Managerial Accounting: The Cornerstone of Business Decision-Making
7th Edition
ISBN: 9781337115773
Author: Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher: Cengage Learning
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Textbook Question
Chapter 2, Problem 63C
Cost Information and Ethical Behavior, Service Organization
Jean Erickson, manager and owner of an advertising company in Charlotte, North Carolina, arranged a meeting with Leroy Gee, the chief accountant of a large, local competitor. The two are lifelong friends. They grew up together in a small town and attended the same university. Leroy is a competent, successful accountant but is having some personal financial difficulties after some of his investments turned sour, leaving him with a $15,000 personal loan to pay off—just when his oldest son is starting college.
Jean, on the other hand, is struggling to establish a successful advertising business. She had recently acquired the rights to open a branch office of a large regional advertising firm headquartered in Atlanta, Georgia. During her first 2 years, she was able to build a small, profitable practice. However, the chance to gain a significant foothold in Charlotte hinged on the success of winning a bid to represent the state of North Carolina in a major campaign to attract new industry and tourism. The meeting she had scheduled with Leroy concerned the bid she planned to submit.
Jean: Leroy, I’m at a critical point in my business venture. If I can win the bid for the state’s advertising dollars, I’ll be set. Winning the bid will bring $600,000 to $700,000 of revenues into the firm. On top of that, I estimate that the publicity will bring another $200,000 to $300,000 of new business.
Leroy: I understand. My boss is anxious to win that business as well. It would mean a huge increase in profits for my firm. It’s a competitive business, though. As new as you are, I doubt that you’ll have much chance of winning.
Jean: You’re forgetting two very important considerations. First, I have the backing of all the resources and talent of a regional firm. Second, I have some political connections. Last year, I was hired to run the publicity side of the governor’s campaign. He was impressed with my work and would like me to have this business. I am confident that the proposals I submit will be very competitive. My only concern is to submit a bid that beats your firm. If I come in with a lower bid and good proposals, the governor can see to it that I get the work.
Leroy: Sounds promising. If you do win, however, there will be a lot of upset people. After all, they are going to claim that the business should have been given to local advertisers, not to some out-of-state firm. Given the size of your office, you’ll have to get support from Atlanta. You could take a lot of heat.
Jean: True. But I am the owner of the branch office. That fact alone should blunt most of the criticism. Who can argue that I’m not a local? Listen, with your help, I think I can win this bid. Furthermore, if I do win it, you can reap some direct benefits. With that kind of business, I can afford to hire an accountant, and I’ll make it worthwhile for you to transfer jobs. I can offer you an up-front bonus of $15,000. On top of that, I’ll increase your annual salary by 20%. That should solve most of your financial difficulties. After all, we have been friends since day one—and what are friends for?
Leroy: Jean, my wife would be ecstatic if I were able to improve our financial position as quickly as this opportunity affords. I certainly hope that you win the bid. What kind of help can I provide?
Jean: Simple. To win, all I have to do is beat the bid of your firm. Before I submit my bid, I would like you to review it. With the financial skills you have, it should be easy for you to spot any excessive costs that I may have included. Or perhaps I included the wrong kind of costs. By cutting excessive costs and eliminating costs that may not be directly related to the project, my bid should be competitive enough to meet or beat your firm’s bid.
Required:
- 1. What would you do if you were Leroy? Fully explain the reasons for your choice. What do you suppose the code of conduct for Leroy’s company would say about this situation?
- 2. What is the likely outcome if Leroy agrees to review the bid? Is there much risk to him personally if he reviews the bid? Should the degree of risk have any bearing on his decision?
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Chapter 2 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
Ch. 2 - Explain the difference between cost and expense.Ch. 2 - What is the difference between accumulating costs...Ch. 2 - What is a cost object? Give some examples.Ch. 2 - What is a direct cost? An indirect cost? Can the...Ch. 2 - What is allocation?Ch. 2 - What is the difference between a product and a...Ch. 2 - Define manufacturing overhead.Ch. 2 - Explain the difference between direct materials...Ch. 2 - Define prime cost and conversion cost. Why cant...Ch. 2 - How does a period cost differ from a product cost?
