Assignment Material

1-17 VALUE CHAIN AND CLASSIFICATION OF COSTS, COMPUTER COMPANY. Dell Computer incurs the following costs:
1. a. Utility costs for the plant assembling the Latitude computer line of products
2. b. Distribution costs for shipping the Latitude line of products to a retail chain
3. c. Payment to David Newbury Designs for design of the XPS 2-in-1 laptop
4. d. Salary of computer scientist working on the next generation of servers
5. e. Cost of Dell employees’ visit to a major customer to demonstrate Dell’s products
6. f. Purchase of competitors’ products for testing against potential Dell products
7. g. Payment to business magazine for running Dell advertisements
8. h. Cost of cartridges purchased from outside supplier to be used with Dell printers
Required
Classify each of the cost items (a–h) into one of the business functions of the value chain shown in Exhibit 1-2 (page 5).
1-18 VALUE CHAIN AND CLASSIFICATION OF COSTS, PHARMACEUTICAL COMPANY. Johnson & Johnson, a health care company, incurs the following costs:
1. a. Payment of booth registration fee at a medical conference to promote new products to physicians
2. b. Cost of redesigning an artificial knee to make it easier to implant in patients
3. c. Cost of a toll-free telephone line used for customer inquiries about its drugs
4. d. Materials purchased to develop drugs yet to be approved by the government
5. e. Sponsorship of a professional golfer
6. f. Labor costs of workers in the tableting area of a production facility
7. g. Bonus paid to a salesperson for exceeding a monthly sales quota
8. h. Cost of FedEx courier service to deliver drugs to hospitals
Required
Classify each of the cost items (a–h) as one of the business functions of the value chain shown in Exhibit 1-2 (page 5).
1-19 VALUE CHAIN AND CLASSIFICATION OF COSTS, FAST-FOOD RESTAURANT. Taco Bell, a fast-food restaurant, incurs the following costs:
1. a. Cost of oil for the deep fryer
2. b. Wages of the counter help who give customers the food they order
3. c. Cost of tortillas and lettuce
4. d. Cost of salsa packets given away with customer orders
5. e. Cost of the posters indicating the special “two tacos for $2.00”
6. f. Costs of corporate sponsorship of the World Series
7. g. Salaries of the food specialists in the corporate test kitchen who create new menu items
8. h. Cost of “to-go” bags requested by customers who could not finish their meals in the restaurant
Required
Classify each of the cost items (a–h) as one of the business functions of the value chain shown in Exhibit 1-2 (page 5).
1-20 KEY SUCCESS FACTORS. Vortex Consulting has issued a report recommending changes for its newest high-tech manufacturing client, Precision Instruments. Precision currently manufactures a single product, a surgical robot that is sold and distributed internationally. The report contains the following suggestions for enhancing business performance:
1. a. Develop a more advanced cutting tool to stay ahead of competitors.
2. b. Adopt a TQM philosophy to reduce waste and defects to near zero.
3. c. Reduce lead times (time from customer order of product to customer receipt of product) by 20% in order to increase customer retention.
4. d. Redesign the robot to use 25% less energy, as part of Vortex’s corporate social responsibility objectives.
5. e. Benchmark the company’s gross margin percentages against its major competitors.
Required
Link each of these changes to the key success factors that are important to managers.
1-21 KEY SUCCESS FACTORS. Phillips Transport Company provides trucking services for major retailers. Managers at the company believe that trucking is a people-management business, and they list the following as factors critical to their success:
1. a. Increase spending on employee development to streamline processes.
2. b. Foster cooperative relationships with truck repair providers to allow for less downtime from truck breakdowns.
3. c. Invest in electric and hybrid vehicles to reduce carbon emissions.
4. d. Train material-handling employees to reduce errors when loading trucks.
5. e. Benchmark the company’s gross margin percentages against its major competitors.
Required
Match each of the above factors to the key success factors that are important to managers.
