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Instructor’s Manual to accompany

ACCOUNTING FOR DECISION MAKING

& CONTROL

EIGHTH EDITION

JEROLD L. ZIMMERMAN

WILLIAM E. SIMON GRADUATE SCHOOL

OF BUSINESS ADMINISTRATION

UNIVERSITY OF ROCHESTER

© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized

For sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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Front Matter

ii © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or

distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

CONTENTS

PREFACE ii

PART I: USING THE TEXT

Suggested Course Outlines iii

Chapter Teaching Suggestions vii

Suggested Assignment Problems & Cases xxv

Alphabetical Listing of Problems and Cases xxxiii

PART II: SOLUTIONS TO PROBLEMS AND CASES

1. Introduction 1-1

2. The Nature of Costs 2-1

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

4. Organizational Architecture 4-1

5. Responsibility Accounting and Transfer Pricing 5-1

6. Budgeting 6-1

7. Cost Allocation: Theory 7-1

8. Cost Allocation: Practices 8-1

9. Absorption Cost Systems 9-1

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

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

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

13. Overhead and Marketing Variances 13-1

14. Management Accounting in a Changing Environment 14-1

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PREFACE

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

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

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

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

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

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

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

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

and an alphabetical index to all problems and cases.

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

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

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

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

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

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

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

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

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

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

recipients and grateful acknowledgers of such material.

mailto:[email protected]

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PART I: USING THE TEXT

Suggested Course Outlines

Quarter, Semester, and Executive Courses

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

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

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

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

Quarter-length courses. Table 1 presents a ten-week quarter course. The text

contains too much material to cover it all comfortably in a ten week quarter course.

Chapter 3 on capital budgeting, and all the appendices must be omitted. This allows time

for covering the crucial problems and a few supplemental cases, but limited opportunity

for outside readings.

Semester-length courses. Table 2 presents a thirteen-week semester course. A

semester format gives the instructor added flexibility for covering Chapter 3 on capital

budgeting, appendices, outside readings, additional topics, or cases. Depending on the

instructor’s interest and program demands, the book complements additional topics on

ethics, international examples, new manufacturing advances, quality management, 6

sigma, ABC and ABM, balanced score card, lean manufacturing, etc. These topics fit

naturally toward the end of the course after developing the underlying framework and an

understanding of the evolution of costing systems.

Executive MBA courses. Table 3 presents the outline for a seven-week executive

course. The book works well with executive MBA students. In a seven week, one-day-a-

week setting with three hours of lectures per week, the course is fast paced. Executive

students, having encountered similar situations, find the problems very realistic, and are

especially receptive to integrating the accounting, economics, and organizational aspects

of the material. However, much of the material must be pared back. Delete all of the

appendices, Chapter 3 on capital budgeting, and Chapters 12 and 13 on standard costs

and variances.

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

(No coverage of Material in Appendices)

Class No. Chapter Topic

1 1 Introduction

2 2 Nature of Costs

3 2 Nature of Costs

4 4 Organizational Architecture

5 5 Responsibility Accounting and Transfer Pricing

6 5 Responsibility Accounting and Transfer Pricing

7 6 Budgets and Budgeting


9 7 Cost Allocation: Theory

10 8 Cost Allocation: Practices

11 MIDTERM

12 9 Absorption Cost Systems


14 10 Criticisms of Absorption Cost Systems: Incentive to

Overproduce

15 11 Criticisms of Absorption Cost Systems: Inaccurate Product

Costs

16 12 Standard Costs: Direct Labor and Materials


18 13 Overhead and Marketing Variances

19 14 Management Accounting in a Changing Environment


Notes:

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

Assigning a longer case every 2-3 weeks also breaks up the pace of the course and allows the students

to apply the concepts to longer, more difficult problems.

This format does not allow much time for outside readings. To read and understand the chapter and

work 2-3 problems requires about 5-6 hours of preparation time per class.

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

Week Chapter Topic

1 1

2

Introduction

Nature of Costs

2 2

2

Nature of Costs

Appendix: Estimating Fixed and Variable Costs

3 3 Opportunity Cost of Capital and Capital Budgeting

4 4

5

Organizational Architecture

Responsibility Accounting and Transfer Pricing

5 5

6


Budgets and Budgeting

6 6

7

Budgets and Budgeting

Cost Allocation: Theory

7 7

8


Cost Allocation: Practices

Appendix — Reciprocal Method for Allocating Service

Department Costs

8

9

MIDTERM

Absorption Cost Systems


Appendix — Process Costing

10 10

11

Criticisms of Absorption Cost Systems: Incentive to Overproduce

Criticisms of Absorption Cost Systems: Inaccurate Product Costs


12 13 Overhead and Marketing Variances

Outside readings & cases (new manufacturing systems, ABC,

Target costing, etc.)


Outside readings & cases (new manufacturing systems, TQM, JIT,

ABM, etc.)

Notes:

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

Assigning a longer case to be handed in every 2-3 weeks also breaks up the pace of the course and allows the

students to apply the concepts to longer, more difficult problems.

The semester format allows time for outside readings to supplement the text. Chapter 3 on capital budgeting

is not covered, Chapter 14 can be increased to two weeks and a capstone case added..

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

(No coverage of Material in Appendices)

Week Chapter Topic

1 1

2

Introduction

Nature of Costs

2 4

5

Organizational Architecture



4 7

8


Cost Allocation: Practices


6 10

11

Criticisms of Absorption Cost Systems: Incentive to

Overproduce

Criticisms of Absorption Cost Systems: Inaccurate Product

Costs


Notes:

The fast paced coverage of the material works especially well with executives, most of whom have

confronted work situations similar to the assignments. They relate quite well to the end-of-chapter

material and there are usually lively class discussions. In fact, many of the problems in the text

resulted from discussions with executive students outside of class describing a job experience. This

course works best if the students have had a microeconomics course.

There is no midterm exam.

This format requires that the appendices be omitted. If it is necessary to cover standard costs and

variances, assign Chapter 12 on direct labor and material standards. Standard costs can be added to

the first half of lecture number 7.

Very little outside reading should be used unless it is optional. Reading the chapters and working a

few homework problems each week will quickly consume the student’s available study time.

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Chapter Teaching Suggestions

My teaching approach is to require the students not only to read the assigned

chapter, but also to prepare and submit a few problems at the beginning of class. This not

only provides a foundation for constructive class discussion, but also ensures that

students do not fall behind.

Throughout the course I emphasize that students of managerial accounting will

develop the very valuable skill of knowing how to take a diverse set of facts and figures

and reduce them to a cogent financial analysis. They will become more skilled in

constructing spreadsheets and doing financial analysis. I remind them of the oft-heard

analogy, ―Accounting is the language of business.‖ Developing the understanding of

accounting and how to communicate via financial analysis is akin to learning a foreign

language, and similarly requires constant practice. The daily assignments provide this

discipline.

Chapter 1. Introduction

Chapter 1 summarizes the course and contains a number of important concepts,

including: internal versus external accounting; the trade-off between using the accounting

system for decision making versus using it for control; single versus multiple accounting

systems; the role of the controller; and economic Darwinism.

A good way to begin the first lecture is to hand out a copy of the Vortec problem

statement (Chapter 1, section F) and give the students five minutes to sketch out the

solution. Then ask them, how many would accept the special order? This is a good way

to generate class discussion the first day. By following the text’s analysis of Vortec in

Chapter 1, several questions naturally arise, including:

• What additional information is required?

• What is the difference between variable and average costs?

• How do the incentives of various managers to accept the order differ?

Vortec is a good ice breaker which allows the students to see that the accounting costs are

being used for a variety of purposes; in particular, they are being used for both decision

making and control. Since the trade-off between decision making and control is an

important organizing feature of the text, it is useful to introduce this key pedagogy early

in the course. (Point out that Chapter 2 elaborates on decision making and Chapters 4

and 5 describe the general issues involving control.)

I also like to reinforce the multiple roles of accounting using Figure 1-1. Finally,

it is important to spend a few minutes discussing the importance of Economic

Darwinism. Many of the topics we discuss (cost allocations, budgeting, product costing)

have survived in competitive industries for long periods of time. For the average firm,

these accounting procedures must be yielding benefits at least as large as their costs. This

does not mean that these procedures are cost beneficial for every firm. Nor does it mean

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that these accounting systems operate at zero costs (including the costs of dysfunctional

decision making).

