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Solution Manual For Cost Accounting, 15th Edition

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    Solutions Manual COST ACCOUNTING Fifteenth Edition Charles T. Horngren Srikant M. Datar Madhav V. Rajan

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    iii TABLE OF CONTENTS Preface iv Dedication ........................................................................................................................................v Supplements Available for 15th Edition vi Alternative Suggested Chapter Sequences viii Categorization of Assignment Material xii Presentation of Solutions xxviii Major Changes in Text for the 15th Edition xxix Changes in Assignment Material for the 15th Edition xxxv Chapter Solutions 1 The Manager and Management Accounting 1-1 2 An Introduction to Cost Terms and Purposes 2-1 3 Cost-Volume-Profit Analysis 3-1 4 Job Costing 4-1 5 Activity-Based Costing and Activity-Based Management 5-1 6 Master Budget and Responsibility Accounting 6-1 7 Flexible Budgets, Direct-Cost Variances, and Management Control 7-1 8 Flexible Budgets, Overhead Cost Variances, and Management Control 8-1 9 Inventory Costing and Capacity Analysis 9-1 10 Determining How Costs Behave 10-1 11 Decision Making and Relevant Information 11-1 12 Strategy, Balanced Scorecard, and Strategic Profitability Analysis 12-1 13 Pricing Decisions and Cost Management 13-1 14 Cost Allocation, Customer-Profitability Analysis, and Sales-Variance Analysis 14-1 15 Allocation of Support-Department Costs, Common Costs, and Revenues 15-1 16 Cost Allocation: Joint Products and Byproducts 16-1 17 Process Costing 17-1 18 Spoilage, Rework, and Scrap 18-1 19 Balanced Scorecard: Quality, Time, and the Theory of Constraints 19-1 20 Inventory Management, Just-in-Time, and Simplified Costing Methods 20-1 21 Capital Budgeting and Cost Analysis 21-1 22 Management Control Systems, Transfer Pricing, and Multinational Considerations 22-1 23 Performance Measurement, Compensation, and Multinational Considerations 23-1

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    iv PREFACE The keys to the success of a course in cost accounting are the assignment and discussion of provocative problem material. The gathering of high-quality assignment material has been a crucial phase of this book’s preparation—not a painful afterthought. Please review the preface in the text in conjunction with examining the suggestions in this Solutions Manual . Please also read all the front matter of this manual. Anna Jensen, Barbara Durham, and Tola Lawal assisted us greatly with contributing, critiquing, and checking of the problems and their solutions. We thank them for their many wonderful contributions. We appreciate the support of Caroline Roop. Her ability to cheerfully respond to our challenges made our tasks much more manageable. We further appreciate the technical support for data analysis provided by DeYett Law. We are thankful to Ellen Geary and Andra Skaalrud at Pearson for providing continual support in preparing this Solutions Manual. SRIKANT M. DATAR MADHAV V. RAJAN

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    v In memory of Charles T. Horngren 1926–2011 Chuck Horngren revolutionized cost and management accounting. He loved new ideas and introduced many new concepts. He had the unique gift of explaining these concepts in simple and creative ways. He epitomized excellence and never tired of details, whether it was finding exactly the right word or working and reworking assignment materials. He combined his great intellect with genuine humility and warmth and a human touch that inspired others to do their best. He taught us many lessons about life through his amazing discipline, his ability to make everyone feel welcome, and his love of family. It was a great privilege, pleasure, and honor to have known Chuck Horngren. Few individuals will have the enormous influence that Chuck had on the accounting profession. Fewer still will be able to do it with the class and style that was his hallmark. He was unique, special, and amazing in many, many ways and, at once, a role model, teacher, mentor, and friend. He will be deeply missed. Srikant M. Datar Harvard University Madhav V . Rajan Stanford University

