Académique Documents
Professionnel Documents
Culture Documents
189
CHAPTER 16
MANAGING COSTS AND UNCERTAINTY
QUESTIONS
1. Thecostcontrolsystemisanintegralpartofthecostmanagementsystem.Thecost
controlsystemprovidesinformationforplanningpurposesand,subsequently,for
evaluationofactualperformance.
2. Withoutfirstestablishingperformancetargetsandbenchmarks,controlsystems
cannot function. The purpose of establishing control systems is to guide the
organizationtowarditsestablishedobjectives.Accordingly,thecontrolcyclemust
beginwiththeestablishmentofplansthatdefinewheretheorganizationisheaded
andwhatitsmanagerswanttoaccomplish.
3. Costcontrolforanyspecificeventisexertedbefore,during,andaftertheevent.
Cost control is exerted before the event to determine the expected cost
(benchmark)andtoprovideaplantoachievetheexpectedcost.Duringanevent,
controlisexertedtomaintainthecostbeingincurredattheplannedlevel.Afteran
event,actualperformanceiscomparedtoplannedperformanceandexplanationsof
differencesaredeveloped.Byunderstandingwhydifferencesexist,managerscan
takeactionstominimizefuturedifferencesbetweentheactualandplannedamounts.
4. Factorspotentiallycausingacosttochangeinclude:
(1) changesinactivitylevel;
(2) changesininflation/deflation;
(3) technologychanges;
(4) changesinsupplyanddemand;
(5) quantityofcompetition;
(6) seasonalityandothertimingphenomena;and
(7) quantitypurchased.
Factors 1 and 57 are most subject to cost containment. The difference in
controllability is the extent to which the factor can be influenced by actions of
managers.Thefactorsthatareexternaltothefirm(e.g.,inflation)arelesssubjectto
controlthaninternalfactors(e.g.,activitylevels).
5. Totalfixedcostscanbedichotomizedintotwogroups,committedanddiscretionary.
Thecommittedfixedcostsareonesthatarelesssusceptibletocostcontrolefforts,at
leastduringtheshortrun.Thesecostsconsistofcostsassociatedwithbasicplant
assets and organizational infrastructure. Discretionary fixed costs are more
susceptibletoshortruncostcontrolefforts.Discretionaryfixedcosts(suchasR&D
andadvertising)areincurredasaresultofmanagerialjudgment.
Costsconsideredascommittedbyonefirmmaybeconsidereddiscretionarybyother
firms.Forexample,afirmthatcompetesonthebasisofproductscontainingthelatest
functionalityandtechnologywouldconsiderresearchanddevelopmentcosttobe
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190
Chapter 16
committed.Afirmthatcompetesonthebasisofpricemightconsiderresearchand
developmentcosttobediscretionary.
6. Many types of discretionary costs do not have outputs for which there is a
preciselyexplainableandpredictabletechnicalrelationshipwithinputs.Whenan
outputmeasureisdevised,itnormallyisavailableonlyinnonmonetary,surrogate
terms.
ForsomediscretionarycostssuchasR&D,outputmayresult,ifatall,onlyafter
makinginputsforaperiodofindefiniteduration.Thus,evenwhenoutputsoccur,
itisdifficulttorelatethemtoaparticularperiodsinput.
7. Efficiencyisameasureofthedegreetowhichtheactualyieldratio(Actualoutput
Actualinput)conformstothedesiredyieldratio(Plannedoutput Planned
input).Effectivenessisameasureofthedegreetowhichagoalorobjectiveis
achieved.
Measuringtheefficiencyofadiscretionarycostrequiresbothameasureofinput
andameasureofoutput.Efficiencyfurtherrequiresapredictablecauseandeffect
relationshipbetweeninputandoutput.Inputcostsarereadilymeasured.However,
outputmeasurementsarenotnormallyreadilyavailable.Whentheyarereadily
available or when surrogates can be identified, there is still often a lack of
confidenceaboutthestrengthofthecauseandeffectrelationshipbetweeninput
andoutputformostdiscretionarycosts.
Tomeasureeffectiveness ofadiscretionaryactivity,anoutputmeasure,either
monetaryornonmonetary,mustbeavailableordevised.Sometimesasurrogate
measure for output of an activity can be identified. Effectiveness of a
discretionarycostcanthenbemeasuredbycomparingactualoutputtoplanned
output(i.e.,ActualoutputPlannedoutput).
8. Costs that have observable and known relationships to a quantifiable activity base
are subject to control as engineered costs. Quality control inspection cost is
sometimessusceptibletotreatmentasanengineeredcost.Amongotherexamples
ofactivitiesthatcouldbeengineeredaremaintenancetasks,machinesetups,and
employeetrainingactivities.
9. Firmsholdcashbalancestoliquidateplannedtransactionsastheyoccur,tocover
cash consequences of unexpected events, and for speculative purposes. Some
firmsmustcarryrelativelylargercashbalancesthanotherfirmsbecauseeitherthe
cash required to maintain operating cycle liquidity is less predictable, or the
abilitytoobtaincashfromfinancingsourcesismoreconstrained.
10. Technologyhasallowedautomationofmanypurchasingprocesses.Becauseof
theautomation,thecostofpurchasingtransactionshasbeendramaticallyreduced.
One of the positive effects of the cost reduction has been an increase in the
competitivenessofthesuppliermarkets.
11. Thefirstapproachtodealingwithuncertaintyistoexplicitlyconsidertheeffects
ofuncertaintyinestimatingfuturecosts.Uncertaintycanbereducedbyselecting
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accessible website, in whole or in part.