Chapter 2. The Nature of Costs

I begin this lecture by defining opportunity costs, ―The sacrifice forgone from a

specific decision.‖ Students find this definition too abstract to have much meaning. Plan

on spending 20 - 30 minutes giving examples and working through text problems. A

good example to use to illustrate opportunity costs is: ―How do you decide what to do

this Saturday night?‖ First you think about the opportunities (movie, concert, watching

TV, studying managerial accounting). (The last gets a good laugh.) Then you think

about what you give up if you do a particular activity. You forgo cash in some cases as

well as the opportunity to do something else. If your managerial accounting final exam is

on Monday, going to a concert precludes studying for the final. If you fail the final and

have to repeat the course in the summer, this can impose large costs, especially if you are

unable to get a good summer internship. This simple example illustrates all the key

points of opportunity costs:

• opportunity costs involve both pecuniary and non-pecuniary considerations,

• opportunity costs are forward looking,

• opportunity costs vary with the opportunity set (e.g., which movies are

playing and when assignments are due).

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

opportunity costs:

P2-9 Emrich Processing

P2-26 Eastern University Parking

Emrich (P2-9) always generates a 15 minute discussion. Ask the students what

cost of the remaining acid should be considered in setting the price for the new contract.

Possible answers will be $700, $500, $0, and -$400. The correct answer is -$400. In this

case opportunity costs are negative because the firm can avoid the disposal costs. This

then leads into a question of what price to charge. Since we don’t know the customer’s

demand curve, we can’t set a price, but the discussion helps illustrate the relation between

costs and pricing (a point that arises throughout the course). Appendix A discusses the

relation between costs and pricing.

Eastern University Parking (P2-26) can generate as much as 20 to 30 minutes of

discussion. Parking is a universal problem on all campuses, and hence, this problem hits

a strong emotional nerve. Most students initially overlook the opportunity cost of land in

setting the parking fees and will discuss other problems with the parking system for five

minutes or so before someone hits on the problem of how land is being valued. It isn’t.

And this creates the bias towards surface lots. Once everyone understands this, then ask,

―Why has the University systematically priced its land at zero?‖ ―Are the administrators

dumb?‖ Most students are willing to stop here and say yes. But prompt them by asking,

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―What are the organizational consequences of including land costs in parking fees?‖ The

solution describes the organizational issues. This problem illustrates dramatically how

accounting costs have both decision making and organizational implications.

Mastich Counters (P2-28) is a great problem for student discussion, especially for

executive students because it involves primarily a human resources question that they

have all encountered – should firms adopt a take-it or lose-it policy for vacation accruals?

At this point I usually compare opportunity and accounting costs. The key point

is that most accounting costs are historical in nature and hence backward-, not forward-

looking.

The final point to emphasize is that estimating opportunity costs is itself a costly

process. Much analysis is usually required to define the opportunity set and to estimate

the benefits forgone from each alternative. Because opportunity costs are costly to

estimate, proxies are often used, such as accounting costs.

After introducing opportunity costs, I spend the rest of the time on cost variability

and review total, average, fixed, variable, and marginal costs. Students will remember

these terms from their economics course, and are reassured when told that we simplify

the economics treatment by assuming cost curves are straight lines, thus eliminating

derivatives from this course. This discussion is very important because it is one of the

first times in the curriculum that two courses are integrated with and build on each other.

A good break-even problem is Amy’s Boards (P2-44), which illustrates that the

snow boards are a variable cost before they are purchased, but become a fixed cost once

purchased. In later chapters, students have difficulty knowing how to handle fixed costs.

Amy’s Boards provides a simple, intuitive example of how fixed costs arise from making

the capacity decision.

Another good problem, especially if the students have had a finance course is

Candice (P2-34). It is a simple breakeven problem whether the question asks to find the

breakeven of two alternative technologies, one has high fixed costs and low variable costs

and the other technology is the opposite. To select the optimum technology depends on

expected volume, which is not given. So the first punch line is the optimum technology

is based on profit maximization, not breakeven. The second punch line is that the firm’s

operating leverage arises from prior firm-value-maximizing decisions.

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Recommended Problem Assignment 2-8 Taylor Chemicals

2-9 Emrich Processing

2-14 Home Auto Parts

2-17 Easton Diagnostics

2-22 iGen3

2-25 Oppenheimer Visuals

2-26 Eastern University Parking

2-28 Mastich Counters

2-31 News.com

2-34 Candice

2-41 Happy Feet

2-42 Digital Convert

2-43 APC Electronics

2-44 Amy’s Boards

Case 2-1 Old Turkey Mash

Chapter 3. Opportunity Cost of Capital and Capital Budgeting

This chapter is a fairly traditional treatment of capital budgeting. It can be

omitted without interrupting the flow of the material, or it can be postponed until later in

the course. The later chapters and problems do not rely on this material. Like other

managerial accounting texts, to simplify the analysis, topics in Chapters 4–14 are treated

as single-period decision problems.

As our students have already taken a basic corporate finance and capital

budgeting course, I do not cover this chapter in my managerial accounting course.

Teaching this chapter depends on the students’ prior exposure to discounting, and the

instructor’s objectives.

Chapter 4. Organizational Architecture

Since Rochester students have had two managerial economics courses that cover

the basic topics in Chapter 4, this chapter largely constitutes a review and is presented in

conjunction with Chapter 5, with Chapter 5 being used to reinforce and illustrate the

general theoretical issues raised in Chapter 4. The key points to emphasize include: the

importance of agency problems: how the organizational architecture can reduce these

problems, and the accounting system as an integral part of the performance evaluation

system in most organizations. I spend a few minutes reviewing the major concepts and

terminology used later in the course:

• Organizational architecture (three-legged stool)

Performance evaluation

Rewards and punishments

Partitioning decision rights

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• Importance of linking decision rights and knowledge

• Administrative devices for the three-legged stool

Separation of decision management and decision control

Initiation - decision management

Ratification - decision control

Implementation - decision management

Monitoring - decision control

Hierarchies

An important question to ask students is ―Where do you get the information for

the initiation, ratification, implementation, and monitoring decisions?‖ They should

understand that initiation and implementation require forward looking information about

opportunity costs, where decision control decisions rely more on historical performance.

In other words, accounting data tends to be more useful for managers who are exercising

decision control rights than for managers exercising decision management rights.

Emphasize that ―one size doesn’t fit all.‖ Accounting data is very useful, but it is more

useful in some situations than in others.

Recommended Problem Assignment 4-5 Voluntary Financial Disclosure

4-11 Formula 409

4-15 Tipping

4-21 Repro Corporation

Case 4-2 Woodhaven Service

Chapter 5. Responsibility Accounting and Transfer Pricing

Chapter 5 illustrates the role of the accounting system in the firm’s organizational

architecture. Two examples are used: performance evaluation of responsibility centers,

and accounting-based transfer pricing.

The first part of the chapter on responsibility accounting is a good example of the

linkage between the assignment of decision rights and performance evaluation. I review

Table 5-1 and point out that evaluating cost centers based on minimizing average cost

does not necessarily maximize firm profits. I also like to spend a few minutes discussing

EVA and asking the question, ―How does EVA differ from residual income?‖ Except for

some measurement refinements in the cost of capital and accounting income, the two are

the same. They differ in that some EVA consultants emphasize linking EVA to

compensation.

The second topic of the chapter is transfer pricing. Traditional managerial

accounting courses cover transfer pricing towards the end of the course. I believe it is

best covered at the beginning as part of the topic of organizational architecture. Cost

allocations and cost recharges pervade all organizations. To understand the incentive

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issues of cost allocations, the general topic of transfer pricing provides an underlying

theoretical foundation for cost allocations in general.

I do not lecture extensively on transfer pricing. Our students have had the

economics of transfer pricing in their managerial economics course. Instead, I emphasize

several key points:

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

available.

• The ideal transfer price is opportunity cost.

• Transfer pricing is not a zero-sum game, and all transfer pricing methods have

both advantages and disadvantages (no method is best in all situations).

• With variable cost transfer pricing, someone must have the decision rights to

determine which costs are fixed and which costs are variable. Since lower-

level managers usually have more specialized knowledge of the cost behavior

patterns, they can use this knowledge opportunistically to reclassify ―fixed‖

costs as ―variable‖ for calculating the variable cost transfer price. This same

argument also arises again in Chapter 10 when discussing variable costing.