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    vi SUPPLEMENTS AVAILABLE FOR THE 15TH EDITION A complete package of supplements is available to assist students and instructors in using Hogren, Cost Accounting , 15th edition. MyAccountingLab MyAccountingLab is an online homework and assessment tool designed to help students practice cost accounting problems and concepts and to give their instructors feedback on student performance. It lets cost accounting professors assign a homework deliverable that is automatically graded but that also serves as a tutorial experience for students. Based on Pearson’s MathXL platform, which has graded millions of assignments, MyAccountingLab provides a strong, reliable platform with a rock solid performance history. To learn more, visit www.myaccountinglab.com . For Instructors Instructor Resource Center (IRC) These password-protected resources are accessible from www.pearsonhighered.com for Cost Accounting , 15th ed. Resources include the following: • Solutions Manual • Test Bank in Word and in TestGen, including algorithmic questions • Instructor’s Manual • PowerPoint Presentations • Image Library Instructor’s Manual By Sandra J. Cereola © 2015 | 0-13-342875-3 | Online The chapter-by-chapter manual offers helpful classroom suggestions and teaching tips. Test Item File © 2015 | 0-13-342872-9 | Online This collection of tests for each chapter offers an array of questions ranging from easy to difficult. An electronic version of these questions is also available. The Test Item File now supports Association to Advance Collegiate Schools of Business (AACSB) International Accreditation.

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    vii Solutions Manual © 2015 | 0-13-342877-X | Online This manual contains the fully worked-out and accuracy-checked solutions for every question, exercise, and problem in the text. PowerPoint Presentations © 2015 | 0-13-342876-1 | Online These chapter-by-chapter presentations provide you with a slide show ready for classroom use. Use the slides as they are or edit them to meet your classroom needs. For Students In addition to this textbook and MyAccountingLab, a companion Web site is available for students at www.pearsonhighered.com/horngren.

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    viii ALTERNATIVE SUGGESTED CHAPTER SEQUENCES The Preface to Cost Accounting noted that our aim in organizing the material was to present a modular, flexible organization that permits a course to be custom tailored. This section presents six possible sequences for a first course in cost accounting. For each of these six sequences, we also present the sequence of a second course that would result in coverage of many or all of the topics in Cost Accounting . Outlines I–V all include Chapters 1 to 9 in varying orders of sequence. Outline VI has a strong (almost exclusive) focus on the decision making role of cost accounting. We analyzed the sequences of chapters assigned by many users of the 14th edition. Although many instructors tended to follow the sequence in the text, other instructors tailored sequences to fit their particular desires. These tailored sequences varied considerably. By far the most popular departure was to assign the chapter on process costing (Chapter 17) immediately after the coverage of job costing (Chapter 4) and activity-based costing (Chapter 5). The next most popular departure was to assign Chapter 10 after Chapter 2 or 3. All the accompanying alternative assignment schedules have an optional provision to facilitate tailoring a course. Obviously, instructors should alter any suggested sequence to suit their preferences. OUTLINE I: This basic course provides a balance of topics between the major purposes of cost accounting: 1. Calculating the cost of products, services, and other cost objects 2. Obtaining information for planning and control and performance evaluation 3. Analyzing relevant information for making decisions Finishing the first course with Chapters 11 and 13 means that topics with less procedural emphasis are highlighted in the last weeks of the course; these two chapters also introduce topics covered in more detail in a second course. Some instructors may assign Chapter 10 without using the Appendix on “Regression Analysis,” preferring to delay use of the Appendix until the second course (especially if many students have not been exposed to regression analysis at the time of the basic course). OUTLINE II: This basic course covers the same chapters as Outline I but assigns Chapter 10 (Determining How Costs Behaves) immediately after Chapter 3 (Cost Volume-Profit Analysis). It also assigns Chapter 12 on Strategy, Balanced Scorecard, and Strategic Profitability Analysis. This first part of the second course emphasizes cost management and performance evaluation before covering the six chapters (14–20) on cost allocation and other aspects of costing systems. OUTLINE III: After covering Chapters 1 to 9 and 11 in the basic course, this sequence finishes with a chapter on strategic issues (Chapter 12) and two chapters on cost allocation topics (Chapters 14 and 15). Some instructors view it as important that students who take only one cost accounting course become aware of how pervasive cost allocation issues are in practice.

