Questions and Answers of Horngrens Cost Accounting

1. What are the objectives managers strive to achieve in managing cash?
1. What is an activity-based budget and how does it differ from traditional budgets?
1. How does a budget help control discretionary costs?
1. When are standards applicable to discretionary costs?
1. How are the benefits of expenditures for discretionary costs measured?
1. How are costs determined to be committed or discretionary?
1. Why is cost consciousness important to all members of an organization?
80. Although they should be considered independently, often the investing and financing decisions are considered together.It’s easy to understand the allure of auto leasing: Consumers make lower
79. Dial Corp., a one-time bus company that in 1996 sold everything from soap to nuts, said it would separate into consumer products and services concerns, splitting a company with about $3 billion
78. In the United States, companies generally respond to economic downturns by reducing spending on capital projects. A frequently observed strategy is to delay investment in new capital projects and
77. In February 1996, the German firm, Jos. L. Meyer GmbH was negotiating for the right to build ships in the United States. The family-owned German shipbuilder, which specializes in cruise ships,
76. Traditionally, capital budgeting in health care has tended to focus on projected financial returns from investments. To justify the commitment of capital resources, a proposed investment must be
75. (Postinvestment audit) Smyth Brothers Inc. has formal policies and procedures to screen and approve capital projects. Proposed capital projects are classified as one of the following types:1..
74. (NPV) Michigan Motor Company is considering a proposal to acquire new manufacturing equipment. The new equipment has the same capacity as the current equipment but will provide operating
73. (Investment financing) HMG Corporation is a for-profit health-care provider that operates three hospitals. One of these hospitals, Metrohealth, plans to acquire new X-ray equipment. Management
72. (Comprehensive; Appendix 2) The management of Custom Metalworks is evaluating a proposal to purchase a new turning lathe as a replacement for a less efficient piece of similar equipment that
71. (Appendix 2; payback; NPV) Caldwell Department Stores is a growing business that is presently considering adding a new product line. The firm would be required by the manufacturer to incur setup
70. (Postinvestment audit) Ten years ago, based on a before-tax NPV analysis, Johnson Wholesaling decided to add a new product line. The data used in the analysis were as follows:Discount rate
69. (Sensitivity analysis) A 50-room motel is for sale in Houston and is being considered by the Lone Star Motel Chain as an investment. The current owners indicate that the occupancy of the motel
68. (Capital rationing) Following are the capital projects being considered by the management of UpTown Productions:Annual After-Tax Number of Project Cost Cash Flows Years Film studios $18,000,000
67. (NPV; PI; IRR; Fisher rate) Scrooge Investments, which has a cost of capital of 12 percent, is evaluating two mutually exclusive projects (A and B), which have the following projections:Project A
66. (NPV; project ranking; risk) Florida Financial Consultants is expanding operations, and the firm’s president, Ms. Hillary Rose, is trying to make a decision about new office space. The
65. (After-tax cash flows; payback; NPV; PI; IRR) Forrester Fashions is considering the purchase of computerized clothes designing software. The software is expected to cost $160,000, have a useful
64. (NPV; taxes) The manager of Crain Street Cold Storage is considering the installation of a new refrigerated storage room. She has learned that the installation would require an initial cash
63. (NPV; PI; payback; IRR) Custom Driveways provides custom paving of sidewalks and driveways for residential and commercial customers. One of the most labor-intensive aspects of the paving
62. (NPV; PI) Houston Storage provides warehousing services for industrial firms.Usual items stored include records, inventory, and waste items. The company is evaluating more efficient methods of
61. (Payback; IRR) Ted’s Bookkeeping Service prepares tax returns for individuals and small businesses. The firm employs four professional people in the tax practice. Currently, all tax returns are
60. (Time line; payback; NPV) Fred’s Freightline is considering the purchase of a new van to replace an existing truck. The van would cost $35,000 and would have a life of seven years with no
59. (Time line; payback; NPV) Black Hills Souvenir Show is considering expanding its building so it can stock additional merchandise for travelers and tourists.Store manager Allison Crowe anticipates