1-22 PLANNING AND CONTROL DECISIONS. Gregor Company makes and sells brooms and mops. It takes the following actions, not necessarily in the order given. For each action (a–e), state whether it is a planning decision or a control decision.
1. a. Gregor asks its advertising team to develop fresh advertisements to market its newest product.
2. b. Gregor calculates customer satisfaction scores after introducing its newest product.
3. c. Gregor compares costs it actually incurred with costs it expected to incur for the production of the new product.
4. d. Gregor’s design team proposes a new product to compete directly with the Swiffer.
5. e. Gregor estimates the costs it will incur to distribute 30,000 units of the new product in the first quarter of next fiscal year.
1-23 PLANNING AND CONTROL DECISIONS. Rachel Mosby is the president of Carolina Landscaping Service. She takes the following actions, not necessarily in the order given. For each action (a–e) state whether it is a planning decision or a control decision.
1. a. Compares payroll costs of the past quarter to budgeted costs.
2. b. Calculates material costs of a project that was recently completed.
3. c. Evaluates hiring a marketing professional to grow sales.
4. d. Estimates the weekly cost of providing landscaping services next year to a local resort.
5. e. Decides to expand service offerings to include snow removal during the slower winter months.
1-24 FIVE-STEP DECISION-MAKING PROCESS, MANUFACTURING. Yukon Foods makes desserts that it sells through grocery stores. Typical products include ice cream sandwiches, sundae cups, and frozen yogurt pops. The managers at Yukon have recently proposed the addition of sugar-free fruit bars. They take the following actions to help decide whether to launch the line.
1. a. Yukon’s test kitchen prepares a number of possible recipes for a consumer focus group.
2. b. Costs of retooling machinery for the new product are budgeted.
3. c. The company decides to produce a new line of sugar-free fruit bars.
4. d. Managers compare actual labor costs of making sugar-free fruit bars with their budgeted costs.
5. e. Sales managers estimate how much the sales of the new fruit bars will reduce sales of the company’s ice cream sandwiches.
6. f. Managers discuss the possibility of introducing a line of sugar-free fruit bars.
7. g. To help decide whether to introduce the sugar-free fruit bars, the company researches the price and quality of competing products.
Required
Classify each of the actions (a–g) as a step in the five-step decision-making process (identify the problem and uncertainties; obtain information; make predictions about the future; make decisions by choosing among alternatives; implement the decision, evaluate performance, and learn). The actions are not listed in the order they are performed.
1-25 FIVE-STEP DECISION-MAKING PROCESS, SERVICE FIRM. Sizemore Landscaping is a firm that provides commercial landscaping and grounds maintenance services. Derek Sizemore, the owner, is trying to find new ways to increase revenues. Mr. Sizemore performs the following actions, not in the order listed.
1. a. Decides to buy power tilling equipment rather than hire additional landscape workers.
2. b. Discusses with his employees the possibility of using power equipment instead of manual processes to increase productivity and thus profits.
3. c. Learns details about a large potential job that is about to go out for bids.
4. d. Compares the expected cost of buying power equipment to the expected cost of hiring more workers and estimates profits from both alternatives.
5. e. Estimates that using power equipment will reduce tilling time by 20%.
6. f. Researches the price of power tillers online.
Required
Classify each of the actions (a–f) according to its step in the five-step decision-making process (identify the problem and uncertainties; obtain information; make predictions about the future; make decisions by choosing among alternatives; implement the decision, evaluate performance, and learn).
1-26 PROFESSIONAL ETHICS AND REPORTING DIVISION PERFORMANCE. Maria Mendez is division controller and James Dalton is division manager of the Hestor Shoe Company. Mendez has line responsibility to Dalton, but she also has staff responsibility to the company controller.
Dalton is under severe pressure to achieve the budgeted division income for the year. He has asked Mendez to book $200,000 of revenues on December 31. The customers’ orders are firm, but the shoes are still in the production process. They will be shipped on or around January 4. Dalton says to Mendez, “The key event is getting the sales order, not shipping the shoes. You should support me, not obstruct my reaching division goals.”
