-25Optometry Practice (H) P2-29Outback Opals P8-2Overland Steel P3-28

PPainting Department P7-20Panrude Airfreight (S) P6-17Parkview Hospital P1-7Pay for Performance P4-2Pebble Beach Sandals P9-21Penury Company P2-11Performance Technologies P5-5Phipps Electronics P5-2Phonetex C7-1Picture Maker P6-22Plastic Chairs P7-24Pool Scrubbers P9-5Portable Phones, Inc. C9-2Potter-Bowen (S) P6-10PQR Coal P3-20Pratt & Whitney P4-12Premier Brands P5-20Printers, Inc. P13-7Productivity Measures C14-2Purchasing Department P13-2Puttmaster C2-3Pyramid Products P9-29

Q

RR&D Inc. P5-18Raises P4-8RBB Brands P8-19Repro Corporation P4-21Republic Insurance (S) P6-26Rextera P11-12Rick’s Bags P9-13Roberts Machining P2-38Rose Hospital P8-3Rothwell Inc. P4-18Royal Holland Line (S) P2-37Royal Resort & Casino (S) C5-3Rust Belt Mufflers C12-2

SSales Commisions P4-10Sanchez Gadgets (S) P11-11Sants Brake Co. P10-23Scanners Plus P7-21Scion C6-2Secure Servers Inc. P14-12Serviflow P5-27Shady Tree Manufacturing P13-17Shop and Save (S) P5-8Silky Smooth Lotions P2-4Simple Plant P9-12Slawson P7-3Smythe and Yves P12-8SnapOn Fasteners C11-2Software Development, Inc. (S) P14-8Soldering Department P13-10South American Mining P3-16Spa Ariana (S) P6-21


Front Matter

Spa Salon (S) P2-18Specialized Surgical Instrument P9-20Spectra Inc. P13-3Stale-Mart (S) P5-17Standard Cost Systems P12-7Starling Coatings P12-20Step Down P8-1Stirling Acquisition P14-9Student Loan Program (S) P3-21Sunder Properties (S) P5-3Sunder Toys P8-10Sunstar Appliances P5-16Symmetric Inc P7-29

TTagway 4000 P14-14Tariffs Inc P8-26Taylor Chains P10-14Taylor Chemicals P2-8Taylor Connect (S) P7-22Telstar Electronics P7-14The Pottery Store (S) P14-7Theory X – Theory Y P4-13Thermalloy P9-6Thompson Instruments P8-27Tilist Golf C11-1Tipping P4-15Toby Manufacturing P11-15Toledo Stadium P3-19TQM at Stowbrdidge Div. P14-10Tramsmation P7-26Transfer Price Company P5-23TransPacific Bank (S) P10-5Troika Toys P6-28True Cost Manufacturing, Inc. P11-8Turow Trailers P13-14

UU.S. and Japanese Tax Laws P1-3Ultrasonic P13-18UniCom (S) P10-22University Lab Testing (H) P5-12University Physician Compensation (H) P4-6Unknown Company P9-14US Copiers P5-10Using Accounting for Planning P1-4

VVanderschmidt’s P4-9Varilux P10-3Veriplex P6-18Videx P6-13Vigdor Wood Products P8-14Vintage Cellars P2-6Volume and Profits P2-12Voluntary Financial Disclosure P4-5Vorma P7-17

WWare Paper Box P9-8Warren City Parts P14-11Wasley P7-7WBG P5-14Webb &Drye (S) P6-20Wedig Diagnostics (H) P11-14Welding Robots P9-18Wellington P9-15Western Sugar P13-9WeststarApplicances P10-20White’s Department Store (S) P4-16Wine Distributors (S) P13-12


Front Matter

Winterton Group (S) P7-10Woodhaven Service (S) C4-2Woodley Furniture P7-25World Imports (S) P7-19Wujo P5-26WWWeb Marketing (S) P8-11Wyatt Oil C8-2

X, Y, ZXBT Keyboards P5-24Xerox P10-2Zeflax Bottles P10-6Zinc Faucets P12-11Zipp Cards P10-4


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