case_solutions - Jiambalvo Case Solutions, 3e CHAPTER 1...

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Jiambalvo Case Solutions, 3e CHAPTER 1 – Managerial Accounting in the Information Age Case 1-1 LO 5 LOCAL 635 Summary Union is disputing “cost of meal” charges to hotel employees. Distinguishes among fixed, variable, sunk, and opportunity costs Makes the point that there is no generally accepted meaning of the term “cost” Questions to ask students 1. What is the source of conflict between Local 635 and the Riverside Hotel? 2. What are some examples of variable, fixed, sunk, and opportunity costs in the context of the Local 635 case? 3. What do you think is the incremental cost of an employee meal? 4. I contend that it is possible that the incremental cost is more than $300. How is this possible? 5. How should the contract be worded to avoid similar problems in the future? Discussion I start this case by asking a student to explain the source of conflict between Local 635 and the Riverside Hotel. The student is likely to explain that while employees are focused on the incremental cost of a meal, management is focused on various fixed costs as well as the incremental costs. This leads to a major take away— there is no generally accepted meaning of the term cost . We know what’s meant by fixed cost, variable cost, opportunity cost, sunk cost, etc., but there is ambiguity as to what exactly cost means. To begin working on the vocabulary of managerial accounting, I ask students for examples of variable, fixed, sunk, and opportunity costs in the context of the Local 635 case. The primary variable cost is the cost of food items (e.g., the cost of meat and salad ingredients). A fixed cost would be the depreciation on the oven (which is also a sunk cost). An opportunity cost would arise if a worker ate the last prime rib and the hotel lost a sale.
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Jiambalvo Case Solutions, 3e I then ask the class to estimate the incremental cost of an employee meal. Most students think it is less than $10. I then suggest that it is possible that the incremental cost is more than $300. When asked to explain how this is possible, students focus on opportunity costs. Suppose an employee eats the last prime rib just before a steady customer, who always eats prime rib, comes into the restaurant. If this customer becomes disgruntled and never returns to the restaurant, the hotel could easily be out $300 or more in the next few months. How should the contract be rewritten? Students generally recommend that meal subsidies be based on some percent of menu prices. For example, meals could be free as long as 70% of the total of menu prices is less than $10. To wrap up, it should be noted that to ensure quality and customer satisfaction, kitchen workers must be motivated to do a good job. Thus, the hotel should be motivated to settle this dispute quickly in a way that seems fair to workers. Case 1-2
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case_solutions - Jiambalvo Case Solutions, 3e CHAPTER 1...

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