I usually start class with Royal Resort and Casino (Case 5-3) to illustrate the

interdependencies among divisions and how difficult it is for accounting systems to

capture these interdependencies. It is important for students to understand the

conundrum of divisional performance measurement. Firms decentralize to take

advantage of local knowledge. But to provide incentives (and overcome free rider

problems) they create a fiction that the firm can be separated into distinct silos (divisions)

to measure performance. But these silos (and the accounting systems) are unable to

capture and assign the synergies that gave rise to the multiproduct firm.

Next, I spend about 15 minutes reviewing Executive Inns (C5-2). The punch line

here is: ―The devil is in the details.‖ It’s not where you pay for performance, but

precisely how you measure performance. Small changes in the details of the performance

metric can create very different incentives. The remainder of class time is used

discussing assigned problem material. A number of our students are marketing majors,

so Stale-Mart (P5-17) always goes over well in class. XBT Keyboards (P5-24) provides

a good example for demonstrating the incentives of managers operating under a variable

costing transfer pricing rule to outsource those production methods with high fixed costs,

thereby converting them into variable costs. I always assign Celtex (Case 5-1), which is

a shortened and simplified version of the old Birch Paper case. The students never

suggest my solution, which always produces a lively and interesting class discussion.

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Recommended Problem Assignment 5-11 Cogen

5-12 University Lab Testing

5-14 WBG

5-15 CJ Equity Partners

5-17 Stale-Mart

5-19 Flat Images

5-20 Premier Brands

5-23 Transfer Price Company

5-24 XBT Keyboards

5-25 Infantino Toyota

5-27 Serviflow

Case 5-1 Celtex

Case 5-2 Executive Inn

Case 5-3 Royal Resort and Casino

Chapter 6. Budgeting

I begin the topic of budgeting by having the students prepare solutions to Potter-

Bowen (P6-10) and Madden International (P6-24). These problems, drawn from actual

company histories, use their budgeting systems in two very different ways. Potter-

Bowen’s is a top-down decision control system, whereas Madden International’s is a

bottom-up decision management scheme, designed to stimulate the assembly of

specialized knowledge within the firm. These two polar extremes illustrate some key

points:

• Firms make trade-offs involving decision management versus decision control

in designing their budgeting system.

• Budgeting systems, like other parts of the firm’s organizational architecture,

must be matched and coordinated to the other parts of the architecture. There

are complementarities among the various components.

These two problems also highlight the multiple roles served by budgeting systems. I

emphasize that virtually all firms use budgets and that budgeting has survived for

centuries. Thus, budgets are important financial mechanisms used by managers. To help

illustrate what budgets do, use the simple dichotomy of decision management and

decision control. Decision management versus control also helps explain a number of

budgeting phenomena, such as long-term budgets, budget lapsing, line-item budgets, and

zero-based budgets.

A useful feature of this topic is that budgeting may be used to illustrate the ability

of organizational architecture to explain observed institutional practices, such as why

some firms use line item budgets and others do not.

I like to teach the budgeting material right after introducing organizational

architecture because, although not a technically demanding topic, it directly reinforces

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the organizational architecture material and allows some good examples of how to use

the theoretical material in Chapter 4 to analyze actual company practice.

Recommended Problem Assignment 6-5 DMP Consultants

6-7 Golf World

6-8 Coating Department

6-10 Potter-Bowen

6-15 International Telecon

6-17 Panarude Airfreight

6-20 Webb & Drye

6-21 Spa Ariana

6-22 Picture Maker

6-24 Madden International

6-25 Brehm Vineyards

Chapter 7. Cost Allocation: Theory

I begin this chapter by having the students discuss their solutions to the Corporate

Jet problem (P7-4). This is an example from an actual company that quickly piques the

students’ interests in cost allocations. This problem also illustrates quite nicely that cost

allocations are really just questions of transfer pricing. After about 15 minutes of student

discussion, I review the major points from the first part of the chapter: the pervasiveness

of cost allocations and some reasons for allocating costs. Since corporate income taxes

and third-party reimbursements cannot explain the pervasiveness of allocations, issues of

motivation and control must also be important considerations in those cases where taxes

and reimbursement do not apply (e.g., non-profits).

The analysis in this chapter is used to demonstrate how cost allocations can be

used to affect behavior. Reviewing this material requires about 30 minutes of class time.

The isoquants and budget lines in the Appendix are standard topics covered in every

economics text. Using these microeconomic tools in the managerial accounting course

helps to integrate the curriculum for the students. Applying the concepts they learned in

economics reinforces the earlier material and shows them the benefits of how

microeconomic tools can be applied to understand other management practices such as

cost allocations. World Imports (P7-19) is a simple problem that nicely illustrates how

cost allocations can change managers’ operating decisions.

The topic of insulating versus noninsulating allocations again illustrates the inter-

relations between performance measurement and other parts of the firm’s organizational

architecture. For example, a firm might sometimes choose a noninsulating allocation

scheme to foster cooperation. I like to assign Symmetric (P7-29), Avid Pharmaceuticals

(P7-7), Encryption Inc. (P7-12), or Scanners Plus (P7-21) to illustrate how noninsulating

cost allocations induce risk sharing. This discussion works to integrate the finance course

with managerial accounting.

Numerous problems highlight how cost allocation schemes affect behavior. My

favorite problems are listed below. Students find this material very engaging. Plan to

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spend at least two hours of class time on this chapter, and make sure you assign enough

class time to cover at least four or five problems. I always assign BFR ship Building (P7-

30) because it illustrates that cost-plus pricing in government contracting induces a bias

against outsourcing and Durango Plastics (C7-2) because it nicely illustrates how cost

allocations can distort relative profitability. Finally, continue to stress that cost

allocations represent nothing more than transfer pricing problems.

Recommended Problem Assignment 7-4 Corporate Jet

7-6 Avid Pharmaceuticals

7-7 Wasley

7-8 Hallsite Imaging

7-12 Encryption, Inc.

7-17 Vorma

7-18 Bio Labs

7-19 World Imports

7-20 Painting Department

7-21 Scanners Plus

7-25 Allied Adhesives

7-26 Plastic Chairs

7-27 Woodley Furniture

7-30 BFR Ship Building

Case 7-2 Durango Plastics

Chapter 8. Cost Allocation: Practices

Chapter 8 continues the discussion in Chapter 7, describing some of the practical

problems encountered in cost allocations, including allocating service department costs

and joint costs. In particular, with reciprocal service flows, the actual mechanics of cost

allocation become fairly complicated. I use the allocation of service department costs

(e.g., direct vs. step-down) to illustrate that, no matter how complex the calculations

appear, in the end a transfer price results which can create incentives for managers to

outsource the product or service. In some cases, this can lead to a death spiral. It is

important that students understand the mechanical details of the various service

department cost allocation methods because it builds their confidence that they can

successfully analyze complex algorithms. Ultimately, they must address the joint

questions of: do the resulting cost allocations approximate opportunity costs, and what

incentives are likely created by the allocations?

Next, I discuss joint cost allocations and make the key point that managers can

make profit-maximizing decisions (which joint products to process further and whether to

produce the joint products) without making any joint cost allocations, and hence

allocating joint costs do not add any further information for optimum decision making.

Hence, allocating joint costs are only useful for financial reporting, taxes, and control.

Enzymes (P8-9) illustrates how allocating joint costs can lead to sub-optimum decisions.

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I spend about 10 minutes of class time having the students discuss and critique

their’ answers to Karsten Mills (P8-20). This is a real company death-spiral example

which demonstrates that there are no simple solutions to many cost allocation/transfer

pricing problems. I end this topic with Carlos Sanguine Winery (Case 8-1). This is

another actual company. Several interesting aspects of this case include:

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

• Allocating grape costs based on gallons was distorting the relative profitability

of the product lines;

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

• Before they could change accounting systems, they were acquired in an

unfriendly takeover (and my involvement with the firm ended).

Recommended Problem Assignment 8-4 Mystic Herbals

8-9 Enzymes

8-10 Sunder Toys

8-11 WWWeb Marketing

8-14 Vigdor Wood Products

8-15 Advanced Micro Processors

8-19 RBB Brands

8-20 Karsten Mills

8-21 Beckett Manufacturing

8-22 Littleton Medical Center

8-24 Grove City Broadcasting

8-30 IVAX

Case 8-1 Carlos Sanguine Winery

Chapter 9. Absorption Cost Systems

This chapter is a straightforward presentation of a traditional absorption costing

system, focusing on the mechanics of absorption costing and leaving most of the analysis

to the next two chapters. This chapter is kept simple and descriptive to insure that the

students have a thorough grounding and understanding of the mechanics before a detailed

analysis is presented in Chapters 10 and 11.