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    ix OUTLINE IV: This basic course is similar to Outline II with one key exception: Chapter 17 (Process Costing) is covered immediately after Chapter 5. Many instructors prefer to cover job costing and process costing in sequence so that their differences are highlighted. OUTLINE V: This basic course emphasizes technical cost accounting topics more than the other five outlines. Chapters 17 and 18 extend Chapters 4 and 5; covering 4, 5, 17, and 18 as a single section of the course provides students with a solid understanding of product costing alternatives. OUTLINE VI: This basic course is adopted by instructors who wish to put most emphasis on the decision making and performance evaluation aspects of cost accounting. Finishing the basic course with Chapters 22 and 23 means that behavioral issues are highlighted in the final weeks of the course.

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    x OUTLINE I OUTLINE II OUTLINE III BASIC COURSE Chapter Number of Sessions Chapter Number of Sessions Chapter Number of Sessions 1 (1) 1 (1) 1 (1) 2 (2) 2 (2) 2 (2) 3 (2) 3 (2) 3 (2) 4 (3) 10 (2) 4 (3) 5 (3) 4 (3) 5 (3) 6 (2) 5 (3) 6 (2) 7 (2) 6 (2) 7 (2) 8 (2) 7 (2) 8 (2) 9 (2) 8 (2) 9 (2) 10 (2) 9 (2) 11 (2) 11 (2) 11 (2) 12 (2) 13 (2) 12 (2) 14 (2) 13 (2) 15 (2) Tests (3) Tests (3) Tests (3) Optional (4) Optional (2) Optional (2) 32 32 32 SECOND COURSE Chapter Number of Sessions Chapter Number of Sessions Chapter Number of Sessions 12 (3) 21 (3) 10 (2) 14 (2) 22 (2) 13 (2) 15 (2) 23 (2) 21 (3) 16 (2) 14 (3) 15 (2) 17 (2) 15 (2) 17 (3) 18 (2) 16 (2) 18 (2) 19 (2) 17 (3) 19 (2) 20 (2) 18 (2) 20 (3) 21 (2) 19 (2) 22 (2) 22 (2) 20 (2) 23 (2) 23 (2) Tests (3) Tests (3) Tests (3) Optional (6) Optional (6) Optional (6) 32 32 32

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    xi OUTLINE IV OUTLINE V OUTLINE VI BASIC COURSE Chapter Number of Sessions Chapter Number of Sessions Chapter Number of Sessions 1 (1) 1 (1) 1 (1) 2 (2) 2 (2) 2 (2) 3 (2) 3 (2) 3 (2) 10 (2) 4 (3) 10 (2) 4 (2) 5 (3) 4 (2) 5 (2) 17 (3) 5 (2) 17 (2) 18 (2) 6 (2) 6 (2) 6 (3) 11 (2) 7 (2) 7 (2) 12 (2) 8 (2) 8 (2) 13 (3) 9 (2) 9 (2) 22 (2) 11 (2) 23 (2) 13 (2) Tests (3) Tests (3) Tests (3) Optional (4) Optional (4) Optional (5) 32 32 32 SECOND COURSE Chapter Number of Sessions Chapter Number of Sessions Chapter Number of Sessions 12 (3) 10 (2) 7 (2) 21 (3) 11 (2) 8 (2) 22 (2) 12 (2) 9 (2) 23 (2) 13 (3) 17 (3) 14 (3) 21 (3) 18 (2) 15 (2) 14 (2) 19 (2) 16 (2) 15 (2) 20 (2) 18 (2) 16 (2) 21 (3) 19 (2) 19 (2) 14 (2) 20 (2) 20 (2) 15 (2) 22 (2) 16 (2) 23 (2) Tests (3) Tests (3) Tests (3) Optional (6) Optional (3) Optional (5) 32 32 32