Chapter 16
thebestpredictorvariablestoincludeinforecastingmodels.Second,thecostscan
bestructuredtoautomaticallyadjusttouncertainoutcomes.Forexample,variable
costs automatically adjusttotherealized level ofsales orproduction.Athird
methodofdealingwithuncertaintyistouseoptionsandforwardcontracts.These
toolsarebestusedtodealwithpriceuncertaintyforbothinputsandoutputs.The
finaltoolfordealingwithuncertaintyisinsurance.Insuranceisespeciallyuseful
asadevicefordealingwithunexpectedeventssuchasactsofnature.
12. Uncertaintyhastwomainsources.First,uncertaintyisrelatedtoonesinabilityto
perfectlyforeseethefutureandtounderstandperfectlycostcausality.Thesecond
sourceofuncertaintyisthepossibilityofunforeseenevents.Forexample, the
economic downturn of 20082009 was not expected by many; therefore, its
effectswerelikelynotincludedinincomeandcashflowbudgetsandforecasts.
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accessible website, in whole or in part.
191
192
Chapter 16
EXERCISES
13. Whetherthe$20millionisexcessivedependsonseveralthings.First,doesthe
amountspentexceedexpectations?Iftheexpenditureexceedsthebudget,thefirm
may have spent too much on fuel and energy. Alternatively, if the firm
increased the volume of operations, the expenditure may be wholly justified.
Further,evenifthefirmspentmorethanbudgeted,theexcessmaybeexplained
byinflationorpriceleveladjustmentsthatarebeyondthecontrolofthefirm.
14.a. The proposed maintenance work order system would provide written
documentation for all man hours and materials used in the maintenance
department. This system would improve cost control by giving operating
management(userdepartments)theopportunitytoreviewspecificmaintenance
charges for time and materials on each maintenance job charged to each
department.Theindividualjobcostrecordswillprovidethebasisforfeedbackto
themaintenancedepartmentonthequalityandefficiencyofworkperformed.
Byprovidinganestimateforeachjobpriortostartingthejob,theuserdepartment
willhaveanopportunitytocancelunneededworkorworkthatappearstobetoo
expensive.Themaintenancedepartmentwillbeabletocomparetheseestimates
withestimatesonsimilarjobsandwiththeactualcostsoncethejobiscompleted
toevaluate personnelperformance. Inaddition,theestimating shouldimprove
schedulingofpriorityjobsandimprovecostcontrolastheestimatingprocedureis
refined.
The maintenance work order system will provide a basis for improved
allocationofcoststouserdepartments.Iftheworkordersystemiseffectiveand
abuyer/sellerrelationshipisdevelopedbetweentheuserdepartmentandthe
maintenance department, the user department will insist on an efficient
preventive maintenance program to minimize breakdown maintenance,
spoilage,andlostproductiontime.
b. The documentation provided by the work order system should provide
maintenancedepartmentmanagementwithstatisticstosupportitsrequestfor
additional people. If the maintenance department can develop a meaningful
cost/benefit relationship showingapayback onadditional personnel through
reduced overtime, less downtime waiting for repairs, improved preventive
maintenance, etc., rational management would authorize the addition of the
requiredmanpower.
(CMAadapted)
15.a. Costreductionbecausequantityofworkfluctuates andparttime employees
provideservicesforpeakcaseloadtimeswithoutfulltimecost.
b. Annualsalaryfulltimeprofessionalstaff($60,0001.20)=$72,000;
if1,500hoursorless,parttimesalary=$50X;
ifover1,500hours,parttimesalary=$50X+$4,500
For1,500orfewerhours,pointofindifference:
$50X=$72,000
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accessible website, in whole or in part.
Chapter 16
X=$72,00050
X=1,440hours
Formorethan1,500hours:
$50X+$4,500=$72,000
$50X=$67,500
X=1,350hours
Thus, the point of indifference occurs at 1,350 hours. Since the point of
indifferenceisactuallylessthan1,500hours,parttimeworkersshouldneverbe
usedbeyond1,440hours.
16. Nosolutionprovided.
17.a. CU
b. CR
c. CA for the cost of callforwarding; the increase in costs for staff shows a
recognitionofclientneedandservicestobeprovided.
d. CA
e. CR
f. CAofwhatwouldhavebeenanincreaseincostswiththeinstallationofthe
newtelephones;alsoshowscostunderstandingsincesheknewwhythecost
wouldincrease.
18.a. CA:ThepricehasbeenincreasedbecausetheOPECcartelhasenoughcontrol
oversupplytorationthesupplyandincreaseprices.
b. CA:Becausethesupplyoftheplasticresinshasbecomemoreconcentrated,
competitionhasbeenreduced,andthesupplierhasthemarketpowertoset
prices.
c. CB:Becauserawmaterialsareavariablecost,whenvolumedropsthetotalcost
alsodrops.
d. QP:Bypurchasingallofthisinputfromonevendor,thefirmhasjustifieda
pricediscountbasedonvolumepurchasing.
e. Inflation(I/D):Thepriceofcornsyruprosebecausetheoveralldemandfor
cornrosewiththeincreasedpopularityofethanolbasedfuels.
f. CB:Becausethevolumeofproductionrose,totalvariablecostswouldalsorise,
includingthecostofdirectlabor.
g. QP:BecausethefirmadoptedJITpractices,thequantityofsteelitpurchases
witheachorderdropped;thisquantityreductionresultedinahigherpricefrom
thesupplier.
h. CA:Becausethequantityofcompetitionhasincreased,competitionatthelocal
airportforairtravelhasincreasedanddriventhepriceoftraveldown.
