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Solution Manual For Cost Accounting, 14th Edition

Solution Manual For Cost Accounting, 14th Edition makes solving textbook questions easier with expertly crafted solutions.

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    1 - 1 CHAPTER 1 THE MANAGER AND MANAGEMENT ACCOUNTING See the front matter of this Solutions Manual for suggestions regarding your choices of assignment material for each chapter. 1 - 1 Management accounting measures , analyzes and reports financial and nonfinancial information that helps managers make decisions to fulfill the goals of an organization. It focuses on internal reporting and is not restricted by generally accepted accounting principles (GAAP) . Financial accounting focuses on reporting to external parties such as investors, government agencies, and banks . It measures and records business transactions and provides financial statements that are based on generally accepted accounting principles (GAAP). Other differences include (1) management accounting emphasizes the future (not the past) , and (2) management accounting influences the behavior of managers and other employees ( rather than primarily reporting economic events) . 1 - 2 Financial accounting is constrained by generally accepted accounting principles. Management accounting is not restricted to these principles. The result is that • management accounting allows managers to charge interest on owners’ capital to help judge a division’s performance, even though such a charge is not allowed under GAAP, • management accounting can include assets or liabilities (such as “brand names” developed internally) not recognized under GAAP, and • management accounting can use asset or liability measurement rules (such as present values or resale prices) not permitted under GAAP. 1 - 3 Management accountants can help to formulat e strategy by providing information about the sources of competitive advantage — for example, the cost, productivity, or efficiency advantage of their company relative to competitors or the premium prices a company can charge relative to the costs of adding features that make its products or services distinctive. 1 - 4 The business functions in the value chain are • Research and development — generating and experimenting with ideas related to new products, services, or processes. • Design of products and processes — the detailed planning , engineering, and testing of products and processes. • Production — procuring, transporting, storing and assembling resources to produce a product or deliver a service. • Marketing — promoting and selling products or services to customers or prospective customers. • Distribution — processing orders and shipping products or services to customers. • Customer service — providing after - sales service to customers.

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    1 - 2 1 - 5 Supply chain describes the flow of goods, services, and information from the initial sources of materials and services to the delivery of products to consumers, regardless of whether those activities occur in the same organization or in other organizations. Cost management is most effective when it integrates and coordinates activities across all companies in the supply chain as well as across each business function in an individual company’s value chain. Attempts are made to restructure all cost areas to be more cost - effective. 1 - 6 “Management accounting deals only with costs.” This statement is misleading at best, and wrong at worst. Management accounting measures, analyzes , and reports financial and non - financial information that helps managers define the organization’s goals, and make decisions to fulfill them. Management accounting also analyzes revenues from products and customers in order to assess product and customer profitability. Therefore, while management accounting does use cost information, it is only a part of the organization’s information recorded and analyzed by management accountants. 1 - 7 Management accountants can help improve quality and achieve timely product deliveries by recording and reporting an organization ’ s current quality and timeliness levels and by analyzing and evaluating the costs and benefits — both financial and non - financial — of new quality initiatives such as TQM, relieving bottleneck constraints or providing faster customer service. 1 - 8 The five - step decision - making process is (1) identify the problem and uncert ainties (2) obtain information (3) make predictions about the future (4) make decisions by choosing among alternatives and (5) implement the decision, evaluate performance and learn. 1 - 9 Planning decisions focus on selecting organization goals and strategies , predicting results under various alternative ways of achieving those goals, deciding how to attain the desired goals, and communicating the goals and how to attain them to the entire organization. Control decisions focus on taking actions that implement the planning decisions, deciding how to evaluate performance , and providing feedback and learning to help future decision making. 1 - 10 The three guidelines for management accountants are 1. Employ a cost - benefit approach. 2. Recognize behavioral and technical considerations. 3. Apply the notion of “different costs for different purposes”. 1 - 11 Agree. A successful management accountant requires general business skills (such as understanding the strategy of an organization) and people skills (such as motivating other team members) as well as technical skills (such as computer knowledge, calculating costs of products, and supporting planning and control decisions).

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    1 - 3 1 - 12 The new controller could reply in one or more of the following ways: (a) Demonstrate to the plant manager how he or she could make better decisions if the plant controller was viewed as a resource rather than a deadweight. In a related way, the plant controller could show how the plant manager ’ s time and resources could be saved by viewing the new plant controller as a team member. (b) Demonstrate to the plant manager a good knowledge of the technical aspects of the plant. This approach may involve doing background reading. It certainly will involve spending much time on the plant floor speaking to plant personnel. (c) Show the plant manager examples of the new plant controller ’ s past successes in working with line managers in other plants. Examples could include • assistance in preparing the budget, • assistance in analyzing problem situations and evaluating financial and nonfinancial aspects of different alternatives, and • assistance in submitting capital budget requests. (d) Seek assistance from the corporate controller to highlight to the plant manager the importance of many tasks undertaken by the new plant controller. This approach is a last resort but may be necessary in some cases. 1 - 13 The controller is the chief management accounting executive. The corporate controller reports to the chief financial officer, a staff function. Companies also have business unit controllers who support business unit managers or regional controllers who support regional managers in major geographic regions. 1 - 14 The Institute of Management Accountants (IMA) sets standards of ethical conduct for management accountants in the following four ar eas : • Competence • Confidentiality • Integrity • Credibility 1 - 15 Steps to take when established written policies provide insufficient guidance are (a) Discuss the problem with the immediate superior (except when it appears that the superior is involved). (b) Clarify relevant ethical issues by confidential discussion with an IMA Ethics Counselor or other impartial advisor. (c) Consult your own attorney as to legal obligations and rights concerning the ethical conflicts.