1. Required
2. 1. Describe Mendez’s ethical responsibilities.
3. 2. What should Mendez do if Dalton gives her a direct order to book the sales?
1-27 PROFESSIONAL ETHICS AND REPORTING DIVISION PERFORMANCE. Hannah Gilpin is the controller of Blakemore Auto Glass, a division of Eastern Glass and Window. Blakemore replaces and installs windshields. Her division has been under pressure to improve its divisional operating income. Currently, divisions of Eastern Glass are allocated corporate overhead based on cost of goods sold. Jake Myers, the president of the division, has asked Gilpin to reclassify $50,000 of installation labor, which is included in cost of goods sold, as administrative labor, which is not. Doing so will save the division $20,000 in allocated corporate overhead. The labor costs in question involve installation labor provided by trainee employees. Myers argues, “The trainees are not as efficient as regular employees, so this is unfairly inflating our cost of goods sold. This is really a cost of training (administrative labor), not part of cost of goods sold.” Gilpin does not see a reason for reclassification of the costs other than to avoid overhead allocation costs.
1. Required
2. 1. Describe Gilpin’s ethical dilemma.
3. 2. What should Gilpin do if Myers gives her a direct order to reclassify the costs?

1-28. PLANNING AND CONTROL DECISIONS, INTERNET COMPANY. PostNews.com offers its subscribers several services, such as an annotated TV guide and local-area information on weather, restaurants, and movie theaters. Its main revenue sources are fees for banner advertisements and fees from subscribers. Recent data are as follows:

The following decisions were made from June through October 2020:
1. a. June 2020: Raised subscription fee to $25.50 per month from July 2020 onward. The budgeted number of subscribers for this monthly fee is shown in the following table.
2. b. June 2020: Informed existing subscribers that from July onward, monthly fee would be $25.50.
3. c. July 2020: Offered e-mail service to subscribers and upgraded other online services.
4. d. October 2020: Dismissed the vice president of marketing after significant slowdown in subscribers and subscription revenues, based on July through September 2020 data in the following table.
5. e. October 2020: Reduced subscription fee to $22.50 per month from November 2020 onward.
Results for July–September 2020 are as follows:

Month/Year	Budgeted Number of Subscribers	Actual Number of Subscribers	Monthly Fee per Subscriber
July 2020	145,000	129,250	$25.50
August 2020	155,000	142,726	25.50
September 2020	165,000	145,643	25.50

1. Required
2. 1. Classify each of the decisions (a–e) as a planning or a control decision.
3. 2. Give two examples of other planning decisions and two examples of other control decisions that may be made at PostNews.com.

1-29. STRATEGIC DECISIONS AND MANAGEMENT ACCOUNTING. Consider the following series of independent situations in which a firm is about to make a strategic decision.
Decisions
1. a. Julian Phones is about to decide whether to launch production and sale of a cell phone with standard features.
2. b. Western Airlines is investigating market demand for a unique design for first-class seating in the form of cabins on its route from Los Angeles to Honolulu.
3. c. Brandon Coverings is developing window shades that will let light into a room and reduce glare based on the outside brightness. There are no such shades currently on the market.
4. d. Bledsoe Brands, a manufacturer of breakfast cereal, is developing a line of generic bagged cereals to be sold to a national discount chain.
5. Required
6. 1. For each decision, state whether the company is following a cost leadership or a product differentiation strategy.
7. 2. For each decision, discuss what information the management accountant can provide about the source of competitive advantage for these firms.
1-30. STRATEGIC DECISIONS AND MANAGEMENT ACCOUNTING. Consider the following series of independent situations in which a firm is about to make a strategic decision.
Decisions
1. a. A running shoe manufacturer is weighing whether to purchase leather from a cheaper supplier in order to compete with lower-priced competitors.
2. b. An office supply store is considering adding a delivery service that its competitors do not have.