I like to give the students the ―big picture‖ of the accounting system by presenting

the usual cost flows through the accounts (Figure 9-1). This helps tie the managerial

accounting course back to their financial accounting course. It also demonstrates that all

manufacturing costs eventually flow through to the income statement.

Tables 9-3 and 9-4 on costs and pricing in an oil change outlet is a unique way to

introduce the idea of normal volume and tie it into the pricing decision. This material

again allows the integration of the managerial economics and managerial accounting

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courses. This example provides a nice vehicle to illustrate how shifts in the demand

curve cause volume and price changes, but as long as marginal cost is constant, prices

should not be raised when demand falls (and average costs rise). Appendix B presents

this material in more rigorous fashion.

I begin the class by reviewing the mechanics for 15 minutes: the job order cost

sheet and cost flows through the accounts (Figure 9-1). I then have the class discuss

Hurst Mats (9-26), which illustrates how focusing on decision management versus

decision control affects the choice of the allocation base to make sure everyone

understands the technical details. The balance of class time is spent having the students

discuss their answers to Pool Scrubbers (P9-5), MacGiver Brass (P9-4), or Welding

Robots (P9-18). MacGiver Brass involves a bank loan decision, which provides the

finance majors with an illustration of the importance of understanding cost accounting.

Welding Robots integrates and reviews a number of key concepts: opportunity costs,

fixed and variable costs, and job order costing.

I do not cover the mechanics of process costing (Appendix A). Most of the

students in the course are non-accounting majors and find the technical aspects of process

costing dull. Instead, I make a few brief remarks that parallel the material in the last

section of the chapter and refer them to Appendix A if they are interested.

Recommended Problem Assignment 9-4 MacGiver Brass

9-5 Pool Scrubbers

9-6 Thermalloy

9-12 Simple Plant

9-18 Welding Robots

9-21 Pebble Beach Sandals

9-26 Hurst Mats

9-28 Amalfi Texts

9-29 Pyramid Products

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

Having introduced the mechanics of absorption costing in Chapter 9, Chapters 10

and 11 analyze these systems. Chapter 10 discusses the incentives to overproduce, which

leads to variable costing. Chapter 11 discusses the assertion that an absorption costing

system inaccurate product costs, which leads to a discussion of activity-based costing.

Both of these chapters increase the students’ understanding of how traditional, absorption

cost systems work.

I begin the class with either Zipp Cards (P10-6) or Medford Mug Company (P10-

10). These problems illustrate the incentive to overproduce under an absorption costing

system. Having made sure everyone understands how overproduction lowers average

cost (as long as marginal cost is not increasing), I then return to the text and review the

numerical example in Tables 10-4 through 10-6. This illustration reintroduces the often

overlooked, important question of who has the decision rights to determine fixed and

variable cost. Managers still have the incentive to overproduce under a variable costing

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system if, at the end of the year, they can classify cost overruns as variable and thereby

inventory them by overproducing.

The incentive to reclassify fixed costs as variable is also present if a variable cost

transfer pricing method is chosen. This again is another good opportunity to link

absorption costing to transfer pricing. Absorption-based product costs are in fact transfer

prices. Hence, the general theoretical issues discussed under transfer pricing also apply

to absorption costing. Linking the discussion in Chapter 10 back to that in Chapter 5

helps to unify the course and to demonstrate that managerial accounting is not a set of

unrelated computational methods. Kothari Inc. (P 10–11) provides a good example of

how variable cost transfer pricing can create incentives to outsource thereby converting

fixed costs into variable costs.

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

Recommended Problem Assignment 10-4 Zipp Cards

10-5 Transpacific Bank

10-6 Zeflax Bottles

10-8 Aspen View

10-9 CLIC Lighters

10-10 Medford Mug Company

10-11 Kothari Inc.

10-12 Mystic Mugs

10-14 Taylor Chains

10-18 Dim

10-20 Weststar Appliances

10-23 Sants Brake Co.

Case 10-1 Joon

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

Chapter 11 discusses another criticism of absorption costing systems – inaccurate

product costs. The proposed solution, activity-based costing, is also described. I

introduce this topic by having the students discuss their solutions to several problems

which demonstrate that traditional unit-level allocation bases can produce misleading

product costs. Milan Pasta (P11-4) and Toby Manufacturing (P10-15) are good examples

of miscosting. Having introduced the topic with this example, I spend about 20 minutes

on ABC, describing how it differs from traditional unit-based absorption costing, and its

advantages.

I then ask the students, why haven’t more firms fully implemented ABC? Why

are product costs for performance evaluation still based on unit-level allocations? These

firms have already incurred the cost of calculating ABC product costs. Why don’t more

firms change their performance measures to an ABC system?

The ensuing discussion inevitably raises organizational issues. When you change

the product costing system, some managers are made better off and some are made worse

off, which leads to high influence costs. Some key points that should be made are:

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• Adopting ABC constitutes a change in performance measures, requiring

compensating changes in the performance reward system in order to keep the

three-legged stool from becoming unbalanced. Tie this point back to Chapter

4.

• Lower-level managers with specialized knowledge of cost drivers must be

given the decision rights over choice of the cost drivers. These decision rights

can be exercised opportunistically.

• Exercising this discretion over choice of cost drivers imposes control costs on

the firm. Usually decision control is harder under ABC than under a more

centrally-managed absorption costing system.

• Again, we see that the decision to use ABC versus absorption costing involves

a trade-off between decision management and decision control. ABC is likely

better for decision management, but worse for decision control. As with

budgeting, a trade-off must be made between decision management and

decision control. Figure 11-4 illustrates there is an optimum number of cost

drivers.

Finally, I end the lecture by discussing Friendly Grocer (P11-9), Sanchez Gadgets

(P11-11), Goodstone Tires (P11-17), or Familia Insurance Company (P11-20). The

marketing majors like these problems. The key point of these problems is that while

ABC may give you a better understanding of your costs, it does not help in understanding

revenues and the interdependencies among demand for various products offered by the

firm. In Friendly Grocer (P11-9), even with ABC, shelf space costs are based on the

historical cost of occupancy. Yet, the opportunity cost of shelf space is not the historical

cost, it is the contribution margin of not stocking some other item and the effect of that

item on the sales of other items stocked. If the grocery store did not stock milk, the sales

of other products would fall. Neither an absorption costing nor an ABC system can

capture these demand-side interdependencies.

SnapOn Fasteners (Case 11-2) is based on the Mueller-Lehmkuhl case, but is

shorter. It contains the essential features of Mueller-Lehmkuhl, but with a very different

solution.

Recommended Problem Assignment 11-4 Milan Pasta

11-6 Astin Car Stereos

11-8 True Cost Manufacturing, Inc.

11-9 Friendly Grocer

11-11 Sanchez Gadgets

11-15 Toby Manufacturing

11-16 Kay Enterprises

11-17 Goodstone Tires

11-20 Familia Insurance Company

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Case 11-2 SnapOn Fasteners

Chapter 12 Standard Costs: Direct Labor and Materials

This chapter describes the mechanics and incentives of standard costs and

variances. To prevent the lecture from becoming overly mechanical and dry, I

continually emphasize the organizational issues and incentive effects of standard cost

variances. I remind the class that agency problems require control mechanisms and that

standard costs provide that control. By splitting the total direct material variance into a

price variance and a quantity variance, the purchasing department is controlled by the

price variance, and the production department is controlled by the quantity variance. But

these are noisy measures of performance. Moreover, there are substantial interaction

effects (externalities) among the various departments. And so while it is important that

students understand the computation of the variances, they should also be able to analyze

the incentive effects of standard costs.

I like to begin the lecture by discussing Great Southern Furniture (P12-15). The

production setting being very intuitive and simple illustrates quite nicely how standards

can be used for decision making (in this case how much to bid on the job) and decision

control (a benchmark to evaluate actual performance). This problem also illustrates how

a time study is used to set standards – a few sets of furniture are assembled and the time

to assemble them is used as the standard.