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    1 - 4 1 - 16 (15 min.) Value chain and classification of costs, computer company. Cost Item Value Chain Business Function a. b. c. d. e. f. g. h. Production Distribution Design of products and processes Research and Development Customer Service or Marketing Design of products and processes (or Research and Development) Marketing Production 1 - 17 (15 min.) Value chain and classification of costs, pharmaceutical company. Cost Item Value Chain Business Function a. b. c. d. e. f. g. h. Design of products and processes Marketing Customer Service Research and Development Marketing Production Marketing Distribution 1 - 18 (15 min.) Value chain and classification of costs, fast food restaurant . Cost Item Value Chain Business Function a. b. c. d. e. f. g. h. Production Distribution Marketing Marketing Marketing Production Design of products and processes (or Research and Development) Customer service 1 - 19 (15 min.) K ey success factors. Change in Operations/ Management Accounting Key Success Factor a. b. c. d. e. Innovation Cost and Quality Time Time and Cost Cost

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    1 - 5 1 - 20 ( 10 - 15 min.) Planning and control decisions. Action Decision a. b. c. d. e. Planning Control Control Planning Planning 1 - 21 (15 min.) Five - step decision - making process, manufacturing. Action Step in Decision - Making Process a. b. c. d. e. f. g. Obtain information Make predictions about the future Identify the problem and uncertainties Implement the decision , evaluate performance , and learn Make predictions about the future Make decisions by choosing among alternatives Obtain information 1 - 22 (15 min .) Five - step decision - making process, service firm . Action Step in Decision - Making Process a. b. c. d. e. f. Obtain information Identify the problem and uncertainties Obtain information and/or m ake predictions about the future Make predictions about the future Obtain information Make decisions by choosing among alternatives

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    1 - 6 1 - 23 (10 – 15 min.) Professional ethics and reporting division performance. 1. Miller ’ s ethical responsibilities are well summarized in the IMA ’ s “Standards of Ethical Conduct for Management Accountants ” (Exhibit 1 - 7 of text). Areas of ethical responsibility include the following: • competence • confidentiality • integrity • credibility The ethical standards related to Miller ’ s current dilemma are integrity, competence and credibility . Using the integrity standard, Miller should carry out duties ethically and communicate unfavorable as well as favorable information and professional judgments or opinions . Competence demands that Miller perform her professional duties in accordance with relevant laws, regulations, and technical standards and provide decision support information that is accurate . Credibility requires that Miller report information fairly and objectively and disclose deficiencies in internal controls in conformance with organizational policy and/or applicable law . Miller should refuse to book the $200,000 of sales until the goods are shipped. Both financial accounting and management accounting principles maintain that sales are not complete until the title is transferred to the buyer. 2. Miller should refuse to follow Maloney's orders. If Maloney persists, the incident should be reported to the corporate controller. Support for line management should be wholehearted, but it should not require unethical conduct. 1 - 24 (15 min.) Planning and control decisions, Internet company. 1. Planning decisions a. Decision to raise monthly subscription fee c. Decision to upgrade content of online services (later decision to inform subscribers and upgrade online services is an implementation part of control) e. Decision to decrease monthly subscription fee starting in November. Control decisions b. Decision to inform existing subscribers about the rate of increase — an implementation part of control decisions d. Dismissal of VP of Marketing — performance evaluation and feedback aspect of control decisions 2. Other planning decisions that may be made at Web N ews.com: decision to raise or lower advertising fees; decision to charge a fee from on - line retailers when customers click - through from Web N ews.com to the retailers’ websites. Other control decisions that may be made at Web N ews.com: evaluating how customers like the new format for the weather information, working with an outside vendor to redesign the website , and evaluating whether the waiting time for customers to access the website has been reduced.

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    1 - 7 1 - 25 (20 min .) Strategic decisions and management accounting. 1. The strategies the companies are following in each case are: a. b. c. d. Low price strategy Differentiated product strategy Low price strategy Differentiated product strategy 2. Examples of information the management accountant can provide for each strategic decision follow . a. b. c. d. Cost to manufacture and sell the cell phone Productivity, efficiency and cost advantages relative to competition Prices of competitive cell phones Sensitivity of target customers to price and quality The production capacity of Roger Phones and its competitors Cost to develop, produce and sell new software Premium price that customers would be willing to pay due to product uniqueness Price of basic software Price of clo sest competitive software Cash needed to develop, produce and sell new software Cost of producing the “store - brand” lip gloss Productivity, efficiency and cost advantages relative to competition Prices of competitive products Sensitivity of target customers to price and quality How the market for lip gloss is growing Cost to produce and sell new line of gourmet bologna Premium price that customers would be willing to pay due to product uniqueness Price of basic meat product Price of closest competitive pr oduct 1 - 26 (15 min.) Management accounting guidelines. 1. Cost - benefit approach 2. Behavioral and technical considerations 3. Different costs for different purposes 4. Cost - benefit approach 5. Behavioral and technical considerations 6. Cost - benefit approach 7. Behavioral and technical considerations 8. Different costs for different purposes 9. Behavioral and technical considerations

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    1 - 8 1 - 27 (15 min.) Role of controller, role of chief financial officer. 1. Activity Controller CFO Managing accounts payable X Communicating with investors X Strategic review of different lines of businesses X Budgeting funds for a plant upgrade X Managing the company’s short - term investments X Negotiating fees with auditors X Assessing profitability of various products X Evaluating the costs and benefits of a new product design X 2. A s CFO, Perez will be interacting much more with the senior management of the company, the board of directors, auditors, and the external financial community. Any experience he can get with these aspects will help him in his new role as CFO. George Perez can be better positioned for his new role as CFO by participating in strategy discussions with senior management, by preparing the external investor communications and press releases under the guidance of the current CFO, by attending courses that focus on the interaction and negotiations between the various business functions and outside parties such as auditors and, either formally or on the job, getting training in issues related to investments and corporate finance.

