Solutions_Assignment02 - AF2110 Assignment02(suggested...

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AF2110 Assignment02 (suggested solutions) Chapter 02 Problem 2-16 (30 minutes) Product Cost Name of the Cost Variable Cost Fixed Direct Materials Labor Mfg. Overhead Period (Selling and Admin.) Cost Opportunity Sunk Cost Rental revenue forgone, $40,000 per year. ................................... X Direct materials cost, $40 per unit X X Supervisor’s salary, $2,500 per month . ..................................... X X Direct labor cost, $18 per unit . ...... X X Rental cost of warehouse, $1,000 per month. ................................ X X Rental cost of equipment, $3,000 per month. ................................ X X Depreciation of the building, $10,000 per year . ...................... X X X Advertising cost, $50,000 per year. ......................................... X X Shipping cost, $10 per unit. ........... X X Electrical costs, $2 per unit. ........... X X Return earned on investments, $6,000 per year. ........................ X
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Problem 2-26 (30 minutes) 1. Mr. Richart’s first action was to direct that discretionary expenditures be delayed until the first of the new year. Providing that these “discretion- ary expenditures” can be delayed without hampering operations, this is a good business decision. By delaying expenditures, the company can keep its cash a bit longer and thereby earn a bit more interest. There is nothing unethical about such an action. The second action was to ask that the order for the parts be cancelled. Since the clerk’s order was a mistake, there is nothing unethical about this action either. The third action was to ask the accounting department to delay recogni- tion of the delivery until the bill is paid in January. This action is dubious. Asking the accounting department to ignore transactions strikes at the heart of the integrity of the accounting system. If the accounting system cannot be trusted, it is very difficult to run a business or obtain funds from outsiders. However, in Mr. Richart’s defense, the purchase of the raw materials really shouldn’t be recorded as an expense. He has been placed in an extremely awkward position because the company’s ac- counting policy is flawed. 2. The company’s accounting policy with respect to raw materials is incor- rect. Raw materials should be recorded as an asset when delivered rather than as an expense. If the correct accounting policy were fol- lowed, there would be no reason for Mr. Richart to ask the accounting department to delay recognition of the delivery of the raw materials. This flawed accounting policy creates incentives for managers to delay deliveries of raw materials until after the end of the fiscal year. This could lead to raw materials shortages and poor relations with suppliers who would like to record their sales before the end of the year. The company’s “manage-by-the-numbers” approach does not foster
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Solutions_Assignment02 - AF2110 Assignment02(suggested...

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