One of the more interesting issues in standard costing involves determining who

has the decision rights to set and revise the standards and how frequently standards are

revised. This involves the usual trade-off between decision management and decision

control described in Chapter 6 (Budgets and Budgeting). The frequency of standard

revisions also involves trading off decision management and decision control.

One company has the policy, ―We never, never revise the standards, except when

we have to‖ (Changing Standards, P12-6). While this statement sounds silly on the

surface, it really does have content. I use the 1970s example of the Hunt brothers, who

tried to corner the silver market. In less than a year, silver prices roughly tripled. Silver

is a major input to making photographic materials because silver compounds are light

sensitive. If Kodak did not change its standard costs when silver prices tripled, poor

decisions would result. For example, higher silver prices dictate that more resources

should be expended in reclaiming spent silver from manufacturing and film processing.

But managers will only expend more resources in silver reclamation if the standard price

of silver is raised. Thus, the rule, ―We never change our standards, except when we have

to‖ makes sense in the following way. Changing standards involves a trade-off between

decision management and decision control. Frequent standard changes reduce the ability

of a standard cost system to hold managers accountable and reduce the control value of

standard costs. However, if standards are not revised after very large changes,

dysfunctional decision making occurs. Starling Coatings (P12-20) illustrates these

concepts.

Students should understand that standard costs and budgeting are closely related.

To help reinforce this understanding, I use Oaks Auto Supply (P12-4) to introduce the

topic of target costing. After working this problem and discussing target costing in

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general, I ask the students a couple of questions: With target costing, is the knowledge at

the top or at the bottom of the organization? Is target costing a bottom-up or top-down

system? What about standard costing? How do incentives change with target costing as

opposed to standard costing?

I then refer back to Chapter 6 on budgeting and remind them that some budgeting

processes are top-down and others are bottom-up (participative budgeting). The best

system for the firm is determined by the firm’s goals and other parts of the organizational

architecture. Emphasize that ―one size doesn’t fit all.‖

Covering the mechanics of calculating material and labor variances takes about an

hour of class time. While the students generally understand the formulas after reading

the chapter, a little class review reduces their anxiety level. I like to emphasize that all

material and labor variances are unfavorable, in the sense that they indicate a deviation

from plan. ―Favorable‖ labor and material variances could indicate lower quality

products are being produced.

I usually discuss either AN7-X1 (P12-5) or Zinc Faucets (P12-11) to justify why

price variances are calculated when materials are purchased. This allows timely

reporting of price variances instead of waiting until raw materials enter the manufacturing

process. Hence, price (and wage rate) variances are computed based on actual quantities,

not standard quantities. Since price changes of raw materials are useful data for pricing

and production decisions, the timely reporting of price variances is useful for decision

making, as well as control.

I end the lecture by having the students discuss Domingo Cigars (Case 12-1).

This problem provides a good combination of calculations and analysis of the incentive

effects of the manufacturing process.

Recommended Problem Assignment 12-1 Medical Instruments

12-4 Oaks Auto Supply

12-5 AN7-X1

12-6 Changing Standards

12-8 Smythe and Yves

12-9 Healing Touch

12-11 Zinc Faucets

12-15 Great Southern Furniture

12-16 Cibo Leathers

12-20 Starling Coatings

Case 12-1 Domingo Cigars

Chapter 13. Overhead and Marketing Variances

Chapter 13 illustrates how standard costs and variances can be defined in a variety

of different contexts. The first part of the chapter concludes the calculation of

manufacturing by computing overhead variances introduced in Chapter 12. A simple

three overhead variance structure illustrates most of the substantive issues. I have found

that more complicated four and five fixed and variable overhead variance systems add

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few insights to justify the additional computational complexity. The second half of the

chapter describes marketing variances.

I devote some time to discussing standard volume and how it differs from

budgeted and actual volumes, an issue, which requires clarification for most students. I

then spend 15 minutes discussing marketing variances, which marketing majors find

more interesting than the manufacturing variances. I try to cover Chapter 13 in about an

hour of class time.

Recommended Problem Assignment 3-5 Oneida Metal

13-9 Western Sugar

13-10 Soldering Department

13-11 Commando Force

13-14 Turow Trailers

13-18 Ultrasonic

13-20 MRI Department

Chapter 14. Management Accounting in a Changing Environment

Chapter 14 is the most important chapter in the book, providing not only a

conclusion (in contrast to other managerial accounting texts), but also a framework for

understanding how managerial accounting changes in a dynamic world. The chapter also

contains some end-of-chapter problems that review major topics discussed in the book.

I spend at least two hours of class time on Chapter 14. I begin the lecture by

discussing Figure 14-1, a simplified version first introduced in Chapter 1. This important

figure provides a framework that describes:

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

architecture;

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

• How the firm’s business strategy depends on aspects of the external

environment, such as technology, market competition, and government

regulation.

Figure 14-1 illustrates that the internal accounting system is not isolated from other

policies of the firm. Based on Figure 14-1, several important insights are emphasized:

• Changes in the accounting system rarely occur in a vacuum. Accounting

system changes generally occur at the same time as changes in the firm's

business strategy and other organizational changes, particularly with regard to

the partitioning of decision rights and the performance evaluation and reward

systems.

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• Alterations in the firm's organizational architecture, including changes in the

accounting system, are likely a response to changes in the firm's business

strategy caused by external shocks from technology and shifting market

conditions.

• Before implementing an accounting or other organizational change, it is

important to understand what is driving the change.

• An accounting system should not be adopted merely because other firms are

doing so; they may have different external shocks causing their previous

systems to become obsolete.

• An accounting system should not be changed without concurrent, consistent

changes in the way decision rights are partitioned as well as in the

performance reward systems. All three parts of the organization's architecture

must be internally consistent and coordinated.

After describing Figure 14-1, I demonstrate how it applies to various

organizational innovations: total quality management, JIT, 6 sigma and lean

manufacturing, and the balanced score card. An assigned problem for each innovation is

worked in class to ensure the students understand the basics. Then each innovation is

analyzed, including the accounting system changes. For example, Fiedler International

(P14-3) illustrates how balanced scorecards can be gamed as does

Recommended Problem Assignment 14-2 Chateau Napa

14-3 Fiedler International

14-4 Guest Watches

14-8 Software Development, Inc.

14-9 Stirling Acquisition

14-11 Warren City Parts Manufacturing

14-12 Secure Servers Inc.

Case 14-1 Global Oil

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Suggested Assignment Problems & Cases

This table contains a listing of the best problems in each chapter. Problems and

cases are classified as ―basic problems,‖ ―more challenging problems,‖ and ―extensions

to text.‖ Basic problems review the essential material in the text in a straightforward

fashion. More challenging problems go beyond the basic material and require the student

to exercise some judgment and conduct some analysis. These problems are either more

unstructured or require some further application of topics covered in the text. Extensions

to the text are problems that introduce new topics not discussed in the text.

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forwarded, distributed, or posted on a website, in whole or part.

Suggested Assignment Problems

Chapter Basic Problems More Challenging Problems Extensions to Text

1 Introduction P1-1 MBA Students

P1-2 One Cost System Isn't Enough

P1-4 Using Accounting for Planning

P1-6 Golf Specialties

P1-8 Montana Pen

P1-3 U.S. and Japanese Tax Laws

P1-5 Budgeting

P1-4 Managers Need Accounting

Information

P1-7 Parkview Hospital

Suggested Assignment Problems


2 Nature of Costs P2-1 Darien Industries

P2-2 Negative Opportunity Costs

P2-4 Silky Smooth Lotions

P2-5 J. P. Max Dept. Stores

P2-6 Vintage Cellars

P2-7 ETB

P2-8 Taylor Chemicals

P2-15 Measer

P2-16 Affording a Hybrid

P2-19 MedView

P2-20 Manufacturing Cost

Classification

P2-24 Exotic Roses

P2-33 Littleton Imaging

P2-3 NPR

P2-9 Emrich*

P2-10 Gas Prices*

P2-12 Volume and Profits

P2-13 American Cinema

P2-17 Easton Diagnostics

P2-21 Australian Shipping*

P2-22 iGen3

P2-25 Oppenheimer Visuals

P2-26 Eastern University Parking*

P2-29 Optometry Practice

P2-31 News.com

P2-34 Candice Company

P2-35 Mat Machinery

P2-36 Cost Behavior Patterns

P2-37 Royal Holland Line

P2-38 Roberts Machining

P2-39 Doral Rentals

P2-41 Happy Feet

P2-42 Digital Convert

P2-43 APC Electronics

P2-11 Penury Company

P2-14 Home Auto Parts*

P2-18 Spa Salon

P2-23 Adapt, Inc.