3. c. A regional retailer is deciding whether to install self-check-out counters. This technology will reduce the number of check-out clerks required in the store.
4. d. A local florist is considering hiring a horticulture specialist to help customers with gardening questions.
5. Required
6. 1. For each decision, state whether the company is following a cost leadership or a product differentiation strategy.
7. 2. For each decision, discuss what information the managerial accountant can provide about the source of competitive advantage for these firms.
1-31. MANAGEMENT ACCOUNTING GUIDELINES. For each of the following items, identify which of the management accounting guidelines applies: cost–benefit approach, behavioral and technical considerations, or different costs for different purposes.
1. 1. Giving constructive feedback when actual performance falls short of the budget.
2. 2. Deciding to give bonuses for superior performance to the employees in a Japanese subsidiary and extra vacation time to the employees in a Swedish subsidiary.
3. 3. Including costs of all the value-chain functions before deciding to launch a new product, but including only its manufacturing costs in determining its inventory valuation.
4. 4. Selecting between a salary plan and a commission plan to compensate sales managers.
5. 5. Signing a lease on a costlier retail location when a lower-cost location had available space.
6. 6. Analyzing whether to keep the billing function within an organization or outsource it.
7. 7. Installing a participatory budgeting system in which managers set their own performance targets, instead of top management imposing performance targets on managers.
8. 8. Recording research costs as an expense for financial reporting purposes (as required by U.S. GAAP) but capitalizing and expensing them over a longer period for management performance-evaluation purposes.
9. 9. Signing a contract to sponsor a basketball star to increase exposure and sales to a younger customer market.
1-32. MANAGEMENT ACCOUNTING GUIDELINES. For each of the following items, identify which of the management accounting guidelines applies: cost–benefit approach, behavioral and technical considerations, or different costs for different purposes.
1. 1. Changing an employee bonus plan to include additional paid time off in response to a changing employee demographic.
2. 2. Deciding whether to sell products directly to customers in a new overseas market or to hire a distributor.
3. 3. Adding the cost of store operations to merchandise cost when deciding on product pricing, but only including the cost of freight and the merchandise itself when calculating cost of goods sold on the income statement.
4. 4. Introducing a participatory budgeting program that involves lower-level managers.
5. 5. Weighing the cost of increased inspection against the costs associated with customer returns of defective goods.
6. 6. Calculating depreciation cost of new equipment based on expected obsolescence when determining cost of inventory, but using tax depreciation tables for tax reporting.
7. 7. Estimating the loss of future business resulting from bad publicity related to an environmental disaster caused by a company’s factory in the Philippines, but estimating cleanup costs for calculating the liability on the balance sheet.
1-33. ROLE OF CONTROLLER, ROLE OF CHIEF FINANCIAL OFFICER. George Jimenez is the controller at Balkin Electronics, a manufacturer of devices for the computer industry. The company may promote him to chief financial officer.
1. Required
2. 1. In this table, indicate which executive is primarily responsible for each activity.

1. 2. Based on this table and your understanding of the two roles, what types of training or experience will George find most useful for the CFO position?
1-34. BUDGETING, ETHICS, PHARMACEUTICAL COMPANY. Henry Maddox was recently promoted to Controller of Research and Development for Pharmex, a Fortune 500 pharmaceutical company that manufactures prescription drugs and nutritional supplements. The company’s total R&D cost for 2020 was expected (budgeted) to be $5 billion. During the company’s midyear budget review, Maddox realized that current R&D expenditures were already at $3.5 billion, nearly 40% above the midyear target. At this current rate of expenditure, the R&D division was on track to exceed its total year-end budget by $2 billion!
In a meeting with CFO Emily Alford later that day, Maddox delivered the bad news. Alford was both shocked and outraged that the R&D spending had gotten out of control. Alford wasn’t any more understanding when Maddox revealed that the excess cost was entirely related to research and development of a new drug, Amiven, which was expected to go to market next year. The new drug would result in large profits for Pharmex, if the product could be approved by year-end.
