What is the difference between a direct and indirect cost? Variable versus fixed cost? What are the differences in accounting for inventoriable (product) versus period costs?
What are the relationships among financial, management, and cost accounting?
1-34 Budgeting, ethics, pharmaceutical company. Chris Jackson was recently promoted to Controller of Research and Development (R&D) for BrisCor, a Fortune 500 pharmaceutical company that manufactures prescription drugs and nutritional supplements. The company’s total R&D cost for 2017 was expected (bud-geted) to be $5 billion. During the company’s midyear budget review, Chris realized that current R&D expen-ditures 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 Ronald Meece later that day, Jackson delivered the bad news. Meece was both shocked and outraged that the R&D spending had gotten out of control. Meece wasn’t any more under-standing when Jackson revealed that the excess cost was entirely related to research and development of a new drug, Vyacon, which was expected to go to market next year. The new drug would result in large profits for BrisCor, if the product could be approved by year-end.
Meece had already announced his expectations of third-quarter earnings to Wall Street analysts. If the R&D expenditures weren’t reduced by the end of the third quarter, Meece was certain that the tar-gets he had announced publicly would be missed and the company’s stock price would tumble. Meece instructed Jackson to make up the budget shortfall by the end of the third quarter using “whatever means necessary.”
Jackson was new to the controller’s position and wanted to make sure that Meece’s orders were fol-lowed. Jackson came up with the following ideas for making the third-quarter budgeted targets: a. Stop all research and development efforts on the drug Vyacon until after year-end. This change would delay the drug going to market by at least 6 months. It is possible that in the meantime a BrisCor com-petitor could make it to market with a similar drug.
b. Sell off rights to the drug Martek. 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 Martek would be lost.
c. Capitalize some of the company’s R&D expenditures, reducing R&D expense on the income state-ment. This transaction would not be in accordance with GAAP, but Jackson thought it was justifi-able because the Vyacon drug was going to market early next year. Jackson would argue that capitalizing R&D costs this year and expensing them next year would better match revenues and expenses.
1. Referring to the “Standards of Ethical Behavior for Practitioners of Management Accounting and Financial Management,” Exhibit 1-7 (page 17), which of the preceding items (a–c) are acceptable to use? Which are unacceptable?
2. What would you recommend Jackson do?
2-33 Inventoriable costs versus period costs. Each of the following cost items pertains to one of these companies: Best Buy (a merchandising-sector company), KitchenAid (a manufacturing-sector company), and HughesNet (a service-sector company): a. Cost of phones and computers available for sale in Best Buy’s electronics department b. Electricity used to provide lighting for assembly-line workers at a KitchenAid manufacturing plant c. Depreciation on HughesNet satellite equipment used to provide its services d. Electricity used to provide lighting for Best Buy’s store aisles e. Wages for personnel responsible for quality testing of the KitchenAid products during the assembly process
f. Salaries of Best Buy’s marketing personnel planning local-newspaper advertising campaigns g. Perrier mineral water purchased by HughesNet for consumption by its software engineers h. Salaries of HughesNet area sales managers i. Depreciation on vehicles used to transport KitchenAid products to retail stores
1. Distinguish between manufacturing-, merchandising-, and service-sector companies. 2. Distinguish between inventoriable costs and period costs. 3. Classify each of the cost items (a–i) as an inventoriable cost or a period cost. Explain your answers.
2-34 Computing cost of goods purchased and cost of goods sold. The following data are for Marvin Department Store. The account balances (in thousands) are for 2017.
Marketing, distribution, and customer-service costs 37,000
Merchandise inventory, January 1, 2017 27,000
General and administrative costs 43,000
Merchandise inventory, December 31, 2017 34,000
Miscellaneous costs 4,000
Purchase returns and allowances 4,000
Purchase discounts 6,000
1. Compute (a) the cost of goods purchased and (b) the cost of goods sold.
2. Prepare the income statement for 2017.
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