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accessible website, in whole or in part.
193
194
Chapter 16
19.a.Classification
C
C
C
D
D
D
C
C
D
D
D
C
D
D
D
D
Cost
Annualauditfees
Annualreportpreparationandprinting
Buildingfloodinsurance
Charitablecontributions
Corporateadvertising
Employeecontinuingeducation
Equipmentdepreciation
Interestonbondspayable
Internalauditsalaries
Marketingresearch
Preventivemaintenance
Propertytaxes
Qualitycontrolinspection
Researchanddevelopmentsalaries
Researchanddevelopmentsupplies
(theamountisdiscretionaryonlyif
R&Distobeconductedinternally)
Secretarialpoolsalaries
SurrogateOutputMeasure
Improvementinsocial
welfare
Objections
Verydifficulttomeasure
Advertising
Increaseinsales
Uncertaintyaboutcause&
effect
Employee
education
Increaseinproductivity,
quality
Difficulttocaptureallcosts
andbenefits
Internalaudit
#ofinternalcontrols
improved
Nosinglemeasurewill
captureallbenefitsof
internalauditing
Marketresearch
#ofnewproducts
identified
Doesntcapturethevalueof
theproductideas
Prev.maint.
Reductioninnumberof
Ageofmachinesplaysa
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accessible website, in whole or in part.
Chapter 16
195
breakdowns
biggerrolein#of
breakdownsthan
maintenancedoes
Qual.control
Reductionin#ofdefective
itemsreturnedby
customers
Otherfactorssuchas
carelesshandlingbythose
movingproductmaycause
defects
R&Dsalaries
Numberofdiscoveries,
inventions,improvements,
etc.
Theseoutputsareso
heterogeneousastonotbe
additive
R&Dsupplies
Expendituresperdollarof
R&Dsalary
Doesnotcapturebenefitsof
expenditure
Secr.pool
Numberofdocuments
prepared
Doesnotnecessarily
measurequalityofwork
20.a.C
b.D
c.C
d.D
e.C
f.D
g.D
h.C
i.D
j.D
Committedcostsareoftenassociatedwithcapitalinvestment.
Amountscanbesetbymanagerialjudgment.
Committedcostsoftencannotbereducedintheshortrunbymanagers.
Hence,thetermdiscretionary.
Theseareexamplesofcoststhatareassociatedwithcapitalinvestment.
Becausethecause/effectassociationisoftennotwellunderstoodfordiscretionary
costs.
Onlydiscretionarycostscanbereducedintheshortrunwithoutimpairingafirms
longtermviability.
Committedcostsareassociatedwithcapacityandcapitalinvestment.
Becausetheyieldondiscretionarycostsisnotpreciselyknown.
Discretionaryactivitiestendtobeserviceactivitiesratherthanactivitiesassociated
withthebasicinfrastructure.
21.a. ExtenttowhichABChasbeenimplementedinthefirm;dollarsofcostsavings
generatedbyABCdrivenprescriptions
b. Numberofpatienthoursoftreatmentonthemachine
c. Changeinemployeeretentionrate;changeinemployeesatisfaction
d. Improvement in employee satisfaction; measures capturing improvement in
flowofpeople
e. Customersgeneratedfromtheadvertising
f. Labortimesavings;reductionincollectioncycle
22.a. Goal
600newstudents
Actualachievement
660newstudents
Goalexceededby60newstudents
Consequently,thedepartmentwasveryeffectiveinmeetingitsgoal.
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196
Chapter 16
b. Yieldgoal:($1,600,000600)=1studentforeach$2,667expended.
Actualefficiency($1,873,200660)=1studentforeach$2,838expended.
Accordingly, the department was very operationally inefficient in pursuing its
objectives.
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Chapter 16
197
23. Totalvariance=$2,780[(1051$20)+(121$30)]
=$2,780$2,460=$320U
Ratevariance=$2,780[(120$20)+(15$30)]
=$2,780$2,850=$70F
Efficiencyvariance=$2,850$2,460=$390U
24.a. Ratevariance=$38,950(2,050$20)=$2,050F
Efficiencyvariance=$41,000[(50,04024)$20]=$700F
Totalvariance=$2,050F+$700F=$2,750F
b. 170hours24inspectionsperhour=4,080inspectionsperworker
Costforfulltimeworkers=$4,5008=
$36,000
13,800
Parttimework[(2,050(1708)]$20=
Totalcostofthisarrangement
$49,800
Totalexpectedcostofexistingarrangement:
2,050$20=
(41,000)
Disadvantageoffulltimearrangement
$8,800
25. Variablecostanalysis:
Variance=ActualcostFlexiblebudget
=$900,000[($800,0002,000)2,100]=$60,000U
Fixedcostanalysis:
Actual
$440,000
BudgetedFixedCost
Applied
2,000$200
2,100$200
$400,000
$420,000
$40,000U
$20,000F
SpendingVariance
VolumeVariance
$20,000U
TotalFixedCostVariance
Thismethodofevaluationwouldencouragethepersonnelworkerstohirelower
qualityworkers.Lowqualityworkerswouldgeneratemoreturnoverthanhigh
qualityworkers,thusthevolumeofbusinessrises;andhiringlowqualityworkers
requiresthehumanresourcesofficetoincurlowersearchcoststhanwouldbe
incurredtohireonlyhighqualityworkers.