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    xii CATEGORIZATION OF ASSIGNMENT MATERIAL The assignment material in the 15th edition has been developed to offer instructors a broad range of options in developing a challenging and interesting course. The following exhibits assist instructors in selecting assignment material. Exhibits P-l and P-2 show assignment material that is based on service or nonprofit and on merchandising (retail, wholesale, or distribution) sectors of the economy. Although many of the assignments in the 15th edition are based in the manufacturing sector, Exhibits P-l and P-2 provide many examples for instructors who wish to either select assignment material from a broad range of sectors or intend to concentrate on sectors outside manufacturing. 1. SERVICE AND NONPROFIT SECTORS: These assignments include settings such as accounting firms, law firms, advertising agencies, bank and finance companies, lodging companies, transportation companies, and government agencies 2. MERCHANDISING SECTORS: These assignments include settings such as distributors, wholesalers, and retailers There is growing demand from instructors for assignment material in three specific areas— ethics, global or international, and modern cost management. Exhibits P-3 to P-5 show assignment material in the 15th edition on these three topics. 3. ETHICS. The second-to-last problem of many chapters incorporates an ethical issue facing a management accountant or a manager. Examples include pressure for cooking the books, concealing unfavorable information, and conflicts of interest between management incentives and company values. Many of these problems require students to consider the IMA Statement of Ethical Professional Practice on p.18 of the text. 4. GLOBAL AND INTERNATIONAL DIMENSIONS. These assignments include material based outside the United States or problems pertaining to companies with operations in more than one country. 5. MODERN COST MANAGEMENT FRONTIER IDEAS. These assignments include material that an instructor can use to highlight areas such as customer focus, key success factors, balanced scorecard, value-chain analysis, strategic analysis of operating income, JIT, and continuous improvement. Assignment material related to activity-based costing (ABC), activity-based management (ABM), and cost drivers is found in many chapters.

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    xiii EXHIBIT P-1 ASSIGNMENT MATERIAL FROM SERVICE AND NOT-FOR-PROFIT SECTORS Chapter Number Context 1 1-18 Fast-food restaurants; value chain, cost classification 1-20 Construction services; key success factors 1-24 House-painting service; five-step decision-making process 1-27 Internet company; planning and control 1-35 Publishing company; ethics; end-of-year actions 1-36 Shipping company; ethical challenges 2 2-18 Marketing research; classification of costs 2-21 Phone contract; fixed and variable costs 2-26 Food and music service; total costs and unit costs 3 3-18 Travel agency; CVP analysis 3-22 Restaurant; CVP analysis 3-29 Music Society; CVP analysis 3-33 Tourism; CVP analysis 3-34 Daycare; CVP analysis, target operating income 3-35 Tax preparer; CVP analysis, margin of safety 3-40 Printing company; breakeven; alternative cost structures, uncertainty, sensitivity 3-47 Museum of art; gross margin, contribution margin 4 4-18 Residential construction; job costing, normal, actual 4-21 Consulting firm, job costing 4-24 University press; job costing, journal entries 4-28 Canadian accounting firm; actual, normal and variation from normal costing 4-29 Web-design firm; actual, normal, and variation from normal costing 4-32 Law firm; job costing 4-33 Law firm; job costing 4-39 Printing; allocation and proration of overhead 4-41 Music contracting agency; job costing 5 5-17 Testing labs; activity-based costing, cost hierarchy 5-18 Professional services firm; alternative allocation bases 5-22 Architectural firm; department costing based on activities 5-23 Printing company; activity-based costing 5-28 Custom framing; activity-based costing 5-29 Banking; activity-based costing, product costing, cross-subsidization 5-30 Law firm; job costing, single direct- and indirect-cost categories 5-31 Law firm; job costing, multiple direct- and single indirect-cost categories 5-32 Law firm; job costing, multiple direct- and indirect-cost categories 5-34 Lawn care, landscaping; first-stage allocation, ABC 5-35 Radiology center; department, activity-cost rates 5-38 Health care; activity-based costing system

