管理会计ima13sol_ch06.doc

CHAPTER 6COVERAGE OF LEARNING OBJECTIVESLEARNING OBJECTIVEFUNDA-MENTAL ASSIGN-MENTMATERIALCRITICAL THINKING EXERCISES AND EXERCISESPROBLEMSCASES, EXCEL, COLLAB. & INTERNET EXERCISESLO1: Use opportunity cost to analyze the income effects of a given alternative.24,29,30,31, 32,41,4349,50,62LO2: Decide whether to make or to buy certain parts or products.A1,B125,33,34,35,51,5264,65,68LO3: Decide whether a joint product should be processed beyond the split-off point.A2,B236,37,55,6367LO4: Identify irrelevant information in disposal of obsolete inventory.27,38,56,58LO5: Decide whether to keep or replace equipment.A3,B3,B439,4157,59,60LO6: Explain how unit costs can be misleading.26,40LO7: Discuss how performance measures can affect decision making.B44259,60LO8: Construct absorption and contribution format income statements and identify which is better for decision making.A4,B528,44,45,46, 47,4866CHAPTER 6Relevant Information and Decision Making: Production Decisions6-A1(20 min)1.The key to this question is what will happen to the fixed overhead costs if production of the boxes is discontinued. Assume that all $60,000 of fixed costs will continue. Then, Sunshine State will lose $36,000 by purchasing the boxes from Weyerhaeuser:Payment to Weyerhaeuser, 80,000 x $2.40$192,000Costs saved, variable costs 156,000Additional costs$ 36,0002.Some subjective factors are:Might Weyerhaeuser raise prices if Sunshine State closed down its box-making facility?Will sub-contracting the box production affect the quality of the boxes?Is a timely supply of boxes assured, even if the number needed changes?Does Sunshine State sacrifice proprietary information when disclosing the box specifications to Weyerhaeuser?3.In this case the fixed costs are relevant. However, it is not the depreciation on the old equipment that is relevant. It is the cost of the new equipment. Annual cost savings by not producing the boxes now will be:Variable costs$156,000Investment avoided (annualized) 100,000Total saved$256,000The payment to Weyerhaeuser is $256,000-$192,000 = $64,000 less than the savings, so Sunshine State would be $64,000 better off subcontracting the production of the boxes.6-A2(15 min.) Table is in thousands of dollars.1,2.(a)(b)(a)-(b)(c)(a)-(b)-(c)SeparableSalesSalesCostsIncrementalBeyondatIncrementalBeyondGain orSplit-OffSplit-OffSalesSplit-Off(Loss)A23054176190(14)B330283023002C1755412110021Increase in overall operating income from further processing of A, B, and C 9The incremental analysis indicates that Products B and C should be processed further, but Product A should be sold at split-off. The overall operating income would be $42,000, as follows:Sales: $54,000 + $330,000 + $175,000$559,000Joint cost of goods sold$117,000Separable cost of goods sold: $300,000 + $100,000 400,000 517,000Operating income$ 42,000Compare this with the present operating income of $28,000. That is, $230,000 + $330,000 + $175,000 - ($190,000 + $300,000 + $100,000 + $117,000) = $28,000. The extra $14,000 of operating income comes from eliminating the $14,000 loss resulting from processing Product A beyond the split-off point.6-A3 (30-40 min.)Problem 6-60 is an extension of this problem. The two problems make a good combination.1.Operating inflows for each year, old machine: $910,000 - ($810,000 + $60,000)$40,000Operating inflows for each year, new machine: $910,000 - ($810,000 + $25,000*)$75,000* $60,000 - $35,000Cash flow statements (in thousands of dollars):KeepBuyThreeThreeYearYearsYearsYearYearsYears 1 2 & 3Together 1 2 & 3TogetherReceipts, inflows from operations40401207575225Disbursements: Purchase of old equipment(87)*-(87)(87)-(87) Purchase of new equipment: Total costs less proceeds from disposal of old equipment ($99,000-$16,000) - - -(83) - (83)Net cash inflow (outflow)(47)40 33(95)75 55*Assumes that the outlay of $87,000 took place on January 2, 2004, or sometime during 2004. Some students will ignore this item, assuming correctly that it is irrelevant to the