Ch. 2 - Define selling cost. Give five examples of selling...Ch. 2 - What is the cost of goods manufactured?Ch. 2 - What is the difference between cost of goods...Ch. 2 - What is the difference between the income...Ch. 2 - Why do firms like to calculate a percentage column...Ch. 2 - Accumulating costs means that a. costs must be...Ch. 2 - Product (or manufacturing) costs consist of a....Ch. 2 - Use the following information for Multiple-Choice...Ch. 2 - Prob. 4MCQCh. 2 - The accountant in a factory that produces biscuits...Ch. 2 - Which of the following is an indirect cost? a. The...Ch. 2 - Prob. 7MCQCh. 2 - Kelloggs makes a variety of breakfast cereals....Ch. 2 - Prob. 9MCQCh. 2 - Stone Inc. is a company that purchases goods...Ch. 2 - JackMan Company produces die-cast metal bulldozers...Ch. 2 - Prob. 12MCQCh. 2 - Use the following information for Multiple-Choice...Ch. 2 - Use the following information for Multiple-Choice...Ch. 2 - Use the following information for Multiple- Choice...Ch. 2 - Prob. 16MCQCh. 2 - Use the following information for Multiple-Choice...Ch. 2 - 2-18 Use the following information for Multiple-...Ch. 2 - Use the following information for Brief Exercises...Ch. 2 - Use the following information for Brief Exercises...Ch. 2 - Direct Materials Used in Production Slapshot...Ch. 2 - Cost of Goods Manufactured Slapshot Company makes...Ch. 2 - Cost of Goods Sold Slapshot Company makes ice...Ch. 2 - Use the following information for Brief Exercises...Ch. 2 - Use the following information for Brief Exercises...Ch. 2 - Prob. 26BEACh. 2 - Prob. 27BEBCh. 2 - Prob. 28BEBCh. 2 - Direct Materials Used in Production Morning Smiles...Ch. 2 - 2-30 Cost of Goods Manufactured Morning Smiles...Ch. 2 - Cost of Goods Sold Morning Smiles Coffee Company...Ch. 2 - Use the following information for Brief Exercises...Ch. 2 - Use the following information for Brief Exercise:...Ch. 2 - Service Organization Income Statement Healing...Ch. 2 - Prob. 35ECh. 2 - Products versus Services, Cost Assignment Holmes...Ch. 2 - Assigning Costs to a Cost Object, Direct and...Ch. 2 - Total and Unit Product Cost Martinez Manufacturing...Ch. 2 - Cost Classification Loring Company incurred the...Ch. 2 - Classifying Cost of Production A factory...Ch. 2 - Use the following information for Exercises 2-41...Ch. 2 - Use the following information for Exercises 2-41...Ch. 2 - Direct Materials Used Hannah Banana Bakers makes...Ch. 2 - Cost of Goods Sold Allyson Ashley makes jet skis....Ch. 2 - Use the following information for Exercises 2-45...Ch. 2 - Use the following information for Exercises 2-45...Ch. 2 - Use the following information for Exercises 2-47...Ch. 2 - Use the following information for Exercises 2-47...Ch. 2 - Use the following information for Exercises 2-47...Ch. 2 - Understanding the Relationship between Cost Flows,...Ch. 2 - Manufacturing, Cost Classification, Product Costs...Ch. 2 - Cost Assignment, Direct Costs Harry Whipple, owner...Ch. 2 - Cost of Direct Materials, Cost of Goods...Ch. 2 - Preparation of Income Statement: Manufacturing...Ch. 2 - Cost of Goods Manufactured, Cost of Goods Sold...Ch. 2 - Cost Identification Following is a list of cost...Ch. 2 - Income Statement, Cost of Services Provided,...Ch. 2 - Cost of Goods Manufactured, Income Statement W. W....Ch. 2 - Cost Definitions Luisa Giovanni is a student at...Ch. 2 - Cost Identification and Analysis, Cost Assignment,...Ch. 2 - Cost Analysis, Income Statement Five to six times...Ch. 2 - Cost Classification, Income Statement Gateway...Ch. 2 - Cost Information and Ethical Behavior, Service...
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