58. (Product life-cycle applications) Different accounting and finance tools can be used to control costs as the product life cycle advances through its stages. With this thought in mind, discuss
57. (Application of discounting methods) In recent years, the stock price averages, e.g., Dow Jones Industrial average, have shown sensitivity to changes in interest rates. Based on your
55. (Application of discounting methods) Several of the capital budgeting techniques presented in this chapter depend on discounted cash flow concepts. These concepts are applied in business in a
54. (Capital budget) Find the home page of the Institute of Management Accountants(IMA). From the home page, locate articles addressing the processes of budgeting. Among these materials is a
53. (Links between short- and long-term operations) Drug companies rely on their research activities as the primary source of future revenues and profits. The capital budget is the principal tool
52. (Change in investment assumption) Lenin’s Linen provides laundered items to various commercial and service establishments in a large metropolitan city.Lenin’s is scheduled to acquire new
51. (Technology acquisition) In 1996 General Motors announced that it was preparing to invest $850 million to update its metal-stamping operations. The new metal-stamping operations would be more
50. (Comprehensive) Hollywood Games operates a video arcade in the Lincoln Mall.The owner of Hollywood Games, Joe Lynch, is considering acquiring a new“centerpiece” video machine. The cost of the
49. (Appendix 2; comprehensive) Kopy Korner is evaluating the purchase of a stateof-the-art desktop publishing system that costs $50,000. The company’s controller has estimated that the system will
48. (Appendix 2) Allison Aftercare operates a rehabilitation center for individuals with physical disabilities. The company is considering the purchase of a new piece of equipment that costs
47. (Appendix 1) Use the tables in Appendix A to determine the answers to the following questions.a. Elijah Santos wishes to have $50,000 in six years. He can make an investment today that will earn
46. (Appendix 1) You have just purchased a new car. Assume you made a down payment of $8,000 and financed the balance of the purchase cost on an installment credit plan. According to the credit
45. (Appendix 1) You have just invested $13,000 in a bank account that guarantees to pay you 12 percent interest, compounded annually. At the end of five years, how much money will have accumulated
44. (Uncertain cash flow; uncertain discount rate) Quixote Wind Systems manufactures wind-powered electricity generators. The company is considering investing in new technology to allow storage of
43. (Uncertain project life) Jake’s Exercise Products Inc. is evaluating a potential investment project that would have an initial cost of $400,000 and will return$150,000 annually for six years.
42. (Uncertain annual cash flow) Jones and Associates, CPAs, is considering the installation of a new system for electronically filing tax returns. The initial cost of the system would be $25,000.
41. (Project ranking) Two independent potential capital projects are under evaluation by Bird & Company. Project 1 costs $400,000, will last 10 years, and will provide an annual annuity of after-tax
40. (Tax effects of asset sale) Delta Mechanical Systems purchased a material conveyor system three years ago. Now, the company is going to sell the system and acquire more advanced technology. Data
39. (Alternative depreciation methods; NPV) Chicago Hydraulic is considering an investment in computer-based production technology as part of a business reengineering process. The necessary
38. (Depreciation) Kansas System Solutions operates consulting offices in three Midwest locations. The firm is presently considering an investment in a new mainframe computer and communication
37. (Multiple methods) Toys for Big Boys is considering purchasing a robot to apply shrink wrap packaging to some of its products. The robot will cost$2,300,000 and will produce annual labor and
36. (Multiple methods) Indiana Furniture Mart is considering buying a delivery truck at a cost of $52,000. Presently, the store relies on a delivery service to deliver its products to area customers.
35. (IRR) Island Paradise is considering adding a new dock to its marina facilities to accommodate larger yachts. The facilities would cost $140,000 and would generate $18,200 annually in new cash
34. (PI) The Omaha Transit Authority (OTA) is considering adding a new bus route. To add the route, OTA would be required to purchase a new bus, which would have a life of 10 years and cost $250,000.