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    1 - 9 1 - 28 (30 min.) Pharmaceutical company, budgeting, ethic s. 1. The overarching principles of the IMA Statement of Ethical Professional Practice are Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for Ethical Conduct…” require management accountants to • Perform professional duties in accordance with relevant laws, regulations, and technical standards. • Refrain from engaging in any conduct that would prejudice carrying out duties ethically. • Communicate information fairly and objectively. • Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. The idea of capitalizing some of the company’s R&D expenditures is a direct violation of the IMA’s ethical standards above. This transaction would not be “ in accordance with relevant laws, re gulations, and technical standards”. Generally Accepted Accounting Principles require research and development costs to be expensed as incurred. Even if Johnson believes his transaction is justifiable, it violates the profession’s technical standards and would be unethical. The other “year - end” actions occur in many organizations and fall into the “gray” to “acceptable” area. Much depends on the circumstances surrounding each one, however, such as the following: a. Stop all research and development efforts on the drug Lyricon until after year - end. This change would delay the drug going to market by at least six months. It is also possible that in the meantime a PharmaCor competitor could make it to market with a similar drug. While this solution may solve the budget short - fall in this year, it could result in a significant loss of future profits for PharmaCor in the long - run, especially if a competitor is able to obtain a patent on a similar drug before PharmaCor. b. Sell of f rights to the drug, Markapro. The company had not planned on doing this because, under current market conditions, it would get less than fair value. It would , however, result in a onetime gain that cou ld offset the budget short - fall. Of course, all future profits from Markapro would be lost. Again, this solution may solve the company’s short - term budget crisis; but could result in the loss of future profits for PharmaCor in the long - run . 2. While it is not uncommon for companies to sacrifice long - term profits for short - term gains, it may not be in the best interest of the company’s shareholders. In the case of PharmaCor, the CFO is primarily concerned with “maximizing shareholder wealth” in the immediate future (third quarter only), but not in the long - term. Because this executive’s incentive pay and even employment may be based on his ability to meet short - term targets, he may not be acting in the best interest of the shareholders in the long - run. Johnson definitely faces an ethical dilemma. It is not unethical on Johnson’s part to want to please his new boss, nor is it unethical that Johnson wants to make a good impression on his first days at his new job; however, Johnson must still act within the ethical standards required by

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    1 - 10 his profession. Taking illegal and/or unethical action by capitalizing R&D to satisfy the demands of his new supervisor, James Clark, is unacceptable . Although not strictly unethical , I would recommend that Johnson no t agree to slow down the R&D efforts on Lyricon or sell of f the rights to Markapro. Each of these appears to sacrifice the overall economic interests of PharmaCor for short - run gain. Johnson should argue against doing this but not resign if Clark insists that these actions be taken. If, however, Clark asks Johnson to capitalize R&D, he should raise this issue with the chair of the Audit Committee after informing Clark that he is doing so. If the CFO still insists on Johnson capitalizing R&D, he should resign rather than engage in unethical behavior.

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    1 - 11 1 - 29 (30 – 40 min.) Professional ethics and end - of - year actions. 1. The possible motivations for the snack foods division wanting to take end - of - year actions include: (a) Management incentives. Gourmet Foods may have a division bonus scheme based on one - year reported division earnings. Efforts to front - end revenue into the current year or transfer costs into the next year can increase this bonus. (b) Promotion opportunities and job security. Top management of Gourmet Foods likely will view those division managers that deliver high reported earnings growth rates as being the best prospects for promotion. Division managers who deliver “unwelcome surprises” may be viewed as less capable. (c) Retain division autonomy. If top management of Gourmet Foods adopts a “management by exception” approach, divisions that report sharp reductions in their earnings growth rates may attract a sizable increase in top management supervision. 2. The “Standards of Ethical Conduct . . . ” require management accountants to • Perform professional duties in accordance with relevant laws , regulations, and technical standards. • Refrain from engaging in any conduct that would prejudice carrying out duties ethically. • Communicate information fairly and objectively . Several of the “end - of - year actions” clearly are in conflict with these requirements and should be viewed as unacceptable by Taylor. (b) The fiscal year - end should be closed on midnight of December 31. “Extending” the close falsely reports next year ’ s sales as this year ’ s sales. (c) Altering shipping dates is falsification of the accounting reports. (f) Advertisements run in December should be charged to the current year. The advertising agency is facilitating falsification of the accounting records. The other “end - of - year actions” occur in many organizations and fall into the “gray” to “acceptable” area. However, much depends on the circumstances surrounding each one, such as the following: (a) If the independent contractor does not do maintenance work in December, there is no transaction regarding maintenance to record. The responsibility for ensuring that packaging equipment is well maintained is that of the plant manager. The division controller probably can do little more than observe the absence of a December maintenance charge. (d) In many organizations, sales are heavily concentrated in the final weeks of the fiscal year - end. If the double bonus is approved by the division marketing manager, the division controller can do little more than observe the extra bonus paid in December. (e) If TV spots are reduced in December, the advertising cost in December will be reduced. There is no record falsification here. (g) Much depends on the means of “persuading” carriers to accept the merchandise. For example, if an under - the - table payment is involved, or if carriers are pressured to accept merchandise, it is clearly unethical. If, however, the carrier receives no extra consideration and willingly agrees to accept the assignment because it sees potential sales opportunities in December , the transaction appears ethical.

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    1 - 12 Each of the (a), (d), (e), and (g) “end - of - year actions” may well disadvantage Gourmet Foods in the long run. For example, lack of routine maintenance may lead to subsequent equipment failure. The divisional controller is well advised to raise such issues in meetings with the division president. However, if Gourmet Foods has a rigid set of line/staff distinctions, the division president is the one who bears primary responsibility for justifying division actions to senior corporate officers. 3. If Taylor believes that Ryan wants her to engage in unethical behavior, she should first directly raise her concerns with Ryan. If Ryan is unwilling to change his request, Taylor should discuss her concerns with the Corporate Controller of Gourmet Foods. She could also initiate a confidential discussion with an IMA Ethics Counselor, other impartial ad viser, or her own attorney. Taylor also may well ask for a transfer from the snack foods division if she perceives Ryan is unwilling to listen to pressure brought by the Corporate Controller, CFO, or even President of Gourmet Foods. In the extreme, she may want to resign if the corporate culture of Gourmet Foods is to reward division managers who take “end - of - year actions” that Taylor views as unethical and possibly illegal. It was precisely actions along the lines of (b), (c), and (f) that caused Betty Vinson, an accountant at WorldCom to be indicted for falsifying WorldCom’s books and misleading investors.

