1.How does managerial accounting differ from financial accounting?

Financial accounting is concerned with reporting financial information to external parties, such as stockholders, creditors, and regulators. Managerial accounting is concerned with providing information to managers for use within the organization. Financial accounting emphasizes the financial consequences of past transactions, objectivity and verifiability, precision, and companywide performance, whereas managerial accounting emphasizes decisions affecting the future, relevance, timeliness, and segment performance. Financial accounting is mandatory for external reports and it needs to comply with rules, such as generally accepted accounting principles (GAAP) and international financial reporting standards (IFRS), whereas managerial accounting is not mandatory and it does not need to comply with externally imposed rules.

2.Pick any major television network and describe some planning and control activities that its managers would engage in.

Five examples of planning activities:

(1) estimating the advertising revenues for a future period

(2) estimating the total expenses for a future period, including the salaries of all actors, news reporters, and sportscasters

 (3) planning how many new television shows to introduce to the market, (4) planning each television show’s designated broadcast time slot

(5) planning the network’s advertising activities and expenditures.

Five examples of controlling activities:               

(1) comparing the actual number of viewers for each show to its viewership projections

(2) comparing the actual costs of producing a made-fortelevision movie to its budget

(3) comparing the revenues earned from broadcasting a sporting event to the costs incurred to broadcast that event

(4) comparing the actual costs of running a production 3 studio to the budget

(5) comparing the actual cost of providing global, on-location news coverage to the budget.

3.If you had to decide whether to continue making a component part or to begin buying the part from an overseas supplier, what quantitative and qualitative factors would influence your decision?

The quantitative analysis would focus on determining the potential cost savings from buying the part rather than making it. The qualitative analysis would focus on broader issues such as strategy, risks, and corporate social responsibility. For example, if the part is critical to the organization’s strategy, it may continue making the part regardless of any potential cost savings from outsourcing. If the overseas supplier might create quality control problems that could threaten the end consumers’ welfare, then the risks of outsourcing may swamp any cost savings. Finally, from a social responsibility standpoint, a company may decide against outsourcing if it would result in layoffs at its domestic manufacturing facility.

4.Why do companies prepare budgets?

Companies prepare budgets to translate plans into formal quantitative terms. Budgets are used for various purposes, such as forcing managers to plan ahead, allocating resources across departments, coordinating activities across departments, establishing goals that motivate people, and evaluating and rewarding employees. These various purposes often conflict with one another, which makes budgeting one of management’s most challenging activities.

5.What are the three major elements of product costs in a manufacturing company?

The three major elements of product costs in a manufacturing company are direct materials, direct labor, and manufacturing overhead.

6.Define the following:

(a)direct materials : Direct materials are an integral part of a finished product and their costs can be conveniently traced to it.

(b)indirect materials : Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience.

(c)direct labor: Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is also called “touch labor.”

(d)indirect labor: Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but the workers involved do not directly work on the product.

(e) manufacturing overhead: Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs.

7.Explain the difference between a product cost and a period cost.

A product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred.

8.Distinguish between

(a)a variable cost: Variable cost: The variable cost per unit is constant, but total variable cost changes in direct proportion to changes in volume.

(b)a fixed cost: Fixed cost: The total fixed cost is constant within the relevant range. The average fixed cost per unit varies inversely with changes in volume.

(c) a mixed cost: Mixed cost: A mixed cost contains both variable and fixed cost elements.

9.What effect does an increase in volume have on

a.Unit fixed costs: Unit fixed costs decrease as volume increases

b.Unit variable costs: Unit variable costs remain constant as volume increases.

c.Total fixed costs: Total fixed costs remain constant as volume increases.

d.Total variable costs: Total variable costs increase as volume increases.

10.Define the following terms:

(a) cost behavior: Cost behavior refers to the way in which costs change in response to changes in a measure of activity such as sales volume, production volume, or orders processed.

(b) relevant range: The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid.

11. What is meant by an activity base when dealing with variable costs? Give several examples

of activity bases.

An activity base is a measure of whatever causes the incurrence of a variable cost. Examples of activity bases include units produced, units sold, letters typed, beds in a hospital, meals served in a cafe, service calls made, etc.

12. Managers often assume a strictly linear relationship between cost and volume. How can this practice be defended in light of the fact that many costs are curvilinear?

The linear assumption is reasonably valid providing that the cost formula is used only within the relevant range.

13. Distinguish between discretionary fixed costs and committed fixed costs.

A discretionary fixed cost has a fairly short planning horizon—usually a year. Such costs arise from annual decisions by management to spend on certain fixed cost items, such as advertising, research, and management development. A committed fixed cost has a long planning horizon— generally many years. Such costs relate to a company’s investment in facilities, equipment, and basic organization. Once such costs have been incurred, they are “locked in” for many years.

14. Does the concept of the relevant range apply to fixed costs? Explain.

Yes. As the anticipated level of activity changes, the level of fixed costs needed to support operations may also change. Most fixed costs are adjusted upward and downward in large steps, rather than being absolutely fixed at one level for all ranges of activity.

15.What is the major disadvantage of the high-low method?

The high-low method uses only two points to determine a cost formula. These two points are likely to be less than typical because they represent extremes of activity.

16.Give the general formula for a mixed cost. Which term represents the variable cost? The

fixed cost?

The formula for a mixed cost is Y = a + bX. In cost analysis, the “a” term represents the fixed cost and the “b” term represents the variable cost per unit of activity.