P2-27 GRC

P2-28 Mastich Counters*

P2-30 JLE Electronics

P2-32 Kinsley & Sons

P2-40 Fuller Aerosols

P2-44 Amy’s Boards*

P2-45 Blue Sage Mountain

C2-1 Old Turkey Mash*

C2-2 Mowerson Division

C2-3 Puttmaster

*Problem generates much classroom discussion.

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Suggested Assignment Problems (cont.)


3 Opportunity Cost of

Capital and Capital

Budgeting

P3-1 IRR

P3-2 Accelerated Depreciation

P3-3 Jasper, Inc.

P3-4 Just One, Inc.

P3-7 Northern Sun, Inc.

P3-9 Lottery

P3-10 Mr. Jones’ Retirement

P3-11 NPV vs. Payback

P3-13 New Car

P3-16 South American Mining

P3-17 House Mortgage

P3-19 Toledo Stadium

P3-24 Housing Markets

P3-5 Equity Corp

P3-8 Ab Landlord

P3-12 Clean Tooth

P3-14 National Taxpayers Union

P3-15 Federal Dam Project

P3-18 Flower City Grocery

P3-20 PQR Coal

P3-21 Student Loan Program

P3-22 Geico

P3-25 Mortgage Department

P3-27 Dakota Mining

P3-6 Declining Market, Inc

P3-23 Depreciation Tax Shield

P3-26 Electric Generator

P3-28 Overland Steel

4 Organizational

Architecture

P4-1 Empowerment

P4-2 Pay for Performance

P4-3 Course Packets

P4-4 Allied Van Lines

P4-6 University Physician

Compensation

P4-7 American InterConnect I

P4-9 Vanderschmidt’s

P4-10 Sales Commisions

P4-11 Formula 409

P4-13 Theory X – Theory Y

P4-5 Voluntary Financial Disclosure

P4-12 Pratt & Whitney

P4-14 American InterConnect II

P4-15 Tipping*

P4-16 White’s Department Store

P4-17 Coase Farm

P4-18 Rothwell Inc.

P4-19 Gong-Fen*

P4-8 Raises

P4-20 International Computer Co.

P4-21 Repro Corporation*

C4-1 Christian Children’s Fund

C4-2 Woodhaven Service*

*Problem generates much classroom discussion

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5 Responsibility

Accounting and

Transfer Pricing

P5-1 Canadian Subsidiary

P5-2 Phipps Electronics

P5-3 Sunder Properties

P5-4 Economic Earnings

P5-7 ICB, Intl

P5-9 Microelectronics

P5-15 CJ Equity Partners*

P5-16 Sunstar Appliances

P5-22 Evergreen Nursery and

Landscape

P5-6 Metal Press

P5-11 Cogen

P5-13 Beckett Automotive Group

P5-17 Stale-Mart*

P5-18 R&D Inc.

P5-19 Flat Images

P5-20 Premier Brands

P5-23 Transfer Price Company

P5-25 Infantino Toyota*

P5-27 Serviflow

C5-2 Executive Inn*

P5-5 Performance Technologies

P5-8 Shop and Save*

P5-10 US Copiers*

P5-12 University Lab Testing

P5-14 WBG*

P5-21 Easton Electronics*

P5-24 XBT Keyboards

P5-26 Wujo

C5-1 Celtex*

C5-3 Royal Resort & Casino*

6 Budgeting P6-1 G. Bennett Stewart*

P6-4 Budget Lapsing

P6-5 DMP Consultants

P6-6 Federal Insurance

P6-8 Coating Department

P6-9 Marketing Plan

P6-11 Feder Purchasing Department

P6-12 Access.Com

P6-13 Videx

P6-14 New York Fashions

P6-16 Adrian Power

P6-19 Madigan Modems

P6-28 Troika Toys

P6-2 Investment Banks

P6-7 Golf World*

P6-10 Potter-Bowen*

P6-15 International Telecon*

P6-17 Panrude Airfreight

P6-20 Webb & Drye*

P6-21 Spa Ariana

P6-22 Picture Maker

P6-23 City Hospital Nursing*

P6-25 Brehm Vineyards

P6-27 M&S Mortgage

P6-29 Cellular First

C6-1 Artisans Shirtcraft

P6-3 Ice Storm*

P6-18 Veriplex*

P6-24 Madden International*

P6-26 Republic Insurance*

C6-2 Scion*


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7 Cost Allocations:

Theory

P7-1 MRI

P7-2 Fair allocations

P7-7 Wasley

P7-8 Hallsite Imaging

P7-9 Jolsen International

P7-10 Winterton Group

P7-11 National Training Institute

P7-12 Encryption, Inc.*

P7-13 Ball Brothers Purchasing Dept.

P7-14 Telstar Electronics

P7-17 Vorma

P7-19 World Imports

P7-20 Painting Department

P7-26 Plastic Chairs

P7-3 Slawson

P7-4 Corporate Jet*

P7-5 Massey Electronics

P7-6 Avid Pharmaceuticals

P7-16 Fuentes Systems

P7-22 Taylor Connect

P7-23 Economic Experts*

P7-27 Woodley Furniture*

P7-28 Tramsmation

C7-1 Phonetex*

P7-15 Diagnostic Imaging Software

P7-18 Bio Labs*

P7-21 Scanners Plus*

P7-24 Finsys

P7-25 Allied Adhesives

P7-29 Symmertic Inc*

P7-30 BFR Ship Building*

C7-2 Durango Plastics*

8 Cost Allocations:

Practices

P8-2 Outback Opals

P8-3 Rose Hospital

P8-5 Fidelity Bank

P8-6 Joint Products, Inc.

P8-7 Donovan Steel

P8-8 Murray Hill’s Untimely Demise

P8-14 Vigdor Wood Products

P8-22 Littleton Medical Center

P8-23 Aurora Medical Center

P8-25 Barry’s Fashions

P8-28 Columbine Granite

P8-1 Step Down

P8-4 Mystic Herbals

P8-11 WWWeb Marketing*

P8-12 ITI Technology

P8-13 Metro Blood Bank

P8-15 Advanced Micro Processors

P8-16 Jason Rocks

P8-18 Doe Company

P8-19 RBB Brands*

P8-21 Beckett Manufacturing

P8-24 Grove City Broadcasting*

P8-27 Thompson Instruments*

P8-30 IVAX

C8-1 Carlos Sanguine Winery*

P8-9 Enzymes

P8-10 Sunder Toys

P8-17 Ferguson Metals

P8-20 Karsten Mills*

P8-26 Tariffs Inc

P8-29 Jones Consortium*

C8-2 Wyatt Oil*


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Chapter Basic Problems More Challenging Problems Extensions toText

9 Absorption Cost

Systems

P9-1 Equivalent Units (appendix)

P9-2 IPX Packaging

P9-3 Densain Water

P9-5 Pool Scrubbers

P9-6 Thermalloy

P9-7 Lys Wheels

P9-8 Ware Paper Box

P9-9 DeJure Scents

P9-10 Chemtrex (appendix)

P9-11 Media Designs

P9-13 Rick’s Bags

P9-14 Unknown Company

P9-15 Wellington

P9-23 Bartolotta Company

P9-25 Frames, Inc.

P9-4 MacGiver Brass*

P9-12 Simple Plant

P9-16 Advanced Medical

P9-17 Dead Eye Putters

P9-19 DigiEar

P9-20 Specialized Surgical Instrument

P9-22 Jacklin Stampings

P9-24 Kitchen Rite*

P9-27 Mutual Fund Company*

P9-28 Amalfi Texts

P9-30 Magic Floor

P9-18 Welding Robots*

P9-21 Pebble Beach Sandals

P9-26 Hurst Mats*

P9-29 Pyramid Products*

C9-1 Heath Metal Products*

C9-2 Portable Phones, Inc.*

10 Criticisms of

Absorption Cost

Systems: Incentive to

Over-produce

P10-1 Federal Mixing

P10-2 Xerox

P10-3 Varilux

P10-4 Zipp Cards

P10-6 Zeflax Bottles

P10-7 Alliance Tooling

P10-9 CLIC Lighters

P10-10 Medford Mug Company

P10-12 Mystic Mugs

P10-13 Avant Designs

P10-5 TransPacific Bank*

P10-8 Aspen View

P10-11 Kothari Inc.*

P10-14 Taylor Chains

P10-15 Conner Coffees*

P10-16 Kathy’s Mats

P10-18 DIM

P10-21 Blauvelt Products

P10-22 UniCom

P10-23 Sants Brake Co.