Alford had already announced her expectations of third-quarter earnings to Wall Street analysts. If the R&D expenditures weren’t reduced by the end of the third quarter, Alford was certain that the targets she had announced publicly would be missed and the company’s stock price would tumble. Alford instructed Maddox to make up the budget shortfall by the end of the third quarter using “whatever means necessary.”
Maddox was new to the controller’s position and wanted to make sure that Alford’s orders were followed. Maddox came up with the following ideas for making the third-quarter budgeted targets:
1. a. Cut planned bonuses to the Amiven R&D team that would be paid in the third quarter, knowing that doing so may result in lower productivity and increased turnover of highly skilled staff.
2. b. Sell off rights to the drug Centrix. The company had not planned on doing this because, under current market conditions, it would get less than fair value. It would, however, result in a one-time gain that could offset the budget shortfall. Of course, all future profits from Centrix would be lost.
3. c. Capitalize some of the company’s R&D expenditures, reducing R&D expense on the income statement. This transaction would not be in accordance with GAAP, but Maddox thought it was justifiable because the Amiven drug was going to market early next year. Maddox would argue that capitalizing R&D costs this year and expensing them next year would better match revenues and expenses.
4. Required
5. 1. Referring to the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management,” Exhibit 1-7, which of the preceding items (a–c) are acceptable to use? Which are unacceptable?
6. 2. What would you recommend Maddox do?
1-35. PROFESSIONAL ETHICS AND END-OF-YEAR ACTIONS. Linda Butler is the new division controller of the snack-foods division of Daniel Foods. Daniel Foods has reported a minimum 15% growth in annual earnings for each of the past 5 years. The snack-foods division has reported annual earnings growth of more than 20% each year in this same period. During the current year, the economy went into a recession. The corporate controller estimates a 10% annual earnings growth rate for Daniel Foods this year. One month before the December 31 fiscal year-end of the current year, Butler estimates the snack-foods division will report an annual earnings growth of only 8%. Rex Ray, the snack-foods division president, is not happy, but he notes that the “end-of-year actions” still need to be taken.
Butler makes some inquiries and is able to compile the following list of end-of-year actions that were more or less accepted by the previous division controller:
1. a. Deferring December’s routine monthly maintenance on packaging equipment by an independent contractor until January of next year.
2. b. Extending the close of the current fiscal year beyond December 31 so that some sales of next year are included in the current year.
3. c. Altering dates of shipping documents of next January’s sales to record them as sales in December of the current year.
4. d. Giving salespeople a double bonus to exceed December sales targets.
5. e. Deferring the current period’s advertising by reducing the number of television spots run in December and running more than planned in January of next year.
6. f. Deferring the current period’s reported advertising costs by having Daniel Foods’ outside advertising agency delay billing December advertisements until January of next year or by having the agency alter invoices to conceal the December date.
7. g. Persuading carriers to accept merchandise for shipment in December of the current year even though they normally would not have done so.
8. Required
9. 1. Why might the snack-foods division president want to take these end-of-year actions?
10. 2. Butler is deeply troubled and reads the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management” in Exhibit 1-7. Classify each of the end-of-year actions (a–g) as acceptable or unacceptable according to that document.
11. 3. What should Butler do if Ray suggests that these end-of-year actions are taken in every division of Daniel Foods and that she will greatly harm the snack-foods division if she does not cooperate and paint the rosiest picture possible of the division’s results?
1-36. PROFESSIONAL ETHICS AND END-OF-YEAR ACTIONS. Phoenix Press produces consumer magazines. The house and home division, which sells home-improvement and home-decorating magazines, has seen a 20% reduction in operating income over the past 9 months, primarily due to an economic recession and a depressed consumer housing market. The division’s controller, Sophie Gellar, has felt pressure from the CFO to improve her division’s operating results by the end of the year. Gellar is considering the following options for improving the division’s performance by year-end:
1. a. Cancelling two of the division’s least profitable magazines, resulting in the layoff of 25 employees.