33. (PI) Texas Flooring is interested in purchasing a computer and software that would allow its salespeople to demonstrate to customers how a finished carpet installation would appear. Managers have
32. (NPV) Atlanta Industrial has been approached by one of its customers about producing 400,000 special-purpose parts for a new farm implement product.The parts would be required at a rate of 50,000
31. (NPV) Seattle Fish Processing Company is considering the installation of an automated product handling system. The initial cost of such a system would be$400,000. This system would generate labor
30. (Payback) John’s Clothing Store is considering a new product line: umbrellas and rain gear. The new product line would require an investment of $20,000 in equipment and fixtures and $40,000 in
29. (Payback period) Cimarron Manufacturing is considering the purchase of new production technology. The new technology would require an initial investment of $750,000 and have an expected life of
28. (Terminology) Match the numbered item on the right with the lettered item on the left.a. Capital asset 1.. Effect of uncertainty.b. Compound interest 2.. Recapture of the original investment.c.
27. (Terminology) Match the numbered item on the right with the lettered item on the left.a. Annuity 1.. A measure of the time that willb. Cost of capital elapse until an initial investment isc.
26. (Appendix 2) How is the accounting rate of return computed? How does this rate differ from the discount rate and the internal rate of return?
25. (Appendix 1) How does an annuity differ from a single cash flow?
24. (Appendix 1) What is meant by the term time value of money? Why is a present value always less than the future value to which it relates?
23. Why are postinvestment audits performed? When should they be performed?
22. How is sensitivity analysis used in capital budgeting?
21. How is risk defined in capital budgeting analysis? List several aspects of a project in which risk is involved and how risk can affect the net present value of a project.
20. Why does capital rationing exist, and how do managers consider it when ranking capital projects?
19. Why should managers use several techniques to rank capital projects? Which technique should be used as the primary evaluator and why?
18. How would managers rank projects using each of the following methods: net present value, profitability index, internal rate of return, payback period, and accounting rate of return?
17. What are four questions that managers should ask when choosing the investment proposals to be funded?
16. What is the difference between the tax shield of depreciation and the tax benefit of depreciation?
15. Depreciation does not represent a cash flow. Why, then, is it important in capital budgeting evaluation techniques that use discounted cash flows?
14. What is the relationship between NPV and IRR? Why does this relationship hold true?
13. What is measured by the internal rate of return? When is a project considered acceptable using this method?
12. Under what circumstance will the PI exceed 1? Discuss the rationale for your answer.
11. How is the profitability index related to the NPV method? What does the PI measure?
10. Will the NPV amount determined in the capital budgeting process be the same amount as that which actually occurs after a project is undertaken? Why or why not?
9. What is measured by the net present value of a potential project? If the net present value of a project equals zero, is it an acceptable project? Explain.
8. Differentiate between a return of capital and a return on capital.
7. Why is the time value of money important in capital budgeting? Which evaluation methods use this concept? Which do not?
6. What does the payback method measure? What are its major weaknesses?
5. Why are time lines helpful in evaluating capital projects?
4. Why are cash flows related to financing not included in evaluating a capital project?
3. Why do capital budgeting evaluation methods use cash flows rather than accounting income?
2. Why do firms use multiple criteria when evaluating potential capital investments?
1. What is a capital asset? How is it distinguished from other assets?
1. (Appendix 2) What are the advantages and disadvantages of the accounting rate of return method?
1. (Appendix 1) How are present values calculated?
1. How and why should management conduct a postinvestment audit of a capital project?
1. How is risk considered in capital budgeting analysis?
1. How do managers rank investment projects?
1. What are the underlying assumptions and limitations of each capital project evaluation method?
1. How do taxation and depreciation methods affect cash flows?
1. How is the internal rate of return on a project computed? What does it measure?
1. How are the net present value and profitability index of a project measured?
1. What is measured by the payback period?
1. Why do most capital budgeting methods focus on cash flows?
32. (Normal and abnormal spoilage; WA) Big Stone Furniture produces breakfast tables in a two-department process: Cutting/Assembly and Lamination. Varnish is added in the Lamination Department when
36. (Cost assignment) Data below summarize operations for GreenerGrass Company for March 2001. The company makes five-gallon containers of weed killer/fertilizer. All material is added at the
38. (Comprehensive; weighted average) Harper Company produces brooms. Department 1 winds and cuts straw into broom heads and transfers these to Department 2 where the broom head is bound and attached

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