P10-17 Navisky

P10-19 Easton Plant

P10-20 Weststar Applicances

C10-1 Joon*


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11 Criticisms of

Absorption Cost

Systems: Inaccurate

Product Costs

P11-1 Maui Seminar

P11-2 GAMMA

P11-3 ABC & Volume Changes

P11-4 Milan Pasta

P11-5 Implementing ABC

P11-15 Toby Manufacturing

P11-18 Hospital Admission Office

P11-6 Astin Car Stereos*

P11-7 DVDS

P11-8 True Cost Manufacturing, Inc.*

P11-12 Rextera*

P11-13 CB Medical Technologies

P11-14 Wedig Diagnostics

P11-16 Kay Enterprises

P11-21 Brickley Chains

C11-1 Tilist Golf

C11-3 DynaGolf*

P11-9 Friendly Grocer*

P11-10 Houston Milling

P11-11 Sanchez Gadgets*

P11-17 Goodstone Tires*

P11-19 ABC and Taxes

P11-20 Familia Insurance Company*

C11-2 SnapOn Fasteners*

12 Standard Costs: Direct

Labor and Materials

P12-1 Medical Instruments

P12-2 Mickles Ltd.

P12-5 AN7-X1

P12-6 Changing Standards*

P12-7 Standard Cost Systems

P12-8 Smythe and Yves

P12-9 Healing Touch

P12-10 Marian Health Care System

P12-11 Zinc Faucets

P12-12 Howard Binding

P12-14 Flower City Cartridges

P12-15 Great Southern Furniture

P12-17 Jillian Soups

P12-3 Alexander Products

P12-4 Oaks Auto Supply

P12-13 Fast Fax

P12-16 Cibo Leathers

P12-18 JLT Chemicals

P12-20 Starling Coatings

C12-2 Rust Belt Mufflers*

P12-19 Julene Inc

C12-1 Domingo Cigars*


Front Matter

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




13 Overhead and

Marketing Variances

P13-1 On-Call

P13-2 Purchasing Department*

P13-4 Logical Solutions

P13-5 Oneida Metal

P13-7 Printers, Inc.

P13-11 Commando Force

P13-12 Wine Distributors

P13-14 Turow Trailers*

P13-16 Artco Planters

P13-17 Shady Tree Manufacturing

P13-18 Ultrasonic

P13-20 MRI Department

P13-3 Spectra Inc.*

P13-6 Beanie Babies

P13-8 Galt Electric Motors

P13-9 Western Sugar*

P13-10 Soldering Department

P13-15 Betterton Corporation

P13-19 Megan Corp.

P13-21 Anpax, Inc.

P13-13 Auden Manufacturing

P13-22 Mopart Division*

C13-1 Lancaster Chamber Orchestra*

14 Management

Accounting in a

Changing Environment

P14-1 British Airways

P14-3 Fiedler International

P14-4 Guest Watches*

P14-6 Old Town Roasters

P14-7 The Pottery Store

P14-10 TQM at Stowbrdidge Div.

P14-2 Chateau Napa

P14-5 Applying TQM in

Manufacturing versus

Administration*

P14-9 Stirling Acquisition*

P14-11 Warren City Parts*

P14-14 Tagway 4000*

P14-8 Software Development, Inc.*

P14-12 Secure Servers Inc.

P14-13 Kollel Hospital*

C14-1 Global Oil*

C14-2 Productivity Measures


Front Matter

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


ALPHABETICAL LISTING OF PROBLEMS AND CASES

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

Problem/Case

Title

Chapter/Problem/

Case Number

A

Ab Landlord (S) Ch. 3, P3-8

ABC & Volume Changes Ch. 11, P11-17

ABC and Taxes Ch. 11, P11-3

Accelerated Depreciation Ch. 3, P3-2

Access.Com (S) Ch. 6, P6-12

Adapt, Inc. (S) Ch. 2, P2-23

Adrian Power Ch. 6, P6-16

Advanced Medical (H) Ch. 8, P8-16

Advanced Micro Processors Ch. 2, P2-17

Affording a Hybrid Ch. 12, P12-3

Alexander Products Ch. 10, P10-8

Alliance Tooling C. 7, P7-22

Allied Adhesives Ch. 4, P4-4

Allied Van Lines Ch. 9, P9-27

Amalfi Texts Ch. 2, P2-14

American Cinema (S) Ch. 4, P4-8

American InterConnect I (S) Ch. 4, P4-16

American InterConnect II (S) Ch. 2, P2-44

Amy’s Boards (S) Ch. 12, P12-5

AN7-X1 Ch. 13, P13-22

Anpax, Inc. Ch. 2, P2-43

APC Electronics Ch. 14, P14-5

Applying TQM in Ch. 13, P13-17

Artco Planters Ch. 6, Case 6-1

Artisans Shirtcraft Ch. 10, P10-9

Problem/Case

Case Number

Title Aspen View P10-8

Astin Car Stereos P11-6

Auden Manufacturing P13-13

Aurora Medical Center (H) P8-23

Australian Shipping (S) P2-21

Avant Designs (S) P10-13

Avid Pharmaceuticals (H) P7-6

B

Ball Brothers Purchasing Dept. P7-13

Barry’s Fashions (S) P8-25

Bartolotta Company P9-23

Beanie Babies (S) P13-6

Beckett Automotive Group (S) P5-13

Beckett Manufacturing P8-21

Betterton Corporation P13-15

BFR Ship Building P7-27

Bio Labs (H) P7-18

Blauvelt Products P10-21

Blue Sage Mountain (S) P2-45

Brehm Vineyards P6-25

Brickley Chains P11-21

British Airways (S) P14-1

Budget Lapsing P6-4

Budgeting P1-5

Canadian Subsidiary P5-1

Front Matter

xxxiv © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,

duplicated, forwarded, distributed, or posted on a website, in whole or part.

