PROBLEMS

1. Managerial Accounting and Performance Measures

Less Than An Hour provides film processing at a single store location. The store has a policy that film will be developed in 24 hours, or the processing is free. It also has a policy that it will refund customers' money for any pictures that were poorly developed.

In order to improve income without raising prices, the company must find ways to reduce costs. To this end, the company has experimented with a new chemical used in its film processing. Management has determined that the new chemical takes less time to process film and is less sensitive to improper handling than the old chemical. While the new chemical is more expensive than the old chemical, the amount of free processing and photo returns have decreased since the company switched to this chemical. Accordingly, management must decide whether to continue using the new chemical or return to the old chemical.

Required

A.  How can managerial accounting be used to assist the company in determining whether to continue using the new chemical?

B.  What are some of the nonfinancial measures provided by managerial accounting to assist managers in the decision-making process?

2. Accounting Information and Business Decisions

Neil Bonavona is purchasing manager for a department store. On March 15, Neil received the following weekly report for men's suits purchased from one of the company's suppliers. Ned immediately ordered another 24 wool suits and another 40 cotton suits from the manufacturer.

Merchandise Report

March 15

Required

A. What information did Neil consider in making his decision?

B. How does the merchandise report assist him with the decision? Does this report appear to meet his information needs for the decision he made?

C. What effect does the information in the report and Ned's decision have on the future of the company?

3. Strategic and Operational Planning

Billie owns several successful bistros. Each one has its own manager and is operated independently of the others. Billie meets with the manager of each location each month to review operating results. During this meeting, the manager must present a projection of operations for the coming month. Billie reviews the sales projections and any promotional campaigns and entertainment that the manager is planning to use.

Based on the success of her current bistros, Billie is considering opening three new facilities. She has found three locations where long-term leases can be obtained. All locations are in eclectic, high-income shopping areas. Billie has determined the cost to furnish the shops with equipment and has obtained approval from a bank that will assist in the required financing.

Required

A. In what ways do the bistros utilize managerial accounting in the operational planning process?

B. Explain how Billie utilizes strategic planning.

3. CASE - Cost Management in a University

Most states now require five years of education for accounting graduates to sit for the Certified Public Accountant (CPA) examination. Many accounting jobs, however, do not require a CPA license, so some students still seek only four-year degrees. The Business School at Cassidy University offers three degrees in accounting: (1) Bachelor of Science (BS) in Accounting, (2) Master of Professional Accountancy (MPA), and (3) Master of Business Administration in Accounting (MBA). Tuition for a semester of graduate study costs approximately twice as much as a semester of undergraduate study. Undergraduate students who meet certain academic requirements are normally admitted to the BS program at the end of their sophomore year after taking a series of prerequisite courses. The school operates undergraduate and graduate placement services to assist students in finding employment. The school also operates an Accounting Graduate Programs office with a staff to administer the accounting graduate programs. The programs office has an annual budget that sets targets for tuition revenues, teaching costs, administrative costs, and merit-based financial aid provided to students. The school is adding a new building to accommodate its graduate programs.

The BS degree is a four-year degree with a curriculum similar to other four-year accounting programs. Each year the school graduates about 275 students with this degree. Some graduates of the BS program are employed as management accountants by corporations or governments. Others are employed by CPA firms and expect to complete a fifth year of education later. Undergraduate tuition costs are similar to those at other universities.

The MBA is a two-year degree in which high-performing students can convert to graduate student status at the end of their junior year in the BS program and continue their education for two more years. Upon graduation, these students receive both BS and MBA degrees. In the first year of the MBA program, students take graduate courses in a broad variety of disciplines such as accounting, economics, finance, information systems, marketing, and quantitative methods. Using a series of intensive business simulations the students learn how to integrate six basic business processes to achieve business success. In the second year of the MBA, accounting students take one of four accounting tracks: consulting, assurance, taxation, or information systems. In addition to an accounting track, the students also take a complementary, non-accounting concentration of advanced graduate courses in areas such as finance, marketing, operations, or tax law. Finally, the students receive instruction in leadership, cognitive development, oral and written communications, and self-assessment skills throughout the two years of graduate study. The school expects to graduate about 60-120 students each year from the MBA program. Recently, graduates of the MBA program received starting salaries approximately 33% higher than graduates of the BS program.

The MPA is a one-year degree with a BS degree as a prerequisite for entry. Admitted students have grade point averages and standardized test scores similar to students admitted to the MBA program. The curriculum in the one year of graduate study is similar to that of the second year of the MBA program. The school expects to graduate about 80 students each year from the MPA program. Most students entering the MPA program come from undergraduate programs at other schools. Recently, graduates of the MPA program received starting salaries approximately 20% higher than graduates of the BS program.

Required

A. Describe how the Business School adds value and who receives this value.

B. How must the school manage the economic and quality aspects of its activities to be successful?

C. What are the major cost drivers involved in the school's educational process? How do you think the school might attempt to control costs?

4. EXERCISES

The partial information that follows pertains to the operations of Big Ben Clocks in 2005:

Raw materials inventory, January 1, 2005                                  $  10,000

Raw materials inventory, December 31, 2005                             4,000

Direct labor charged to production during 2005                           36,000

Factory overhead costs incurred during 2005                              30,000

Cost of goods manufactured for the year 2005                           90,000

Work-in-process inventory, January 1, 2005                              10,000

Work-in-process inventory, December 31, 2005                         30,000

Finished goods inventory, January 1, 2005                                 30,000

Cost of goods sold                                                                   80,000

Sales were $200,000, which produced a markup on cost of 160%.

Determine the cost of materials purchased, raw materials used during the year, and the balance in the finished goods inventory account on December 31, 2005.

5. Manufacturing Cost Flows

Nevil Company began the year with $435,000 of raw materials inventory, $695,000 of work-in-process inventory, and $310,000 of finished goods inventory. During the year, the company purchased $1,775,000 of raw material and used $1,860,000 of raw materials in production. Labor used in production for the year was $1,245,000. Overhead was $690,000. Work-in-process completed and transferred to finished goods inventory was $3,705,000 Cost of goods sold for the year was $3,750,000.

Required

A. Calculate the effect of these events on Nevil's inventory accounts for the year.

B. Assume Nevil practices JIT inventory management. Its goal is to reduce inventory levels, improve quality, and reduce costs. Comment on Nevil's success in reducing inventory levels.