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    1 - 13 1 - 30 (30 min.) Professional ethics and end - of - year actions. 1. The possible motivations for Controller, Todd Allen to modify the division’s year - end earnings are: ( i ) Job security and promotion. The company’s CFO will likely reward him for meeting the company’s performance expectations. Alternately, the Allen may be penalized, perhaps even by losing his job if the performance expectations are not met. ( ii ) Management incentives. Allen’s bonus may be based on the division’s ability to meet certain profit targets. If the Consumer Products division has already met its profit target for the year, the Controller may personally benefit if new printing equipment is sold off and replaced with the discarded equipment that no longer meets current safety standards, or if operating income is manipulated by questionable revenue and/or expense recognition . 2. The overarching principles of the IMA Statement of Ethical Professional Practice are Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for Ethical Conduct…” require management accountants to • Perform professional duties in accordance with relevant laws, regulations, and technical standards. • Refrain from engaging in any conduct that would prejudice carrying out duties ethically. • Communicate information fairly and objectively. • Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. Several of the “year - end” actions are clearly are in conflict with the statement ’ s principles and required standards and should be viewed as unacceptable. ( c ) Subscription revenue received in December in advance for magazines that will be sent out in January is a liability. Showing it as revenue falsely reports next year’s revenue as this year’s revenue. ( d ) Reversing the division’s Allowance for Bad Debt Expense would violate Generally Accepted Accounting Principles unless the bad debt allowance is currently overstated. Recording this transaction would result in an overstatement of income and could potentially mislead investors. ( e ) Booking advertising revenues that relate to January in December falsely reports next year’s revenue as this year’s revenue. The other “year - end” actions occur in many organizations and fall into the “gray” to “acceptable” area. Much depends on the circumstances surrounding each one, however, such as the following: (a ) Cancelling two of the division’s least profitable magazines, resulting in the layoff of twenty - five employees. While employee layoffs may be necessary for the business to survive, the layoff decision could result in economic hardship for those employees who lose their jobs, as well as result in employee morale problems for the rest of the division. Most companies would prefer to avoid causing hardship for their existing employees due to layoffs unless absolutely necessary for the survival of the business as a whole.

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    1 - 14 ( b ) Selling the new printing equipment that was purchased in January and replacing it with discarded equipment from one of the company’s other divisions. The previously discarded equipment no longer meets current safety standards. Again, while this method may result in a short - term solution for the Controller and the Production Manager personally, this decision may actually harm the corporation financially as a whole, not to mention the potential resulting injuries to production workers from hazardous equipment. This method would be also be ethically questionable and would likely violate the IMA’s ethical standards of integrity and credibility. ( f ) Switching from declining balance to straight line depreciation to reduce depreciation expense in the current year. Many companies switch their depreciation policy from one method to another. Deacon Publishing could argue that straight - line depreciation better represents the decrease in the economic value of the asset compared to the declining balance method. Straight - line depreciation may also be more in line with what its competitors do. If, however, the company changes to straight - line depreciation with the sole purpose of reducing expenses to meet its profit goal s , such behavior would be unacceptable. The Standards of Ethical Behavior require management accountants to communicate information fairly and objectively and to carry out duties ethically. 3. Allen should dire ctly raise his concerns first with the CFO, especially if the pressure from the CFO is so great that the only course of action on the part of the controller is to otherwise behave unethically. If the CFO refuses to change his direction, then the controller should raise these issues with the CEO, and next to the Audit Committee and the Board of Directors, after informing the CFO that he is doing so . The Controller could also initiate a confidential discussion with an IMA Ethics Counselor, other impartial adviser, or his/her own attorney. In the extreme, the Controller may want to resign if the corporate culture of Deacon Publishing is to reward executives who take year - end actions that the Controller views as unethical and possibly illegal. It was precisely actions along the lines of ( c ), ( d ) and ( e ) that caused Betty Vinson, an accountant at WorldCom, to be indicted for falsifying WorldCom’s books and misleading investors.

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    1 - 15 1 - 31 (40 min.) Global company, ethical challenges . 1. The overarching principles of the IMA Statement of Ethical Professional Practice are Honesty, Fairness, Objectivity and Responsibility. The statement’s corresponding “Standards for Ethical Conduct…” require management accountants to • Perform professional duties in accordance with relevant laws, regulations, and technical standards. • Refrain from engaging in any conduct that would prejudice carrying out duties ethically. • Communicate information fairly and objectively. • Disclose all relevant information that could reasonably be expected to influence an intended user’s understanding of the reports, analyses, or recommendations. Several of the suggestions made by Hamsen’s staff are clearly in conflict with the statement’s principles and required standards and should be viewed as unacceptable. c. Pressure current customers to take early delivery of goods before the end of the year so that more revenue can be reported on this year’s financial statements. This tactic, commonly known as channel stuffing, merely results in shifting future period revenues into the current period. The overstatement of revenue in the current period may mislead investor’s to believe that the company’s financial well being is better than the actual results achieved. This practice would violate the IMA’s standards of credibility and integrity. Channel stuffing is frequently considered a fraudulent practice. e. R ecord t he executive year - end bonus compensation for the current year in the next year when it is paid until after the December fiscal year - end. Generally Accepted Accounting Principles requires expenses to be recorded (accrued) when incurred, not when paid (cash basis accounting). Therefore, failure to record the executives’ year - end bonus would violate the IMA’s standards of credibility and integrity. f. Recognize sales revenues on orders received , but not shipped as of the end of the year. Generally Accepted Accounting Principles requires income to be recorded (accrued) when the four criteria of revenue recognition have been met: 1. The company has completed a significant portion of the production and sales effort. 2. The amount of revenue can by objectively measured. 3. The major portion of the costs has been incurred, and the remaining costs can be reasonably estimated. 4. The eventual collection of the cash is reasonably assured. Because criteria 1 and 3 have not been met at the time the order is placed the revenue should not be recognized until after year - end. Therefore, recording next year’s revenue in the current year would be a violation of Generally Accepted Accounting Principles and would be falsifying revenue. This would be a violation of the IMA’s standards of credibility and integrity and may be considered fraudulent. The other “year - end” actions occur in many organizations and fall into the “gray” to