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    xiv EXHIBIT P-1 (Continued) Chapter Number Context 6 6-16 Environmental testing; sales budget 6-23 Window-washing; budgeted cost of jobs 6-28 Tour company; responsibility accounting, stretch targets 6-34 Restaurant; purchasing agent responsibility accounting 6-42 Hair salon; human aspects of budgeting 7 7-28 7-31 Student loan financing; static and flexible budgets Car detailing; variance analysis 8 8-24 8-25 8-27 Food delivery service; overhead variances Aircraft maintenance; total overhead, 3-variance analysis Back office services; overhead variances 8-37 Publishing company; activity-based costing 8-40 8-41 Pet food inspection; non-financial variances Cloud services provider; overhead variances 9 9-30 Printing press; metrics to minimize inventory buildups 9-39 Hospital chain; cost allocation, downward demand spiral 9-40 Hospital chain; cost allocation, responsibility accounting, ethics 10 10-17 Car rental contracts; variable-, fixed- and mixed-cost functions 10-22 Travel services; estimating a cost function, high-low method 10-23 Customer-service costs; estimating a cost function, high-low method 10-24 Consulting services; linear cost approximation 10-26 Catering company; regression analysis 10-31 Produce club; high-low method, regression analysis 10-32 Restaurant; sales and advertising, high-low method, regression analysis 10-34 Agricultural transportation; interpreting regression analysis 10-37 Nonprofit hospital; regression, choosing among models 10-38 Nonprofit hospital; multiple regression 11 11-24 Hospital; relevant costs, decision on closing surgery centers 11-26 Printing press; choosing customers 11-27 Pizza restaurant; relevance of equipment costs 11-33 Limousine service; opportunity costs, relevant costs 11-42 Fishing tours; dropping and adding tours 12 12-26 Consulting firm; strategy, balanced scorecard 12-27 Consulting firm; strategic analysis of operating income 12-28 Consulting firm; analysis of growth, price-recovery, and productivity components 12-29 Consulting firm; identifying and managing unused capacity 12-38 Cable and internet services; balanced scorecard, social performance 12-39 Airline; balanced scorecard, environmental and social performance

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    xv EXHIBIT P-1 (Continued) Chapter Number Context 13 13-16 Tool repair shop; value-added, nonvalue-added costs 13-17 Architects; target operating income, value-added costs 13-20 Energy audits; target costs, effect of process-design changes on service costs 13-21 Hotel management; cost-plus target return on investment pricing 13-24 Hotel; price discrimination 13-27 Amusement park; value-engineering, target costing, ABC 13-29 Repair services; cost-plus, time and materials, ethics 13-30 Temp labor agency; cost-plus and market-based pricing 13-31 Testing labs; cost-plus and market-based pricing 13-32 Industrial site cleanup; life-cycle costing 13-33 Airline; price discrimination 13-34 Airline; anti-trust laws, pricing 13-35 Interior decoration; preparing a bid, pricing, ethics 14 14-16 Hospitals; cost allocation 14-18 Repair service; customer profitability 14-21 Hotel; cost allocation to divisions 14-23 Sports team; variance analysis, multiple products 14-31 Interior design; customer-cost hierarchy and profitability analysis 15 15-19 Management consulting; direct and step-down support department cost allocation 15-20 Management consulting; reciprocal method support department cost allocation 15-23 Allocation of common living costs 15-24 Consulting services; allocation of common travel costs 15-29 University; fixed cost allocation 15-35 Hotel; revenue allocation, bundled products 15-36 Organized tours; direct, step-down, reciprocal support department allocation 17 17-38 Publishing company; transferred-in costs, weighted-average method 17-39 Publishing company; transferred-in costs, FIFO method 19 19-21 Conference center; quality improvement, relevant costs and revenues 19-23 University; waiting time 19-24 University; waiting time, relevant costs, student satisfaction 19-28 Pizza delivery; quality improvement, Pareto diagram, cause-and-effect diagram 19-34 Healthcare group; waiting time, patient satisfaction, compensation 20 20-31 Deli sandwich shop; supplier evaluation, costs of quality, timely deliveries

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    xvi EXHIBIT P-1 (Continued) Chapter Number Context 21 21-18 Hospital; capital budgeting methods, no income taxes 21-19 Hospital; capital budgeting methods, income taxes 21-22 21-33 Construction company; payback and NPV methods, no income taxes Laundromat; payback methods, even and uneven cash flows 21-24 Bakery; new equipment purchase, income taxes 21-35 Entertainment center; recognizing cash flows for capital investment projects 22 22-16 Theme parks; management control systems, balanced scorecard 23 23-17 23-20 23-23 Educational services; DuPont method Reinsurance and financial services; ROI, RI, EVA Venture capital; Capital budgeting, RI 23-29 Restaurants; ROI, measurement alternatives for performance measures 23-31 Media group; ROI, RI, DuPont method, investment decisions, balanced scorecard 23-32 Media group; division managers' compensation, levers of control 23-33 Bank; executive compensation, balanced scorecard 23-37 Health spas; RI, EVA, measurement alternatives, goal congruence

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