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Solutions Manual
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COST ACCOUNTING
Creating Value for Management     Fifth Edition




MICHAEL MAHER
University of California, Davis
                      Table of Contents
Chapter 1                                 Chapter 15
 Cost Accounting: How Managers User        Using Differential Analysis for
   Cost Accounting Information               Production Decisions

Chapter 2                                 Chapter 16
 Cost Concepts and Behaviour               Managing Quality and Time

Chapter 3                                 Chapter 17
 Cost System Design: An Overview           Planning and Budgeting

Chapter 4                                 Chapter 18
 Job Costing                               Flexible Budgeting and Performance
                                              Evaluation
Chapter 5
 Process Costing                          Chapter 19
                                           Performance Evaluation: Cost
Chapter 6                                    Variances
 Spoilage and Quality Management
                                          Chapter 20
Chapter 7                                  Performance Evaluation in
 Allocating Costs to Departments             Decentralized Organizations

Chapter 8                                 Chapter 21
 Activity-Based Costing                    Transfer Pricing

Chapter 9                                 Chapter 22
 Activity-Based Management                 Nonfinancial Performance Measures

Chapter 10                                Chapter 23
 Allocating Joint Costs                    Capital Investmenet Decisions

Chapter 11                                Chapter 24
 Variable Costing                          Inventory Management

Chapter 12                                Chapter 25
 Cost Estimation                           Management Ethics and Financial
                                             Fraud
Chapter 13
 Cost-Volume-Profit Analysis              Chapter 26
                                           Revenue, Mix and ield Variances
Chapter 14
 Differential Cost and Revenue Analysis
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Chapter 1
Cost Accounting: How Managers
Use Cost Accounting Information



Solutions to Review Questions

11.
C Analysis of divisional performance
A Costing for income tax purposes
B Determining how many units to produce in the coming week


12.
Descriptions of the six business functions in the value chain are as follows:
1. Research and development: the creation and development of ideas related to new products, services,
   or processes.
2. Design: the detailed development and engineering of products, services, or processes.
3. Production: the collection and assembly of resources to produce a product or deliver a service.
4. Marketing: the process that informs potential customers about the attributes of products or services, and
   leads to the sale of those products or services.
5. Distribution: the process established to deliver products or services to customers.
6. Customer Service: product or service support activities provided to customers.


13.
Value-added activities are activities that customers perceive as adding utility to the goods or services they
purchase. Nonvalue-added activities do not add value to the goods or services.


14.
Differential costs are important for managerial decision making, but other cost data can provide
management with additional important information. For example, inventory values and costs of goods sold
are important for income tax and financial reporting purposes as well as for most bonus and cost-plus
contracting purposes. Costs for performance evaluation are not necessarily differential costs. Companies try
to recover all costs, hence some estimate of total costs is needed. (This could be an opportunity to discuss
short-run and long-run costs with students, noting that in the long run, all costs must be covered.)




 The McGraw-Hill Companies, Inc., 1997
Solutions Manual, Chapter 1                                                                              1
15.
Costs that could be shared among housemates might include a share of the rent, food, utilities, and other
related costs. Costs that would differ with the addition of another person are the differential costs. These
differential costs might include food. It would be necessary to negotiate an agreement between you and the
other person considering all factors. For example, should you split the total costs or charge only the
differential costs of the additional person.
Businesses are often faced with similar decisions on finding the appropriate cost base for splitting costs.
There are no generally accepted accounting rules for determining appropriate shared costs in either
situation. Hence, it is important to specify arrangements about costs precisely when agreements are made.


16.
Performance evaluation systems are designed for a specific company's needs. The systems should be
flexible to adapt to the circumstances which exist in that company. A common set of accounting principles
would tend to reduce flexibility and usefulness of these systems. As long as all parties know the accounting
basis used by the system, the exact rules can be designed in whatever manner the parties deem
appropriate.


17.
Most utilities are characterized by the need to install a substantial amount of equipment to meet peak loads.
The peak load for the telephone company is during business hours, particularly in the mid-morning. At other
times this equipment is operating at less than capacity. That is, there are lines available for use. By
encouraging users to shift their usage from the peak times to such off-peak hours as evenings, nights and
weekends, less equipment is required and the existing equipment is utilized more heavily.
The considerations in the decision would include: (a) the savings from not having to purchase more
equipment; (b) the revenues that could be generated on off-peak hours when existing equipment would be
sufficient; (c) the revenues that could be generated from telephone calls that would not be made at all at the
higher prices; and (d) the costs of operating the telephone system in off-peak hours. Offsetting these
benefits would be the reduction in revenues from calls that would be made during off-peak hours even if full
rates were in effect. Apparently the telephone company has found that the benefits outweigh the loss in
revenues from using off-peak rates.


18.
While a manager, and not the controller, has the business expertise to make management decisions, the
decisions will not be good ones if the manager does not understand the data used to make them. For
example, the manager may be working with the costs of a product, and not realize which costs are fixed and
which are variable. The controller understands the types of data that are available, the rules used to
accumulate the data, and the limitations that exist on the data. Therefore, the manager and the controller
need to interact in the decision-making process. The controller can provide the manager with the relevant
data, and an explanation of its suitable uses. The manager then can make better decisions.




                                                                    The McGraw-Hill Companies, Inc., 1997
2                                                                                        Cost Accounting, 5/e

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