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    1 - 16 “acceptable” area. Much depends on the circumstances surrounding each one, however, such as the following: a. Stop all transatlantic shipping efforts. The start - up costs for the new operations are hurting current profit margins. While this method may result in better short - term financial results for Bredahl, it may do harm to the long - term financial condition of the corporation as a whole. b. Make deep cuts in pricing through the end of the year to generate additional revenue. Again, this is only a short - term tactic to improve this year’s financial results. Investors may be content in the short - run, but in the long run the new shipping company will see reduced margins from these actions. d . Sell - off distribution equipment prior to year - end. The sale would result in one - time gains that could offset the company’s lagging profits. The owned equipment could be replaced with leased equipment at a lower cos t in the current year . While this course of action does not necessarily violate the IMA’s code of ethical standards, it may be only a short - term tactic to improve this year’s financial results. Hamsen will need to weigh his options long - term to make the most cost effective decision for his company. g. Establish corporate headquarters in Ireland before the end of the year, lowering the company’s corporate tax rate from 28% to 12.5% . Hamsen may have other legitimate reasons for relocating his company to Ireland, but doing so only to reduce his tax liability would likely be considered an evasion of taxes in the company’s home country. Hamsen should seek the advice of skilled consultants in the area of international tax before making any such move. The company could face large fines and even criminal charges for evading corporate income taxes of the home country. 2. It is possible that any of the “year - end” actions that fall into the “gray” area may be good for investors, depending on the credible evidence which supports the management decision. For example, replacing owned equipment with leased equipment may result in both short - term gains for the company and long - term cost reduction. If so, this decision would be in the best interest of the investors. If the decision only results in short - term gains, but higher costs in the long - run, then the decision may not be in the best long - term inte rest of the company’s investors and should not be implemented solely to prop up short - term earnings. Those decisions that clearly violate the IMA code of ethical standards (c, e, and f) would never be in the best interest of the investor. These options would result in misleading financial statements and could result in the demise of the company or even in criminal charges, as was the ca se with companies such as Enron and WorldCom. If Hamsen asks the management accountant to take any of the actions that are clearly unethical, he should raise this issue with the chair of the Audit Committee after informing Hamsen that he is doing so. If Hamsen still insists on the management accountant taking these actions, he should resign rather than engage in unethical behavior.

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    2 - 1 CHAPTER 2 AN INTRODUCTION TO COST TERMS AND PURPOSES 2 - 1 A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, an activity, and a department. 2 - 2 Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost - effective) way. Indirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost - effective) way. Cost assignment is a general term that encompasses the assignment of both direct costs and indirect costs to a cost object. Direct costs are traced to a cost object while indirect costs are allocated to a cost object. 2 - 3 Managers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. When costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. Managers prefer to use more accurate costs in their decisions. 2 - 4 Factors affecting the classification of a cost as direct or indirect include • the materiality of the cost in question, • available information - gathering technology, • design of operations 2 - 5 A variable cost changes in total in proportion to changes in the related level of total activity or volume. An example is a sales commission that is a percentage of each sales revenue dollar. A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. An example is the leasing cost of a machine that is unchanged for a giv en time period (such as a year) regardless of the number of units of product produced on the machine. 2 - 6 A cost driver is a variable, such as the level of activity or volume, that causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. For example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor - vehicle assembly line. 2 - 7 The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range. 2 - 8 A unit cost is computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator). In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.

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    2 - 2 2 - 9 Manufacturing - sector companies purchase materials and Ashton nents and convert them into various finished goods , for example automotive and textile companies. Merchandising - sector companies purchase and then sell tangible products without changing their basic form , for example retailing or distribution . Service - sector companies provide services or intangible products to their customers, for example, legal advice or audits. 2 - 10 Manufacturing companies have one or more of the following three types of inventory: 1. Direct materials inventory . Direct materials in stock and awaiting use in the manufacturing process. 2. Work - in - process inventory . Goods partially worked on but not yet completed. Also called work in progress . 3. Finished goods inventory . Goods completed but not yet sold. 2 - 11 Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and th at become cost of goods sold when the product is sold. These costs are included in work - in - process and finished goods inventory (they are “inventoried”) to accumulate the costs of creating these assets. Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the accounting period in which they are incurred because they are expected not to benefit future periods (because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues. 2 - 1 2 Direct material costs are the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods), and can be traced to the cost object in an economically feasible way. Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way. Manufacturing overhead costs are all manufacturing costs that are related to the cost object (work in process and then finished goods), but cannot be traced to that cost object in an economically feasible way. Prime costs are all direct manufacturing costs (direct material and direct manufacturing labor). Conversion costs are all manufacturing costs other than direct material costs. 2 - 1 3 Overtime premium is the wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight - time wage rates. Idle time is a subclassification of indirect labor that represents wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like. 2 - 1 4 A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include • pricing and product mix decisions, • contracting with government agencies, and • preparing financial statements for external reporting under generally accepted accounting principles.

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    2 - 3 2 - 15 Three common features of cost accounting and cost management are: • calculating the costs of products, services, and other cost objects • obtaining information for planning and control and performance evaluation • analyzing the relevant information for making decisions 2 - 16 (15 min.) Computing and interpreting manufacturing unit costs . 1. (in millions) Supreme Deluxe Regular Total Direct material cost $ 89 .00 $ 57.00 $60.00 $206.00 Direct manuf. labo r costs 16 .00 26.00 8.00 50.00 Manufacturing overhead costs 48 .00 78 .00 24 .00 150.00 Total manuf. costs 153 .00 161.00 92.00 406.00 Fixed costs allocated at a rate of $15 M  $ 50M (direct mfg. labor) equal to $0.3 0 per dir. manuf. labor dollar (0.3 0  $1 6 ; 2 6 ; 8) 4.80 7.80 2.40 15 .00 Variable costs $ 148.20 $153.20 $89.60 $391.00 Units produced (millions) 125 150 140 Cost per unit (Total manuf. costs ÷ units produced) $1.2240 $1.0733 $0.6571 Variable manuf. cost per unit (Variable manuf. costs  Units produced) $ 1.1856 $1.0213 $0.6400 (in millions) Supreme Deluxe Regular Total 2. Based on total manuf. cost per unit ($ 1.2240  150 ; $ 1.0733  190 ; $ 0.6571  220 ) $ 183.60 $203.93 $144.56 $ 532.09 Correct total manuf. costs b ased on variable manuf. cost s plus fixed costs equal Variable costs ($ 1.1856  150 ; $ 177.84 $194.05 $140.80 $5 12.69 $ 1.0213  190 ; $ 0.64  220 ) Fixed costs 15 .00 Total costs $527.69 The total manuf acturing cost per unit in requirement 1 includes $ 15 million of indirect manufacturing costs that are fixed irrespective of changes in the volume of output per month, while the remaining variable indirect manufacturing costs change with the production volume. Given the uni t volume changes for August 20 11 , the use of total manuf acturing cost per unit from the past month at a different unit volume level (both in aggregate and at the individual product level) will overestimate total costs of $ 532.09 million in August 20 11 relative to the correct total manufacturing costs of $ 527.69 million calculated using variable manufacturing cost per unit times units produced plus the fixed costs of $ 15 million .