decision. However, note that a statement for the entire year was requested.The difference for three years taken together is $22,000 ($55,000 - $33,000). Note particularly that the $87,000 book value can be omitted from the comparison. Merely cross out the entire line; although the column totals will be affected, the net difference will still be $22,000.2.Income statements (in thousands of dollars):KeepBuyThreeThreeYearsYearsYearYearsYears1, 2 & 3Together12 & 3TogetherSales9102,7309109102,730Expenses:Other expenses8102,4308108102,430Operating of machine60180252575Depreciation 29 87* 33 33 99Total expenses8992,6978688682,604Loss on disposal:Proceeds (revenue)-(16)-(16)Book value (expense) - - 87 - 87*Loss - - 71 - 71Total charges8992,6979398682,675Net income 11 33 (29) 42 55*As in part (1), the $87,000 book value can be omitted from the comparison without changing the $22,000 difference. This would mean dropping the depreciation item of $29,000 per year (a cumulative effect of $87,000) under the keep alternative, and dropping the book value item of $87,000 in the loss on disposal computation under the buy alternative.Difference for three years together, $55,000 - $33,000 = $22,000.Note the motivational factors here. A manager may be reluctant to replace simply because the large loss on disposal will severely harm the profit performance in Year 1.3.The net difference for the three years taken together would be unaffected because the item is a past cost. You can substitute any number for the original $87,000 figure without changing this answer.For example, examine how the results would change in part (1) by inserting $1 million where the $87,000 now appears (in thousands of dollars):Keep:Buy:Three YearsThree YearsTogether TogetherDifferenceReceipts120225105Disbursements:Purchase of old equipment(1,000)(1,000)0Purchase of new equipment:Gross price99Disposal proceeds of old16 -( 83) (83)Net cash outflow( 880)( 858) 22In sum, this may be a horrible situation. The manager really blundered. But keeping the old equipment will compound the blunder to the cumulative tune of $22,000 over the next three years.4.Diplomatically, Lee should try to convey the following. All of us tend to indulge in the erroneous idea that we can soothe the wounded pride of a bad purchase decision by using the item instead of replacing it. The fallacy is believing that a current or future action can influence the long-run impact of a past outlay. All past costs are down the drain. Nothing can change what has already happened. The $87,000 has been spent. Subsequent accounting for the item is irrelevant. The schedules in parts (1) and (2) clearly show that we may completely ignore the $87,000 original outlay and still have a correct analysis. The important point is that the $87,000 is not an element of difference between alternatives and, therefore, may be safely ignored. The only relevant items are those expected future items that will differ between alternatives.5.The $87,000 purchase of the original equipment, the sales, and the other expenses are irrelevant because they are common to both alternatives. The relevant items are the following (in thousands of dollars):Three YearsTogetherKeepBuyOperating of machine (3 x $60; 3 x $25)$180$ 75Incremental cost of new machine:Total cost$99Less proceeds of old machine 16Incremental cost - 83Total relevant costs$180$158Difference in favor of buying$ 22 6-A4(40-50 min.)1.COLUMBIA COMPANYContribution Income StatementFor the Year Ended December 31, 2004(in thousands of dollars)Sales$1,800Less variable expensesDirect material$400Direct labor330Variable manufacturing overhead (Schedule 1) 150Total variable manufacturing cost of goods sold$880Variable selling expenses60Variable administrative expenses 23Total variable expenses 963Contribution margin$ 837Less fixed expenses:Fixed manufacturing overhead (Schedule 2)$232Selling expenses240Administrative expenses 121Total fixed expenses 593Operating income$ 244COLUMBIA COMPANYAbsorption Income StatementFor the Year