2. b. Changing to a lighter weight paper that would reduce both paper and postage costs by 5%. It is uncertain what effect the lower quality would have on future sales.
3. c. Recognizing unearned subscription revenue (cash received in advance for magazines that will be delivered in the future) as revenue when cash is received in the current month (just before fiscal year-end) instead of showing it as a liability.
4. d. Delaying the shipment of January issues, normally shipped on December 20, to January 2, shifting the postage costs to January. Subscription revenue for those issues, however, would be recognized in December.
5. e. Recognizing advertising revenues that relate to January in December.
6. f. Switching from declining balance to straight-line depreciation to reduce depreciation expense in the current year.
7. Required
8. 1. What are the motivations for Gellar to improve the division’s year-end operating earnings?
9. 2. From the point of view of the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management,” Exhibit 1-7, which of the preceding items (a–f) are acceptable? Which are unacceptable?
10. 3. What should Gellar do about the pressure to improve performance?
1-37. ETHICAL CHALLENGES, GLOBAL COMPANY ENVIRONMENTAL CONCERNS. Contemporary Interiors (CI) manufactures high-quality furniture in factories in North Carolina for sale to top American retailers. In 2005, CI purchased a lumber operation in Indonesia, and shifted from using American hardwoods to Indonesian ramin in its products. The ramin proved to be a cheaper alternative, and it was widely accepted by American consumers. CI management credits the early adoption of Indonesian wood for its ability to keep its North Carolina factories open when so many competitors closed their doors. Recently, however, consumers have become increasingly concerned about the sustainability of tropical woods, including ramin. CI has seen sales begin to fall, and the company was even singled out by an environmental group for boycott. It appears that a shift to more sustainable woods before year-end will be necessary, and more costly.
In response to the looming increase in material costs, CEO Geoff Armstrong calls a meeting of upper management. The group generates the following ideas to address customer concerns and/or salvage company profits for the current year:
1. a. Pay local officials in Indonesia to “certify” the ramin used by CI as sustainable. It is not certain whether the ramin would be sustainable or not. Put highly visible tags on each piece of furniture to inform consumers of the change.
2. b. Make deep cuts in pricing through the end of the year to generate additional revenue.
3. c. Record executive year-end bonus compensation accrued for the current year when it is paid in the next year after the December fiscal year-end.
4. d. Reject the change in materials. Counter the bad publicity with an aggressive ad campaign showing the consumer products as “made in the USA,” since manufacturing takes place in North Carolina.
5. e. Redesign upholstered furniture to replace ramin contained inside with less expensive recycled plastic. The change in materials would not affect the appearance or durability of the furniture. The company would market the furniture as “sustainable.”
6. f. Pressure current customers to take early delivery of goods before the end of the year so that more revenue can be reported in this year’s financial statements.
7. g. Begin purchasing sustainable North American hardwoods and sell the Indonesian lumber subsidiary. Initiate a “plant a tree” marketing program, by which the company will plant a tree for every piece of furniture sold. Material costs would increase 25%, and prices would be passed along to customers.
8. h. Sell off production equipment prior to year-end. The sale would result in one-time gains that could offset the company’s lagging profits. The owned equipment could be replaced with leased equipment at a lower cost in the current year.
9. i. Recognize sales revenues on orders received but not shipped as of the end of the year.
10. Required
11. 1. As the management accountant for Contemporary Interiors, evaluate each of the preceding items (a–i) in the context of the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management,” Exhibit 1-7. Which of the items are in violation of these ethics standards and which are acceptable?
12. 2. What should the management accountant do with regard to those items that are in violation of the ethical standards for management accountants?

Activity	Controller	CFO
Managing the company’s long-term investments
Presenting the financial statements to the board of directors
Strategic review of different lines of businesses
Budgeting funds for a plant upgrade
Managing accounts receivable
Negotiating fees with auditors
Assessing profitability of various products
Evaluating the costs and benefits of a new product design

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