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    2 - 4 2 - 17 (15 min.) Direct, indirect, fixed and variable costs. 1. Yeast – d irect, variable Flour - direct, variable Packaging materials – direct (or could be indirect if small and not traced to each unit), variable Depreciation on ovens – indirect, fixed (unless “units of output” depreciation, which then would be variable) Depreciation on mixing machines – indirect, fixed (unless “units of output” depreciation, which then would be variable) Rent on factory building – indirect, fixed Fire Insurance on factory building – indirect, fixed Factory utilities – indirect, probably some variable and some fixed (e.g. electricity may be variable but heating costs may be fixed) F inishing d epartment hourly laborers – direct, variable (or fixed if the laborers are under a union contract) Mixing d epartment manager – indirect, fixed Materials handlers – depends on how they are paid. If paid hourly and not under union contract, then indirect, variable. If salaried or under union contract then indirect, fixed Custodian in factory – indirect, fixed Night guard in factory – indirect, fixed Machinist (running the mixing machine) – depends on how they are paid. If paid hourly and not under union contract, then indirect, variable. If salaried or under union contract then indirect, fixed Machine maintenance personnel – indirect, probably fixed, if salaried, but may be variable if paid only for time worked and maintenance increases with increased production Maintenance supplies – indirect, variable Cleaning supplies – indirect, most likely fixed since the custodians probably do the same amount of cleaning every night 2. If the cost object is Mixing Department, then anything directly associated with the Mixing Department will be a direct cost. This will include: • Depreciation on mixing machines • Mixing Department manager • Materials handlers (of the Mixing Department) • Machinist (running the mixing machines) • Machine Maintenance personnel (of the Mixing Department) • Maintenance supplies ( if separately identified for the Mixing Department) Of course the yeast and flour will also be a direct cost of the Mixing Department, but it is already a direct cost of each kind of bread produced.

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    2 - 5 2 - 18 (15 – 20 min.) Classification of costs, service sector. Cost object: Each individual focus group Cost variability: With respect to the number of focus groups There may be some debate over classifications of individual items , especially with regard to cost variability. Cost Item D or I V or F A D V B I F C I V a D I F E D V F I F G D V H I V b a Some students will note that phone call costs are variable when each call has a separate charge. It may be a fixed cost if Consumer Focus has a flat monthly charge for a line, irrespective of the amount of usage. b Gasoline costs are likely to vary with the number of focus groups. However, vehicles likely serve multiple purposes, and detailed records may be required to examine how costs vary with changes in one of the many purposes served. 2 - 19 (15 – 20 min.) Classification of costs, merchandising sector. Cost object: Video s sold in video section of store Cost variability: With respect to changes in the number of videos sold There may be some debate over classifications of individual items , especially with regard to cost variability. Cost Item D or I V or F A D F B I F C D V D D F E I F F I V G I F H D V

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    2 - 6 2 - 20 (15 – 20 min.) Classification of costs, manufacturing sector. Cost object: Type of car assembled (Corolla or Geo Prism) Cost variability: With respect to changes in the number of cars assembled There may be some debate over classifications of individual items , especially with regard to cost variability. Cost Item D or I V or F A D V B I F C D F D D F E D V F I V G D V H I F 2 - 21 (20 min.) Variable costs, fixed costs, total costs. 1. Minutes/month 0 50 100 150 200 240 300 327.5 350 400 450 510 540 600 650 Plan A ($/month) 0 5 10 15 20 24 30 32 .7 5 35 40 45 51 54 60 65 Plan B ($/month) 15 15 15 15 15 15 19.80 22 23.80 27.80 31.80 36.60 39 43.80 47.80 Plan C ($/month) 22 22 22 22 22 22 22 22 22 22 22 22 23.50 26.50 29 0 10 20 30 40 50 60 0 100 200 300 400 500 600 Total Cost Number of long - distance minutes Plan A Plan B Plan C 2. I n each region, Ashton cho o ses the plan that has the lowest cost. From the graph (or from calculations) * , we can see that if Ashton expects to use 0 – 150 minutes of long - distance each month, she should buy Plan A; for 150 – 327.5 minutes, Plan B ; and for over 327.5 minutes, Plan C. If Ashton plans to make 100 minutes of long - distance calls each month, she should choose Plan A; for 240 minutes, choose Plan B; for 540 minutes, choose Plan C. *Let x be the number of minutes when Plan A and Plan B have equal cost $0.10 x = $15 x = $15 ÷ $0.10 per minute = 150 minutes. Let y be the number of minutes when Plan B and Plan C have equal cost $15 + $0 .08 ( y – 240) = $22 $0.08 ( y – 240) = $22 – $15 = $7 y – 240 = $7 87.5 $0.08 = y = 87.5 + 240 = 327.5 minutes

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    2 - 7 2 - 22 (15 – 20 min.) Variable costs and fixed costs. 1. Variable cost per ton of beach sand mined Subcontractor $ 80 per ton Government tax 50 per ton Total $130 per ton Fixed costs per month 0 to 100 tons of capacity per day = $150,000 101 to 200 tons of capacity per day = $300,000 201 to 300 tons of capacity per day = $450,000 2. T o t a l F i x e d C o s ts $ 4 5 0 , 0 0 0 $ 3 0 0 , 0 0 0 $ 1 5 0 , 0 0 0 1 0 0 2 0 0 3 0 0 T o n s o f C a p a c i t y p e r D a y $ 9 7 5 , 0 0 0 $ 6 5 0 , 0 0 0 $ 3 2 5 , 0 0 0 2 , 5 0 0 5 , 0 0 0 7 , 5 0 0 T o n s M i n e d T o t a l V a r i a b l e C o s ts The concept of relevant range is potentially relevant for both graphs. However, the question does not place restrictions on the unit variable costs. The relevant range for the total fixed costs is from 0 to 100 tons; 101 to 200 tons; 201 to 300 tons, and so on. Within these ranges, the total fixed costs do not change in total. 3. Tons Mined per Day Tons Mined per Month Fixed Unit Cost per Ton Variable Unit Cost per Ton Total Unit Cost per Ton (1) (2) = (1) × 25 (3) = FC ÷ (2) (4) (5) = (3) + (4) (a) 180 4,500 $300,000 ÷ 4,500 = $66.67 $130 $196.67 (b) 220 5,500 $450,000 ÷ 5,500 = $81.82 $130 $211.82 The unit cost for 220 tons mined per day is $211.82, while for 180 tons it is only $196.67. This difference is caused by the fixed cost increment from 101 to 200 tons being spread over an increment of 80 tons, while the fixed cost increment from 201 to 300 tons is spread over an increment of only 20 tons.