Ended December 31, 2004(in thousands of dollars)Sales$1,800Less manufacturing cost of goods sold:Direct material$400Direct labor330Manufacturing overhead (Schedules 1 and 2) 382Total manufacturing cost of goods sold 1,112Gross margin$ 688Less:Selling expenses$300Administrative expenses 144 444Operating income$ 244COLUMBIA COMPANYSchedules of Manufacturing OverheadFor the Year Ended December 31, 2004(in thousands of dollars)Schedule 1: Variable CostsSupplies$ 20Utilities, variable portion40Indirect labor, variable portion 90$150Schedule 2: Fixed CostsUtilities, fixed portion$ 12Indirect labor, fixed portion40Depreciation110Property taxes20Supervisory salaries 50 232Total manufacturing overhead$3822.Change in revenue$200,000Change in total contribution margin:Contribution margin ratio in part 1 is $837 $1,800 = .465Ratio times increase in revenue is .465 x $200,000$ 93,000Operating income before change 244,000New operating income$337,000This analysis is readily done by using data from the contribution income statement. In contrast, the data in the absorption income statement must be analyzed and split into variable and fixed categories before the effect on operating income can be estimated. 6-B1(15-20 min.)1.MakeBuy Total Per Unit TotalPer UnitPurchase cost10,000,00050Direct material5,500,00027.5Direct labor1,900,0009.5Factory overhead, variable1,100,0005.5Factory overhead, fixed avoided 1,000,000 5.0Total relevant costs9,500,00047.510,000,00050Difference in favor of making 500,000 2.5The numerical difference in favor of making is 500,000 or 2.5 per unit. The relevant fixed costs are 1,000,000, not 2,500,000.2.Buy and LeaveMakeCapacity IdleBuy and RentRent revenue - - 1,250,000Obtaining of components(9,500,000) (10,000,000)(10,000,000)Net relevant costs(9,500,000)(10,000,000)(8,750,000)The final column indicates that buying the components and renting the vacated capacity will yield the best results in this case. The favorable difference is 9,500,000 - 8,750,000 = 750,000. 6-B2(15 min.)1.Sales ($400 + $600 + $100)$1,100Costs:Raw materials$700Processing 100Total 800Profit$3002.Sales ($860 + $850 + $175)$1,885Costs:Joint costs$800Frozen dinner costs470Salisbury steak costs200Tanning costs 80Total costs 1,550Profit$ 335Although it is more profitable to process all three products further than it is to sell them all at the split-off point, it is important to look at the economic benefit from further processing of each individual product.3.Steaks to frozen dinners:Additional revenue from processing further ($860 - $400)$460Additional cost for processing further 470Increase (decrease) in profit from processing further$ (10)Hamburger to Salisbury steaks:Additional revenue from processing further ($850 - $600)$250Additional cost for processing further 200Increase (decrease) in profit from processing further$ 50Untanned hide to tanned hide:Additional revenue from processing further ($175 - $100)$75Additional cost for processing further 80Increase (decrease) in profit from processing further$ (5)Only the hamburger should be processed further, because it is the only product whose additional revenue for processing further exceeds the additional cost. The resulting profit would be $350:Sales ($400 + $850 + $100)$1,350Costs:Joint costs$800Further processing of hamburger 200Total cost 1,000Profit$ 350 6-B3(15-20 min.)1.Three Years TogetherKeepReplaceDifferenceCash operating costs$42,000$22,500$19,500Old equipment, book value:Periodic write-off asdepreciation15,000-or lump-sum write-off-15,000*Disposal value-3,000*3,000New equipment, acquisition cost 15,000*- 15,000Total costs$57,000$49,500$ 7,500*In a formal income statement, these two items would be combined as loss on disposal of $15,000 - $3,000 = $12,000.