26. Thefirmmayhavetoomuchcashinvestedinworkingcapital.Thetwoaccounts
consuming the most cash are Accounts Receivable and Work in Process
Inventory. Accounts Receivable can be reduced by finding ways to speed up
collections. For example, arrangements can be made to electronically collect
accountsfromcustomers.Termsofsalecanbetightenedandstricterpoliciesfor
granting credit can be imposed. For Work in Process Inventory, ways can be
found to reduce the inventory level. For instance, by speeding up production
processes,lesstimewillbeconsumedfromthestarttocompletionofproduction.
Methodssuchasjustintimeinventorymanagementwouldbeuseful.
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198
Chapter 16
Also,thecompanyspayablesareverysmallrelativetocurrentassets.Current
payables can be used as free financing for current assets. To illustrate, the
companycouldnegotiatecredittermsfromitssuppliers.Thiscreditwouldbea
sourceoffinancingforinventoryandaccountsreceivableandwouldfreeupcash
thecompanycurrentlyhasinvestedintheseaccounts.
27. Amongthebenefitsyouwoulddiscusswouldbethefollowing:
(1) Reducedsearchcosts.Significantresourcescanbeexpendedjusttoidentify
thepotentialsetofsuppliers.Theeprocurementsystemwillreducethese
costs.
(2) Because the eprocurement system reduces the cost of transacting for
potentialvendors,thequantityofcompetitionshouldbeincreased.Theresult
shouldbelowerpricesforinputs.
(3) The costs of settling up with suppliers should also be reduced because
paymenttothesuppliercanberemittedelectronically.Typicallyelectronic
paymentscreatelowertransactioncoststhanissuingpaperchecks.
(4) Othercostsofthepurchasingtransactionscanbereduced.Forexample,the
costsofissuingpaperpurchaseorderscanbeeliminatedbyaneprocurement
system.
28. a.Thecoefficientofdeterminationisthepercentageofvariabilityinthedependent
(predicted)variableexplainedbythevariabilityoftheindependent(predictor)
variable.Becausetotal labor hourshasthehighestcoefficientofdeterminationit
wouldbethebest,singlepredictorvariable.Howeverasuperiorpredictionmodel
mightbeobtainedbyincludingtwoorevenallthreeofthecandidatevariablesin
themodel.
b. The lowest value for the coefficient of determination is 0, which means that the
independent variable is not useful at all in predicting the dependent variable.
The highest value of the coefficient of determination is 1, which means that the
independent variable completely explains the dependent variable.
29. Becausethecostofmetalcomprisessuchahighpercentageoftotalproduction
cost, any deviation from budget for this input could cause income to vary
significantlyfromexpectations.Accordingly,strategiesshouldbeconsideredfor
bothuncertaintyregardingquantityandprice.
Thequantityuncertaintycanbeaddressedbyunderstandinghowproductdemand
affectsmetalusage.Thus,thequantityelementmaybedealtwithmosteffectively
bygettingthebestpossibleelementsforproductsalesandbycarefullymonitoring
theefficiencywithwhichmetalisconsumedinproduction.
Thepriceuncertaintycanbemitigatedbyeitherforwardcontractingforthemetal
andsetting the priceinthecontracts orbyhedgingthe priceofthemetal by
purchasingfuturescontracts.
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Chapter 16
30. First,thecompanyshouldattempttounderstandthedriversofthecyclicalityin
the industry. To the extent the company can identify the causes of the cycle,
managerscanmonitorthevariablesrelatedtothecycledriversandtakeactions
that anticipate changes in the cycle. These variables would serve as leading
indicatorsofchangesinthecycle.
However,managerscanalsostructurethecompanytobebettersuitedtosurviving
the cycles. Particularly, managers should structure costs of the company to
automaticallyadjusttochangesinproductdemand.Managerscandothis,for
example, by organizing the firms cost structure to be comprised largely of
variablecosts.
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199
200
Chapter 16
PROBLEMS
31.a. Inonesense,thecompanydidanexcellentjobofcontrollingcostssinceactual
costs were $700,000 below budget. However, it appears that the company
controlledcostswellthatshouldnothavebeenincurredinthefirstplace.The
factthatthevastmajorityofcustomersdonotusethemanualssuggeststhatthe
costs are not valueadding for the customers, and therefore, the cost of
producingmanualscouldhavebeenavoidedaltogether.
b. Ultimately, cost control must be viewed relative to the value created for
customers.Ifacostdoesnotaddvalueintheeyesofthecustomer,thecost
should be avoided rather than controlled. The customer will ultimately be
unwilling to pay the price for products that include substantial nonvalue
addingcosts.
32.a. Someconsiderationsforthebookstoreinclude:
Exerciseprudentcostmanagementoverdiscretionarycosts.Oneofthemore
significantdiscretionarycostsisadvertising.
Maximizeuseoftechnology.Althoughbookhandlingisinherentlyalabor
intensive exercise, transaction processing related to sales, purchases, and
repurchasescanbehighlyautomatedtosavelaborcosts.
Instituteprogramstoreduceemployeeturnover.Becausemanyemployees
maybestudents,employeeturnovercanbeveryhigh.Employeeturnover
increasesspecificcostssuchasemployeetraining,qualityfailurecosts,and
unemploymenttaxes.
Arrangefloorspacetominimizebookhandlingcostsandtofacilitatethe
flowofstudents.
Workcloselywithprofessorstoascertainwhichbookswillbeusedinthe
upcomingsemesterandwhichwillnotbeusedagain.
Develop associations with book wholesalers to market books that are no
longeradoptedbythelocaluniversity.
Encourageprofessorstoadoptthesamebookformultiplesections ofthe
sameclasstorealizeeconomiesofscaleinpurchasingandshipping.