Candice Company P2-34

Carlos Sanguine Winery C8-1

CB Medical Technologies P11-13

Cellular First P6-29

Celtex C5-1

Changing Standards P12-6

Chateau Napa P14-2

Chemtrex (appendix) P9-10

Christian Children’s Fund (S) C4-1

Cibo Leathers P12-16

City Hospital Nursing (H) P6-23

CJ Equity Partners (S) P5-15

Clean Tooth P3-12

CLIC Lighters P10-9

Coase Farm (S) P4-17

Coating Department P6-8

Cogen P5-11

Columbine Granite P8-28

Commando Force (S) P13-11

Conner Coffees P10-15

Corporate Jet (S) P7-4

Cost Behavior Patterns P2-36

Course Packets P4-3

D

Dakota Mining P3-27

Darien Industries P2-1

Dead Eye Putters P9-17

Declining Market, Inc P3-6

DeJure Scents P9-9

Densain Water (S) P9-3

Depreciation Tax Shield P3-23

Diagnostic Imaging Software P7-15

DigiEar (H) P9-19

Digital Convert P2-42

DIM P10-18

DMP Consultants (S) P6-5

Doe Company P8-18

Domingo Cigars C12-1

Donovan Steel P8-7

Doral Rentals (S) P2-39

Durango Plastics C7-2

DVDS P11-7

DynaGolf C11-3

E

Eastern University Parking (S) P2-26

Easton Diagnostics P2-17

Easton Electronics P5-21

Easton Plant P10-19

Economic Earnings P5-4

Electric Generator P3-26

Empowerment P4-1

Emrich (S) P2-9

Encryption, Inc. P7-12

Enzymes P8-9

Equity Corp P3-5

Equivalent Units (appendix) P9-1

ETB P2-7

Evergreen Nursery and Landscape (S) P5-22

Executive Inn (S) C5-2

Exotic Roses P2-24

F

Fair allocations P7-2

Familia Insurance Company (S) P11-20

Fast Fax P12-13

Feder Purchasing Department (S) P6-11

Federal Dam Project P3-15

Federal Insurance (S) P6-6

Federal Mixing P10-1

Ferguson Metals P8-17

Front Matter

xxxv © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,


Fidelity Bank (S) P8-5

Fiedler International (S) P14-3

FinSys (S) P7-24

Flat Images P5-19

Flower City Cartridges P12-14

Flower City Grocery P3-18

Formula 409 P4-11

Frames, Inc. P9-25

Friendly Grocer (S) P11-9

Fuentes Systems P7-16

Fuller Aerosols P2-40

G

G. Bennett Stewart P6-1

Galt Electric Motors P13-8

GAMMA P11-2

Gas Prices P2-10

Geico P3-22

Global Oil C14-1

Golf Specialties P1-6

Golf World P6-7

Gong-Fen (S) P4-19

Goodstone Tires P11-17

GRC P2-27

Great Southern Furniture (S) P12-15

Grove City Broadcasting (S) P8-24

Guest Watches P14-4

H

Hallsite Imaging P7-8

Happy Feet P2-41

Healing Touch P12-9

Heath Metal Products C9-1

Home Auto Parts P2-14

Hospital Admission Office (H) P11-18

House Mortgage (S) P3-17

Housing Markets P3-24

Houston Milling P11-10

Howard Binding P12-12

Hurst Mats P9-26

I

ICB, Intl (S) P5-7

Ice Storm P6-3

iGen3 P2-22

Implementing ABC P11-5

Infantino Toyota (S) P5-25

International Computer Co. P4-20

International Telecon P6-15

Investment Banks (S) P6-2

IPX Packaging P9-2

IRR P3-1

ITI Technology P8-12

IVAX P8-30

J

J. P. Max Dept. Stores (S) P2-5

Jacklin Stampings P9-22

Jason Rocks P8-16

Jasper, Inc. P3-3

Jillian Soups P12-17

JLE Electronics P2-30

JLT Chemicals P12-18

Joint Products, Inc. P8-6

Jolsen International P7-9

Jones Consortium (S) P8-29

Joon C10-1

Julene Inc P12-19

K

Karsten Mills P8-20

Front Matter

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Kathy’s Mats P10-16

Kay Enterprises P11-16

Kinsley & Sons (S) P2-32

Kitchen Rite P9-24

Kollel Hospital P14-13

Kothari Inc. P10-11

L

Lancaster Chamber Orchestra (S) C13-1

Littleton Imaging P2-33

Littleton Medical Center P8-22

Logical Solutions (S) P13-4

Lottery P3-9

Lys Wheels P9-7

M

M&S Mortgage (S) P6-27

MacGiver Brass P9-4

Madden International P6-24

Madigan Modems P6-19

Magic Floor P9-30

Managers Need Accounting Information P1-4

Manufacturing Cost Classification P2-20

Marian Health Care System (H) P12-10

Marketing Plan P6-9

Massey Electronics P7-5

Mastich Counters P2-28

Mat Machinery P2-35

Maui Seminar P11-1

MBA Students P1-1

Measer P2-15

Medford Mug Company P10-10

Media Designs (S) P9-11

Medical Instruments P12-1

MedView (H) P2-19

Megan Corp. P13-19

Metal Press P5-6

Metro Blood Bank (H) P8-13

Mickles Ltd. P12-2

Microelectronics P5-9

Milan Pasta P11-4

Montana Pen P1-8

Mopart Division P13-22

Mortgage Department (S) P3-25

Mowerson Division C2-2

Mr. Jones’ Retirement P3-10

MRI P7-1

MRI Department P13-20

Murray Hill’s Untimely Demise P8-8

Mutual Fund Company (S) P9-27

Mystic Herbals P8-4

Mystic Mugs P10-12

N

National Taxpayers Union P3-14

National Training Institute (S) P7-11

Navisky P10-17

Negative Opportunity Costs P2-2

New Car P3-13

New York Fashions (S) P6-14

News.com (S) P2-31

Northern Sun, Inc. P3-7

NPR P2-3

NPV vs. Payback P3-11

O

Oaks Auto Supply (S) P12-4

Old Town Roasters (S) P14-6

Old Turkey Mash C2-1

On-Call (S) P13-1

One Cost System Isn't Enough P1-2

Oneida Metal P13-5

Front Matter

xxxvii © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned,


Oppenheimer Visuals P2-25

Optometry Practice (H) P2-29

Outback Opals P8-2

Overland Steel P3-28

P

Painting Department P7-20

Panrude Airfreight (S) P6-17

Parkview Hospital P1-7

Pay for Performance P4-2

Pebble Beach Sandals P9-21

Penury Company P2-11

Performance Technologies P5-5

Phipps Electronics P5-2

Phonetex C7-1

Picture Maker P6-22

Plastic Chairs P7-24

Pool Scrubbers P9-5

Portable Phones, Inc. C9-2

Potter-Bowen (S) P6-10

PQR Coal P3-20

Pratt & Whitney P4-12

Premier Brands P5-20

Printers, Inc. P13-7

Productivity Measures C14-2

Purchasing Department P13-2

Puttmaster C2-3

Pyramid Products P9-29

Q

R

R&D Inc. P5-18

Raises P4-8

RBB Brands P8-19

Repro Corporation P4-21

Republic Insurance (S) P6-26

Rextera P11-12

Rick’s Bags P9-13

Roberts Machining P2-38

Rose Hospital P8-3

Rothwell Inc. P4-18

Royal Holland Line (S) P2-37

Royal Resort & Casino (S) C5-3

Rust Belt Mufflers C12-2

S

Sales Commisions P4-10

Sanchez Gadgets (S) P11-11

Sants Brake Co. P10-23

Scanners Plus P7-21

Scion C6-2

Secure Servers Inc. P14-12

Serviflow P5-27

Shady Tree Manufacturing P13-17

Shop and Save (S) P5-8

Silky Smooth Lotions P2-4

Simple Plant P9-12

Slawson P7-3

Smythe and Yves P12-8

SnapOn Fasteners C11-2

Software Development, Inc. (S) P14-8

Soldering Department P13-10

South American Mining P3-16

Spa Ariana (S) P6-21

Spa Salon (S) P2-18

Specialized Surgical Instrument P9-20

Spectra Inc. P13-3

Stale-Mart (S) P5-17

Standard Cost Systems P12-7

Front Matter

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Starling Coatings P12-20

Step Down P8-1

Stirling Acquisition P14-9

Student Loan Program (S) P3-21

Sunder Properties (S) P5-3

Sunder Toys P8-10

Sunstar Appliances P5-16

Symmetric Inc P7-29

T

Tagway 4000 P14-14

Tariffs Inc P8-26

Taylor Chains P10-14

Taylor Chemicals P2-8

Taylor Connect (S) P7-22

Telstar Electronics P7-14

The Pottery Store (S) P14-7

Theory X – Theory Y P4-13

Thermalloy P9-6

Thompson Instruments P8-27

Tilist Golf C11-1

Tipping P4-15

Toby Manufacturing P11-15

Toledo Stadium P3-19

TQM at Stowbrdidge Div. P14-10

Tramsmation P7-26

Transfer Price Company P5-23

TransPacific Bank (S) P10-5

Troika Toys P6-28

True Cost Manufacturing, Inc. P11-8

Turow Trailers P13-14

U

U.S. and Japanese Tax Laws P1-3

Ultrasonic P13-18

UniCom (S) P10-22

University Lab Testing (H) P5-12

University Physician Compensation (H) P4-6

Unknown Company P9-14

US Copiers P5-10

Using Accounting for Planning P1-4

V

Vanderschmidt’s P4-9

Varilux P10-3

Veriplex P6-18

Videx P6-13

Vigdor Wood Products P8-14

Vintage Cellars P2-6

Volume and Profits P2-12

Voluntary Financial Disclosure P4-5

Vorma P7-17

W

Ware Paper Box P9-8

Warren City Parts P14-11

Wasley P7-7

WBG P5-14

Webb & Drye (S) P6-20

Wedig Diagnostics (H) P11-14

Welding Robots P9-18

Wellington P9-15

Western Sugar P13-9

Weststar Applicances P10-20

White’s Department Store (S) P4-16

Wine Distributors (S) P13-12

Winterton Group (S) P7-10

Woodhaven Service (S) C4-2

Woodley Furniture P7-25

World Imports (S) P7-19

Wujo P5-26

WWWeb Marketing (S) P8-11

Front Matter

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Wyatt Oil C8-2

X, Y, Z

XBT Keyboards P5-24

Xerox P10-2

Zeflax Bottles P10-6

Zinc Faucets P12-11

Zipp Cards P10-4