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Chapter+9+solutions - CHAPTER 9 COST APPLICATIONS: THEORY...

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C HAPTER 9 COST APPLICATIONS : THEORY AND APPLICATIONS SOLUTIONS R EVIEW Q UESTIONS 9.1 Profit margin. 9.2 Contribution margin equals revenues less variable costs, and profit margin equals contribution margin less allocated capacity costs. 9.3 Direct estimation, and cost allocations. 9.4 The direct estimation approach involves systematically examining each cost account to evaluate whether (and how much) a decision would change a capacity cost. An advantage of this approach is that it can be very accurate. However, it is tedious and time- consuming, and is subject to the biases and incentives of the decision maker. 9.5 To calculate income in accordance with GAAP, and to influence behavior. 9.6 Absorption costing. 9.7 All product costs – direct materials, direct labor, as well as variable and fixed manufacturing overhead. 9.8 Sales volume does not affect the fixed manufacturing overhead expensed on the income statement. Under variable costing, the entire amount of fixed overhead is expensed, regardless of sales volume. 9.9 As sales volume increases, the amount of fixed manufacturing overhead expensed on the income statement also increases (and vice-versa). This occurs because, under absorption costing, fixed manufacturing overhead “travels” with the units produced and sold. 9.10 When inventory levels do not change – that is, when sales = production. They might do this when there is uncertainty about the final cost – e.g., it allows the government and the supplier to share the risk of cost overruns. 9.11 To protect its suppliers from the risk of cost over-runs, so that they make the necessary investments and supply DoD’s requirements. 9.12 To increase profits, as the Ryan Supply Systems example illustrates. 9.13 Allocations can act like a tax – for example, organizations might allocate costs based on labor hours to encourage divisions to automate.
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9.14 Controllability and incentives. 9.15 Income reported under absorption costing = income reported under variable costing + fixed manufacturing costs in ending inventory – fixed manufacturing costs in beginning inventory. D ISCUSSION QUESTIONS 9.16 In such production facilities, all costs that are traceable directly to each product line need not be allocated among products. In other words, many indirect costs become direct costs, and costing a product become simpler and more accurate. The disadvantage is that when a production line is idle because of temporary lull in demand, it cannot be used to make other products. That is, dedicating production lines can often lead inefficient utilization of capacity. 9.17 Supplying a product with a negative profit margin product may be necessary to keep a large customer of the profitable products from going elsewhere. Making a negative profit margin product may also be good for business if it brings good reputation in the market place. For example, a restaurant can establish reputation in a community by catering to large not-for-profit charity events at or below cost so as to develop a clientele. 9.18
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Chapter+9+solutions - CHAPTER 9 COST APPLICATIONS: THEORY...

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