*In a formal income statement, written off as straight-line depreciation of $15,000 3 = $5,000 for each of three years.2.Three Years TogetherKeepReplaceDifferenceCash operating costs$42,000$22,500$19,500Disposal value of old equipment-3,0003,000New equipment, acquisition cost- 15,000- 15,000Total relevant costs$42,000$34,500$ 7,500This tabulation is clearer because it focuses on only those items that affect the decision.3.The prospective benefits of the replacement alternative:3 x ($14,000 - $7,500) =$19,500Deduct initial net cash outlay required,$15,000 - $3,000 = 12,000Difference in favor of replacement$ 7,500Of course, the new equipment is likely to be faster, thus saving operator time. The latter is important, but it is not quantified in this problem.6-B4(10 min.)1.The replacement alternative would be chosen because the county would have $7,500 more cash accumulated in three years.2.The keep alternative would be chosen because the higher overall costs of photocopying for the first year would be shown for the replacement alternative (under accrual accounting):First Year Keep ReplaceCash operating costs$14,000$ 7,500Depreciation expense5,0005,000Loss on disposal 12,000Total costs$19,000$24,500Thus, the performance evaluation model might motivate the manager to make a decision that would be undesirable in the long run.6-B5(40-50 min.)1.KINGLAND MANUFACTURINGContribution Income StatementFor the Year Ended December 31, 2004(In thousands of dollars)Sales$10,000Less variable expenses:Direct material$4,000Direct labor2,000Variable indirect manufacturing costs (Schedule 1) 960Total variable manufacturing cost of goods sold$6,960Variable selling expenses:Sales commissions$500Shipping expenses 300800Variable clerical salaries 400Total variable expenses 8,160Contribution margin$ 1,840Less fixed expenses:Manufacturing (Schedule 2)$ 582Selling (advertising)200Administrative-executive salaries 100Total fixed expenses 882Operating income$ 958KINGLAND MANUFACTURINGAbsorption Income StatementFor the Year Ended December 31, 2004(In thousands of dollars)Sales$10,000Less manufacturing cost of goods sold:Direct material$4,000Direct labor2,000Indirect manufacturing costs (Schedules 1 and 2) 1,542 7,542Gross profit$ 2,458Selling expenses:Sales commissions$500Advertising200Shipping expenses 300$1,000Administrative expenses:Executive salaries$100Clerical salaries 400 500 1,500Operating income$ 958KINGLAND MANUFACTURINGSchedules 1 and 2Indirect Manufacturing CostsFor the Year Ended December 31, 2004(In thousands of dollars)Schedule 1: Variable CostsCutting bits$ 60Abrasives for machining100Indirect labor 800$ 960Schedule 2: Fixed CostsFactory supervisors salaries$100Factory methods research40Long-term rent, factory100Fire insurance on equipment2Property taxes on equipment10Depreciation on equipment300Factory superintendents salary 30 582Total indirect manufacturing costs$1,5422.Operating income would increase from $958,000 to $1,050,000, computed as follows:Increase in revenue$500,000Increase in total contribution margin:Contribution margin ratio in contribution incomestatement is $1,840 $10,000 = .184.Ratio times revenue is .184 x $500,000$ 92,000Increase in fixed expenses0Operating income before increase $958,000New operating income$1,050,000The above analysis is readily calculated by using data from the contribution income statement. In contrast, the data in the absorption income statement must be analyzed and divided into variable and fixed categories before the effect on operating income can be estimated.6-1An opportunity cost does not entail a disbursement of cash at any future time, whereas an outlay cost does entail an additional disbursement sooner or later.6-2The $800 represents an opportunity cost. It is the amount forgone by rejecting an opportunity. It signifies that the value to the owner of keeping those strangers out of the summerhouse for that two-week period is at least $800.6-3Accountants do not ordinarily record opportunity costs in accounting records, because those records are traditionally concerned with real transactions rather than possible transactions. It is impossible to record data on all lost opportunities.6-4A differential cost is any difference in total cost or revenue between two alternatives. A differential cos