Provideincentivestostudentstopurchasebooksearlysothattheworkload
canbespreadacrossmoretimeandbehandledbyfeweremployees.
Usetemporaryratherthanpermanentemployeestohandlebusyseasonwork.
Findinnovativewaystomanagefreightcosts.Examinealternativemodesof
transportation.Byorderingearlier,slowerandlessexpensivefreightdelivery
modescanbeused.
Rent temporary warehouse space to handle the bulge in inventory that
accompaniesthestartandendofschoolterms.
b. Someconsiderationsforbookpublishersinclude:
Maximizethelifecyclelengthofeachpublicationsothatfixedcostscanbe
spreadacrossmoreunits.
Managetheproductmixsothatunprofitablepublicationsareeliminated.
Managethenumberofpublicationsthatareoverseenbyeacheditor.
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accessible website, in whole or in part.
Chapter 16
Adoptlaborsavingtechnologytoimprovequalityandreducelaborcostsin
thepublishingoperation.
Makeprofessorsawarethattherearecoststoprovidingteachingsupplements
andthatsuchcostsmusteventuallybepassedontostudents.
Conductmarketresearchtodeterminewhatstudentsandprofessorsdesirein
terms of textbook features, content, and supplements. This research can
minimizeexpendituresonunprofitableandlowvolumeproducts.
Minimizethenumberofdraftsofeachbookthatmustbeprintedpriorto
printingthefinalversion.
Focusqualitycontroloneachtextbookwhileitisindraftformtoeliminate
changesthatareverycostlytomakeinlaterstagesofproduction.
Considertheuseofparttimeeditorsandotheremployees.
Consideroutsourcingthoseaspectsofoperationsthatcanbeaccomplished
moreefficientlyandeffectivelybyoutsidevendors.
Managethepurchasingofpaperandotherinputstominimizehandlingcosts
andmaximizepurchasediscounts.
ConcentrateondevelopingJITproductioncapabilitytominimizeproduction
ofbooksthatarecurrentlynotindemand.Thiswillreducestorageneedsand
costsassociatedwithcarryinginventory.
Adoptthelatesttechnologiesincostmanagement(e.g.,activitybasedcosting).
c. Studentscan
Sharetextbookswithafriendoracquaintancewhoistakingthesameclass.
Thisapproachcaneffectivelycutthecostofpurchasingbooksinhalf.
Avoidpurchasingsupplementsandothermaterialsthatarenotrequiredby
theinstructor.
Purchasetheirrequiredtextbooksfromstudentsratherthanthebookstore.
Thiseliminatesthebookstoremarkup.
Purchasethepaperbackeditionsratherthanhardbacktextbooks.
Selltextbookstothebookstoreorotherwholesalersattheendofthesemester.
Use electronic versions of the textbook rather than paper versions to
eliminatepublicationcosts.
Exert pressure on professors to eliminate the use of unnecessary
supplements.
d. Collegetextbooksaredifferenttodayforthreemajorreasons.First,thesubject
matterofmanydisciplineshaschangeddramaticallyinthepast20years.Second,
the technology available to publishers has advanced and allows more
sophisticated products to be developed. Third, the market has become
extraordinarily competitive and has forced textbook publishers to offer more
comprehensiveproductstoattractandmaintainmarketshare.
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201
202
33.
Chapter 16
(Fromemployerperspective)
Advantages
Disadvantages
a. Lessexpensive
Possiblylowerquality
Flexibility(ifnotworkingelsewhere)
Notavailableasmuchoutofclass
Less flexible (if employed elsewhere
onafulltimebasis)
b.Lowercost
Lessloyaltytothefirm
c.Greaterflexibility
ofpersonnel
Lessexpensive
Possiblylesscompetence
Lesscontinuity
d.Lessexpensive
Flexibility
Possiblypoorqualitywriting
Lesscontroloverwriters
e.Availability
Possiblylowerqualitywork
Possiblylessreliable
Possiblylessresponsive
Greaterpossibilityoftheft
f.Lessexpensive
Availability
Lesstraining
Possiblylessloyalty
Possiblypoorercustomerrelations
g.Lessexpensive
Possiblylessreliable
Possiblylesscontrol
Possiblylowerqualityofwork
h.Lessexpensive
Possiblylowerqualityofwork
Possiblylessreliable
Possiblylesscontrol
i. Morealertemployees
Lessexpensive
Lowerpension&benefitscosts
Possiblylowerqualityofwork
Possiblylesscompetentworkers
Lackofcompanyloyalty
j.Providesmoreflexible
capacity
Lowercost
Flexibilityofcapacity
Inconsistentwork
Reducedabilitytocontrol
quality
k.Availability
Betterqualityoflife
formomandpop
Lessexpensive
Potentialtheft
Potentialdamagetorelations
withcustomers
34. a.Theuseofparttimersisobviouslyaneffectivecostcontroltechnique.Thefirm
isabletoavoidincurringthefringebenefitandotherindirectcostsassociated
withfulltimeemployees.Further,usingparttimersallowsthefirmtoexpand
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Chapter 16
203
andcontractcapacitytoavoidthegenerationofidleresourcesthatarenormally
foundinaseasonalbusiness.
b. Iftherearequalitativedifferencesbetweenthoseworkerswhoarewillingto
work part time and those who are only willing to work full time, these
qualitativedifferencesmaybevisibleintheworktheyperform.However,the
quality of the work performed by paraprofessionals should be controllable
throughcarefulsupervisionandcarefulselectionoftasks.
c. Whether it is ethical to bill paraprofessionals time at the same rate as
professionals depends on whether the value of the paraprofessionals work
equalsthatoftheprofessionals.Assumingtheparaprofessionalsareperforming
equallywellonequaltasks,billingatthesamerateisethical.Alternatively,if
theparaprofessionalsareperforminglowervaluetasks,thenitisunethicalto
billtheirtimeatthesamerateasthatoftheprofessionals.
d. Itisunlikelythatparttimersandparaprofessionals,usedinlieuoffulltime
professionals,canenhancetheeffectivenessofpublicaccountingfirms.Itis
muchmorelikelythecasethattheyarehiredonthegroundsofefficiency.The
paraprofessionals and parttimers are a less expensive input than full time
professionalstothevariousserviceactivitiesconductedinpublicaccounting
firms.