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    2 - 8 2 - 23 (20 min.) Variable costs, fixed costs, relevant range . 1. T he production capacity is 4,1 00 jaw breakers per month. Therefore, the current annual relevant range of output is 0 to 4,1 00 jaw breakers × 12 months = 0 to 4 9,200 jaw breakers . 2 . Current annual fixed manufacturing costs wi thin the relevant range are $1,2 00 × 12 = $ 14,400 for rent and othe r overhead costs, plus $9 ,000 ÷ 10 = $9 00 for depreciation, totaling $ 15,300 . The variable costs , the materials, are 3 0 cents per jaw breaker , or $ 13,680 ($0. 3 0 per jaw breaker × 3, 8 00 jaw breakers per month × 12 months) for the year. 3 . If demand changes from 3 , 8 00 to 7,600 jaw breakers per month , or from 3,8 00 × 12 = 45,600 to 7,600 × 12 = 91,200 jaw breakers per year, Sweetum will need a second machine. Assuming Sweetum buys a second machine identical to the first machine, it will increase capacity from 4,100 jaw breakers per month to 8,2 00. The annual re levant range will be between 4,1 00 × 12 = 4 9,200 and 8, 2 00 × 12 = 98,400 jaw breakers. Assume the second machine costs $ 9 ,000 and is depreciated using straight - line depreciation over 10 years and zero residual value, just like the first machine. This will add $9 00 of depreciation per year. Fixed costs for next year will increase to $ 16,200 from $15,300 for the current year + $9 00 (because rent and other fixed overhead costs will remain the same at $1 4,400 ). That is , total fixed costs for next year equal $9 00 (dep reciation on first machine) + $9 00 (depreciation on second machine) + $ 14,400 (rent and other fixed overhead costs). The variable cost per jaw breaker next year will be 90% × $0.3 0 = $ 0.27 . Total variable costs equal $0. 27 per jaw breaker × 91,200 jaw breaker s = $ 24,624 . If Sweetum decides to not increase capacity and meet only that amount of demand for which it has available capacity (4,100 j aw breakers per month or 4,100 × 12 = 49,200 jaw breakers per year), the variable cost per unit will be the same at $0.30 per jaw breaker. Annual total variable manufacturing costs will increase to $0.30 × 4,100 jaw breakers per month × 12 months = $14,760. Annual total fixed manufacturing costs will remain the same, $15,300.

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    2 - 9 2 - 24 (20 min.) Cost drivers and value chain. 1. Identify customer needs (w hat do smartphone users want?) — Design of products and processes Perform marke t research on competing brands — Design of products and processes Design a p rototype of the HCP smartphone — Design of products and processes Market the new design to cell phone companies — Marketing Manufacture the HCP smartphone — Production Process ord ers from cell phone companies — Distribution Package the HCP smartphones — Production Deliver the HCP smartphon es to the cell phone companies — Distribution Provide on line assistance to cell phone users for use of the HCP smartphone — Customer Service Make design changes to the HCP smartphon e based on customer feedback — Design of products and processes 2. Value Chain Category Activity Cost driver Design of products and processes Identify customer needs Number of surveys returned and processed from competing smartphone users Perform market research on competing brands Hours spent researching competing market brands Number of surveys returned and processed from competing smartphone users Design a prototype of the HCP smartphone Engineering hours spent on initial product design Make design changes to the smartphone based on customer feedback Number of design changes Production Manufacture the HCP smartphones Machine hours required to run the production equipment Package the HCP smartphones Number of smartphones shipped by HCP Marketing Market the new design to cell phone companies Number of cell phone companies purchasing the HCP smartphone Distribution Process orders from cell phone companies Number of smartphone order s processed Number of deliveries made to cell phone companies Deliver the HCP smartphone s to cell phone companies Number of deliveries made to cell phone companies Customer Service Provide on - line assistance to cell phone users for use of the HCP smartphone Number of smartphone s shipped by HCP Customer Service hours

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    2 - 10 2 - 25 (10 – 15 min.) Cost drivers and functions. 1. Function Representative Cost Driver 1. Accounting Number of transactions processed 2. Human Resources Number of employees 3. Data p rocessing Hours of computer processing unit (CPU) 4. Research an d d evelopment Number of research scientists 5. Purchasing Number of purchase orders 6. Distribution Number of deliveries made 7 . Billing Number of invoices sent 2. Function Representative Cost Driver 1. Accounting Number of journal entries made 2. Human Resources Salaries and wages of employees 3. Data Processing Number of computer transactions 4. Research and Development Number of new products being developed 5. Purchasing Number of different types of materials purchased 6. Distribution Distance traveled to make deliveries 7. Billing Number of credit sales transactions

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    2 - 11 2 - 26 (20 min.) Total costs and unit costs 1. Fixed, Variable and Total Cost of Graduation Party 0 1000 2000 3000 4000 5000 0 100 200 300 400 500 600 Number of attendees Costs ($) Fixed costs Variable costs Total cost 2. Number of attendees 0 100 200 300 400 500 600 Total cost s (fixed + variable) $1,6 00 $2,000 $2,4 00 $2,8 00 $3,2 00 $3,6 00 $4,0 00 Cost s per attendee (total cost s  number of attendees) $20.00 $12.0 0 $9.33 $ 8.00 $ 7.2 0 $ 6.67 As shown in the table above, for 100 attendees the total cost will be $2 , 000 and the cost per attendee will be $20. 3. As shown in the table in requirement 2, for 500 att endees the total cost will be $3 , 6 00 and the cost per att endee will be $7.20 . Number of attendees 0 100 200 300 400 500 600 Variable cost per person ($ 9 caterer charge – $5 student door fee) $ 4 $ 4 $ 4 $ 4 $ 4 $ 4 $ 4 Fixed Costs $1, 6 00 $ 1, 6 00 $ 1, 6 00 $ 1, 6 00 $ 1, 6 00 $ 1,6 00 $ 1,6 00 Variable cost s ( number of attendees × variable cost per person) 0 4 00 8 00 1,2 00 1,6 00 2,0 00 2,4 00 Total cost s (fixed + variable) $1,6 00 $2,000 $2,4 00 $2,8 00 $3,2 00 $3,6 00 $4,0 00