35. a. CU
b. CU
c. CA
d. CU
e. CU
f. CAorCR
g. CA
h. CR
i. CU
j. CA
k. CC
l. CA
36.a. 2,0000.98=1,960flawlesspackagesperkWh.
b. AchievedefficiencyperkWh=(350,0005,000)180=1,916.7gasketsper
kWh,whichfallsshortofthestandardby43.3flawlessgasketsperkWh(1,960
1,916.7).
c. Achieved effectiveness = 5,000 350,000=1.43percent flaws,versus the
expected 2.0 percent rate of flaws. Thus, the machine is more effective in
producingflawlessoutputthanclaimed.
d. kWhatstandardefficiency:[(350,0005,000)1,960]=176.02kWh.
Std.kWh
Act.kWh
176.02
180.00
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204
Chapter 16
ExcesskWh
CostperkWh
Excesscost
3.98
4.50
$17.91
Actual
$370,500
1,630,000
$2,000,500
Appropriation
$400,000
1,600,000
$2,000,000
Under(Above)
Budget
$29,500
(30,000)
$(500)
TheEDPmanagerexceededhis$2,000,000totalappropriationeventhoughhe
underspent the variable portion of it. The amount by which the actual
expenditure exceeds the appropriation is sufficiently small enough that top
managementisunlikelytoviewtheexcessexpenditureasaproblem.
b.
Thedepartmentwasreasonablyeffectiveiftheaboveratioisaviablesurrogate
for effectiveness. However, it is somewhat problematic in this case in that
management has been looking askance at the rapid expansion of EDP
departmentservices.Also,thiscalculationdoesnotmeasurethequalityofthe
output.
c.
Variableexpensesefficiency:
Fixedexpensesefficiency:
d.(1)
Actual
ActualHrs.Std.Rate
ActualHrs.Std.Rate
3,900$100
3,900$100
$370,500
$390,000
$390,000
$19,500F
$0
SpendingVariance
EfficiencyVariance(note)
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Chapter 16
205
$19,500F
TotalVariableEDPCostVariance
Note:Sinceinputhoursofserviceareallassumedtobegoodhoursofoutputin
thiscase,thereisnoefficiencyvariance.Ifaseparatemeasureofoutputcanbe
devised,anefficiencyvariancecanbecalculated.
(2)
Actual
Budget
ActualHrs.Std.Rate
3,900$400
$1,630,000
$1,600,000
$1,560,000
$30,000U
$40,000U
SpendingVariance
VolumeVariance
$70,000U
TotalFixedEDPCostVariance
e. Todothis,normaloranticipatedhoursofutilizationmustbespecified.Inthe
caseathand,afirstapproximationcanbefoundbydividingthecurrentyear
budgetedfixedcostsbythenumberofanticipated(budgeted)hours($1,600,000
4,000= $400perhour)andthe budgeted variable costs bythebudgeted
servicehours($400,0004,000=$100perhour).Combiningthefixedand
variablerate($400plus$100),atotalof$500perhourofcomputertimeis
indicated.
Itseemsreasonabletobelievethatchargingalmost$500perhourforcomputer
timewheretherewasnochargepreviouslywouldcauseareductionindemand.
AreductionindemandwouldcausethefixedportionofEDPdepartmentcosts
tobeaveragedoverfewerhours,resultinginanevenhigherchargeperhour.
Forinstance,ifdemandcouldbeexpectedtodropby20percentto3,200hours,
thenthefixedrateperhourwouldriseto$500($1,600,0003,200)andthe
totalchargingratewouldriseto$600perhour.
f. CertainlyitwouldbeunethicaltoevaluatetheEDPmanageronameasureof
performance that fails to control for the effects of volume. The original
budgetarydataindicatethat$400,000ofthebudgetedcostsisvariable.The
actual variable costs willdifferfromthebudgeted amountifactual volume
differs from budgeted volumeregardless of how well the EDP manager
controlscosts.Accordingly,itisnecessarytocontrolforthedifferencebetween
budgetedandactualvolumewhenevaluatingtheEDPmanager.
38.
BothEFTandEFC:Useofsimple,inexpensiveantibioticsisfoundtobebetter
treatment(moreeffective)andlessexpensive(moreefficient).CAbecauseit
callsforusingalowercostalternative.
EFC:WatchfulwaitingdoesthejobbetterthanusingexpensiveMRIs.
CA:Watchfulwaitingisalowercostsubstitute.
EFT:Medicalprofessionalsfindreducedlikelihoodofdyingfromheartattacks
byprescribingaspirinand/orbetablockers.
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206
Chapter 16
EFT:Medicalprofessionalsfindthatinhaledsteroidmedicationscanprevent
disabilityandcomplicationsamongasthmaticpatients.
EFC&CA:Patientstrainedtoavoidasthmatriggers,measuretheirownlung
function,followaconsistenttreatmentplan,andmakeadjustmentsintheirown
medicationsisamuchlowercostsubstitutethanextendedhospitalstaysand
emergencyroomvisits.
39.a. Aflexiblebudgetallowsmanagementtodirectlycomparetheactualcostof
operationswithbudgetedcostsfortheactivityachieved.Itassistsmanagement
inevaluatingtheeffectsofvaryinglevelsofactivityoncosts,profits,andcash
position, thus aiding in the choice of the level of operation for planning
purposes.
Theflexiblebudgetspresentedarebasedonthreedifferentactivitymeasures,
noneofwhichcoincideswiththeactuallevelofperformanceforNovember.
Thebudgetmustberestatedtoalevelofactivitythatmatchestheactualresults.
Thefixedandvariablecomponentsofthemixedcostsmustbesegregatedanda
budgetedcostcalculatedforthelevelofactivityattained.
b. Salessalariesaretheonlycostthatvariesperfectlywithnumberofsalespersons
($100,000100=$1,000).Thefollowingvarywithsalesorders:
Salescommissions
Salestravel
Salesofficeexpense
Shippingexpense
Totalvariablecost
$400persalesorder
100persalesorder($50,000assumedfixed)
30persalesorder($400,000assumedfixed)
100persalesorder($500,000assumedfixed)
$630persalesorder
c. BirminghamChemical
SellingExpenseReportNovember
MonthlyExpenses
Adver.&promo.
Admin.salaries
Salessalaries1
Salescommissions2
Salespersontravel3
Salesoff.expense4
Shippingexpense5
Budget
$1,600,000
80,000
90,000
596,000
199,000
448,000
660,000
$3,673,000
Actual
$1,550,000
80,000
101,000
609,000
185,000
500,000
640,000
$3,665,000
Variance
$50,000F
0
11,000U
13,000U
14,000F
52,000U
20,000F
$8,000F
($100,000100)90=$90,000
($600,000$15,000,000)$14,900,000=$596,000
3
Changeincost:$225,000$200,000=$25,000
Changeinsalesdollars:$17,500,000$15,000,000=$2,500,000
Variablecostperdollarofsales=changeincostdividedbychangeinactivitylevel:$25,000
$2,500,000=$0.01perdollarofsales
Fixedcostat$15,000,000:$200,000($15,000,0000.01)=$50,000
Totaltravelbudget:$50,000fixed+(14,900,0000.01)=$199,000(variable=$149,000)
4
Changeincost:$452,500$445,000=$7,500
Changeinnumberoforders:1,7501,500=250
2
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Chapter 16
207
Variablecostperorder:$7,500250=$30
Fixedcost:$445,000(1,500$30)=$400,000
Totalofficeexpensebudget:$400,000+(1,600$30)=$448,000
5
Changeincost:$675,000$650,000=$25,000
Changeinnumberofunits:17,50015,000=2,500
Variablecostperunit:$25,0002,500=$10.00
Fixedcost:$650,000(15,000$10.00)=$500,000
Totalshippingexpensebudget:$500,000+(16,000$10.00)=$660,000
208
Chapter 16
fromeitherpublicorprivatesourcesonreasonabletermsifthefirmsareforcedto
gotocapitalmarketsunderdistresscircumstances.
42.a. The high rate of growth has created a cash crunch for the firm because a
significantamountofresourcesistiedupintheoperatingcycle.Theoperating
cycle begins with cash being invested in inventory. Once the goods are
completedandsold,theinventoryisconvertedtoanaccountsreceivable.Only
whenthereceivablesarecollecteddoestheproductionofinventoryresultin
cash collections. As production is ramped up, more cash is invested in the
operatingcycle.Inthiscase,$4,850,000isinvestedinaccountsreceivableand
inventory,andonly$200,000isincash.
b. Thefirmneedstoeitherslowdownthepayablescycleorspeedupthecollections
cycle,orboth.Thecollectionscyclecanbeacceleratedbyofferingdiscountsto
customerswhowillpayquicklyfollowingthesale;also,JITproductionreduces
theamountofcashinvestedininventory,andreducestheamountoftimerequired
toproduceinventory.Thepayablescyclecanbeextendedbyaskingsuppliersto
grantmoregenerouspaymenttermssuchthattheoutflowofcashtopayfor
suppliesisdelayed.Additionally,thefirmcouldopenalineofcredittohelp
managecashflowintheshortterm.
43.To:
From:
Subject:
CarolineRoper
BretShulman
ExplanationofNovember2013Variances
Chapter 16
variancesareunfavorable,theincreasedcostsof$10,400aremorethanoffset
bytheadditionalrevenuesof$40,740withwhichtheseitemsareassociated.
f. Thefavorablefoodpricevariancewasdeterminedbymultiplyingthedifference
between the budgeted and actual price per participant day by the actual
participant days. The actual price per participant day was determined by
dividingtheactualfoodchargesbythetotalparticipantdays($32,0001,280).
g. Whilethecombinedpromotionalpiecehada$5,000unfavorableimpacton
Novemberexpenses,therewillbenoneedforfurtherpromotionoftheBoston
program.Therefore,the$20,000budgetedforthispurposeinDecemberwill
not be expended, lowering planned expenses for the month. The promotion
timingdifferencerepresentsanincorrectmatchingofcostsandrevenue.The
costsallocated totheBostonprogramshouldbereflected ontheDecember
statementofoperationstobematchedagainsttheDecemberprogram.
h. ThecoursedevelopmentvarianceisunfavorableintheNovemberbudget,but
itsoverallimpactonthecompanycannotbedetermineduntilsuchtimeasthe
levelofacceptanceofthenewcourseisexperienced.