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    2 - 12 4. Using the calculations shown in the table in requirement 2, we can construct the cost - per - attendee graph shown below: 0 5 10 15 20 25 0 100 200 300 400 500 600 700 Number of Attendees Cost per Attendee ($) As president of the student association requesting a grant for the party, you should not use the per unit calculations to make your case. The person making the grant may assume an attendance of 500 stude nts and use a low number like $7.20 per attendee to calculate the size of your grant. Instead, you should emphasize the fixed cost of $1 , 6 00 that you will incur even if no students or very few students attend the party, and try to get a grant to cover as much of the fixed costs as possible as well as a variable portion to cover as much of the $ 4 variable cost to the student association for each person attending the party. 2 - 27 (25 min.) Total and unit cost, decision making. 1 . $0 $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 0 5,000 10,000 Total Manufacturing Costs Number of Flanges Fixed Costs Variable Costs Total Manufacturing Costs Note that the production costs include the $2 8 ,000 of fixed manufacturing costs but not the $10,000 of period cost s . The variable cost is $1 per flange for ma terials, and $2 .80 per flange ($2 8 per hour divided by 10 flanges per hour) for direct manufacturing labor for a total of $3.80 per flange.

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    2 - 13 2. The inventoriable (manufacturing) cost per unit for 5,000 flanges is $ 3.80 × 5,000 + $ 28,000 = $47,000 A verage (unit) cost = $47 ,000 ÷ 5,000 units = $ 9.40 per unit. This is below Flora ’s selling price of $ 10 per flange. However, in order to make a profit, Gayle ’s Glassworks also needs to cover the period (non - manufacturing) costs of $10,000, or $10,000 ÷ 5,000 = $2 per unit. Thus total cost s , both inventoriable (manufacturing) and period (non - manufacturing) , for the flanges is $9.40 + $2 = $ 11.40 . Gayle ’s Glasswork s cannot sell below Flora ’s price o f $ 10 and still make a profit on the flanges. Alternatively, At Flora ’s price of $ 10 per flange: Revenue $10 × 5,000 = $50,000 Variable costs $3.80 × 5,000 = 19,000 Fixed costs 38,000 Operating l oss $ (7,000 ) Gayle ’s Glassworks cannot sell below $ 10 per flange and make a profit. At Flora ’s price of $ 10 per flange, the company has an operating loss of $ 7,000 . 3 . If Gayle ’s Glassworks produces 10,000 units, then total inventoriable cost will be: Variable cost ($ 3.80 × 10,000 ) + fixed manufacturing cost s , $2 8 ,000 = total manufacturing cost s , $ 66,000 . Average (unit) inventoriable (manufacturing) cost will be $66,000 ÷ 10,000 units = $6.60 per flange Unit total cost including both inventoriable and period costs will be ($66 ,000 +$10,000) ÷ 10,000 = $7.60 per flange, and Gayle ’s Glassworks will be able to sell the flanges for less than Flora and still make a profit. Alternat iv ely, At Flora ’s price of $ 10 per flange: Revenue $10 × 10,000 = $100,000 Variable costs $3.80 × 10,000 = 38,000 Fixed costs 38,000 Operating income $ 24,000 Gayle ’s Glassworks can sell at a price below $ 10 per flange and still make a profit. The company earns operating income of $2 4 , 0 00 at a price of $ 10 per flange. The company will earn operating income as long as the price exceeds $ 7.60 per flange. The reason the unit cost decreases significantly is that inventoriable (manufacturing) fixed costs and fixed period (nonmanufacturing) costs remain the same regardless of the number of units produced. So, as Gayle ’s Glasswork s produces more units , fixed costs are spread over more units , and cost per unit decreases . This means that if you use unit costs t o make decisions about pricing, and which product to produce , you must be aware that the unit cost only applies to a particular level of output.

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    2 - 14 2 - 28 (20 – 30 min.) Inventoriable costs versus period costs. 1. Manufacturing - sector companies purchase materials and comp on ents and convert them into different finished goods. Merchandising - sector companies purchase and then sell tangible products without changing their basic form. Service - sector companies provide services or intangible products to their customers — for example, legal advice or audits. Only manufacturing and merchandising companies have inventories of goods for sale. 2. Inventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold. These costs for a manufacturing company are included in work - in - process and finished goods inventory (they are “ inventoried ” ) to build up the costs of creating these assets. Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues. 3. (a) Perrier m ineral water purchased for resale by Safeway — inventoriable cost of a merchandising company. It becomes part of cost of goods sold when the mineral water is sold. (b) Electricity used for lighting at GE refrigerator assembly plant — inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good. (c) Depreciation on Google’s computer equipment used to update directories of web sites — period cost of a service company. Google has no inventory of goods for sale and, hence, no inventoriable cost. (d) Electricity used to provide lighting for Safeway ’ s store aisles — period cost of a merchandising company. It is a cost that benefits the current period and it is not traceable to goods purchased for resale. (e) Depreciation on GE ’ s assembly testing equipment — inventoriable cost of a manufacturing company. It is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good. (f) Salaries of Safeway ’ s marketing personnel — period cost of a merchandising company. It is a cost that is not traceable to goods purchased for resale. It is presumed not to benefit future periods (or at least not to have sufficiently reliable evidence to estimate such future benefits). (g) Perrier mineral w ater consumed by Google’s software engineers — period cost of a service company. Google has no inventory of goods for sale and, hence, no inventoriable cost. (h) Salaries of Google’s marketing personnel — period cost of a service company. Google has no inventory of goods for sale and, hence, no inventoriable cost.

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