(CMAadapted)
44.a. Thecontrollerwouldlikelysupporttheprocurementofsuchasystembecauseit
wouldallowcontrollerfunctionstobeexecutedmoreefficiently,andpossibly,
at a higher level of quality. The improvement in efficiency would arise
incidentaltotheelimination ofthepaperdocuments involvedinpurchasing
processes (e.g., purchase order) and payment processes (e.g., checks). The
improvementinqualitywouldarisefromeliminatingpointsintheprocessin
which human error can be introducedfor example, manually transferring
informationfromamaterialrequisitionformontoapurchaseorder.
Anyreluctanceonthepartofthecontrollerwouldlikelyberelatedtotheneed
todevelopnewcontrolstomaintainthesecurityoftheprocurementprocess.
b. TheVPofproductdevelopmentwouldlikelyopposeimplementingthesystem.
Perhaps more so than other executives in the firm, the VP of product
developmentbenefitsfrominteractingdirectlyandpersonallywithvendors.It
will be difficult in an eprocurement system to replicate the richness of
informationexchangesthatoccurinfacetofaceconversations,orevenphone
conversations. Thus, to the extent that many innovative product ideas arise
among vendors, the flow of those ideas might be curtailed with the
implementationofaneprocurementsystem.
45.a. Thebreakevenpointwouldoccurwherethetotalrevenuesequalthetotalcosts.
AssumeXequalsnumberofparticipants,then
Totalrevenues=$600X
Totalcosts=($200+$80+$150)X+$25,000=$430X+$25,000
Breakevenpoint:$600X$430X$25,000=$0
X=147participants(rounded)
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209
210
Chapter 16
b. Yes,thereissubstantialriskbecauseifthedepartmentisunabletoattractat
least147participants,thedepartmentwilllosemoneyontheacademy.Since
thechiefinsiststhattherearenoslackresourcestocoversuchaloss,theriskis
unacceptablyhigh.
c. Thesourceofriskisthefixedcosts.Iftherentalforthetrainingfacilitiescould
berestructuredsothatthedepartmentwaschargedonaperparticipantbasis,
rather than a flatrate basis, this source of risk could be eliminated.
Accordingly,thedepartmentshouldnegotiatewiththeownerofthefacilitiesto
chargethedepartmentonaperparticipantbasisandtrytokeepthecostunder
$170perparticipant,sothetotalvariablecostoftheacademyislessthan$600
perparticipant,andthetotalfixedcostsare$0.
46.a. TherearetwogeneraltypesofrecommendationsthatcouldbemadetoLogan.
First,onecouldrecommendtoLoganthatforecastingmodelsforenergycosts
beimproved.Toaidinthisprocess,astatisticianoreconometriciancouldbe
hired to improve existing forecast models. Second, some or all of the
uncertainty regarding the price of energy could be eliminated by utilizing
forwardcontractsorhedgingstrategies.Accordingly,arecommendationshould
bemadetoLogantoconsiderimplementingsuchastrategy.
b. The management of energy costs should have two focal points. One focus
shouldbeonmanagingthepriceofenergy.Betteruseofforwardcontractsand
hedgingstrategieswouldbeusefultomanagethepriceofenergy.Thesecond
focuswouldbeonmanagingtheusageofenergy.Theusageofenergycanbe
controlledbymanagingtheefficiencywithwhichenergyisconsumedandby
usingthemosteconomicalenergysources.
47.(1)Thefinancingcostsofinventoryhavetwosourcesofrisk.Thefirstrelatesto
theinventoryitself:isthevalueofinventorytobefinancedandthelengthof
timetheinventorymustbefinanced;thesecondrelatestotheinterestratepaid
toobtainthefinancingfortheinventory.Thevalueofinventorytobefinanced
canbereducedbymovingtoJITproductionor,ataminimum,deferringthe
buildupofinventoryuntillaterintheyear.Theinterestratepaidtoborrow
fundstofinancetheinventorycanbecontrolledthroughhedgingstrategies
involvingtheuseoffuturescontractsorbyenteringintolongtermagreements
withlenders.
(2) Thecostofresinalsohastwomainriskfactors.Oneisthequantityofresinto
beacquiredandtheotheristhepriceperunittobepaidfortheresin.The
quantityofresinisbestcontrolledbyeffectivelymanagingtheefficiencyof
operationsandcorrectlyforecastingthequantityofresintobeconsumed.The
priceriskisbestmanagedbyenteringintoforwardcontractsorbyhedging
usingfuturescontracts(ifavailable).
(3) Actsofnatureare,bydefinition,impossibleornearlyimpossibletopredict;
i.e.,theseeventsoccuronarandombasis.Accordingly,purchasinginsurance
isthebestapproachformanagingthisrisk.
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Chapter 16
(4) Priceuncertaintyforproductsproducedcanbemanagedbyenteringintolong
termcontractswithcustomers,orbypurchasingfuturescontracts(technically,
thefirmwouldbeshortsellingcontracts)toprotectagainstpricedeclines.
(5) Uncertaintyregardingdemandforthecompanysproductsisbestdealtwith
by improving managers understanding of the demand drivers for the
companys products. Doing so will allow the company to develop better
forecastsofdemand.Betterforecastswillallowthecompanytoimprovethe
relationshipbetweenproductionvolumeandsalesvolumeandreducetherisks
ofobsoleteinventoryaswellasstockoutages.
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