CHAPTER 2
Basic Cost Management Concepts and Accounting for Mass Customization Operations ANSWERS TO REVIEW QESTIONS 2-1
Produc Productt costs costs are are cost costss that that are associ associate ated d with with manuf manufact acture ured d goods goods until until the the time time peri period od duri during ng whic which h the the prod produc ucts ts are are sold sold,, when when the the prod produc uctt cost costss beco become me expenses. Period costs are expensed during the time period in which they are incurred.
2-2 2-2
Prod Produc uctt cost costss are are also also calle called d inve invent ntor oria iabl blee cost costss beca becaus usee they they are assig assigne ned d to manufactured goods that are inventoried until a later period, when the products are sold. The product costs remain in the Wor-in-Process or !inished-"oods #nventory account until the time period when the goods are sold.
2-$
The most most impor importan tantt differ differenc encee betwe between en a manu manufac factur turing ing firm firm and a servi service ce indu industr stryy firm, with regard to the classification of costs, is that the goods produced by a manufacturing firm are inventoried, whereas the services produced by a service industry firm are consumed as they are produced. Thus, the costs incurred in manufacturing products are treated as product costs until the period during which the goods are sold. %ost of the costs incurred in a service industry firm to produce services are operating expenses that are treated as period costs.
2.& 2.&
The The fiv fivee typ types es of prod produc ucti tion on pro proce cess sses es are are as as fol follo lows ws''
(ob shop' )ow production production volume* volume* little standardi standardi+atio +ation* n* one-of-a-in one-of-a-ind d prod produc ucts ts.. xam xampl ples es incl includ udee cust custom om home home cons constr truc ucti tion on,, feat featur uree film film production, and ship building. atch' atch' %ultiple %ultiple products* products* low volume. volume. xamples xamples include include constructio construction n euipment, tractor trailers, and cabin cruisers. /ssembly /ssembly line' / ffew ew ma0or products* products* higher higher volume. volume. xamples xamples include include itchen appliances and automobile assembly. %ass %ass cust custom omi+ i+at atio ion' n' igh igh prod produc ucti tion on volu volume me** many many stan standa dard rdi+ i+ed ed components* components* customi+e customi+ed d combinatio combination n of componen components. ts. /n example example is the computer industry.
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ontinuous flow' igh production volume* highly standardi+ed commodity prod produc ucts ts.. xam xampl ples es incl includ udee food food proc proces essi sing ng,, text textil iles es,, lumb lumber er,, and and chemicals.
2-3
The term term mass mass cust customi omi+at +ation ion is used used to desc describ ribee an indust industry ry such such as the comput computer er industry, where large numbers of identical components are mass produced, and then these components are combined in a customi+ed way to customer specifications. !or example, when a customer places an order for a 4ell computer on line, the company assembles 0ust the components reuested by the customer, loads the reuested reuested software, software, and ships ships the customi+ed customi+ed computer computer system. system. 5iewed 5iewed in this light, the term mass customi+ation is not internally inconsistent.
2-6 2-6
The The cost cost of idle idle time time is trea treate ted d as manuf manufac actu turi ring ng over overhe head ad beca becaus usee it is a norma normall cost of the manufacturing operation that should be spread out among all of the manufactured products. The alternative to this treatment would be to charge the cost of idle time to a particular 0ob that happens to be in process when the idle time occurs. #dle time often results from a random event, such as a power outage. harging the cost of the idle time resulting from such a random event to only the 0ob that happened to be in process at the time would overstate the cost of that 0ob.
2-7 2-7
8ver 8verti time me premi premium um is incl includ uded ed in manu manufa fact ctur urin ing g over overhe head ad in orde orderr to sprea spread d the the extra cost of the overtime over all of the products produced, since overtime often is a normal cost of the manufacturing operation. The alternative would be to charge the overtime premium to the particular 0ob in process during overtime. #n most cases, such treatment would overstate the cost of that 0ob, since it is only coincidental that a particular 0ob happened to be done on overtime. The need for overtime to complete a particula particularr 0ob results from the fact that other 0obs were completed completed during during regular regular hours.
2-9 2-9
The The phras phrasee :diff :differ eren entt costs costs for diffe differe rent nt purpo purpose ses; s; refe refers rs to the the fact fact that that the word word :cost; can have different meanings depending on the context in which it is used. ost data that are classified and recorded in a particular way for one purpose may be inappropriate for another use.
2-< 2-<
The The city city of Tampa Tampa woul would d use use cost cost info inform rmat atio ion n for for plan planni ning ng when when it devel develop oped ed a budget for its operations during the next year. #ncluded in that budget would be pro0 pro0ec ecte ted d cost costss for for poli police ce and and fire fire prot protec ecti tion on,, stre street et main mainte tena nanc nce, e, and and city city administration. /t the end of the year this budget would be used for cost control. The actual costs incurred would be compared to pro0ected costs in the budget. ity administrators would also use cost data in maing decisions, such as where to locate a new fire station.
2-1= 2-1=
/ fixed fixed cost remai remains ns consta constant nt in total total across across change changess in activity activity,, whereas whereas the the total total variable cost changes in proportion to the level of activity.
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ontinuous flow' igh production volume* highly standardi+ed commodity prod produc ucts ts.. xam xampl ples es incl includ udee food food proc proces essi sing ng,, text textil iles es,, lumb lumber er,, and and chemicals.
2-3
The term term mass mass cust customi omi+at +ation ion is used used to desc describ ribee an indust industry ry such such as the comput computer er industry, where large numbers of identical components are mass produced, and then these components are combined in a customi+ed way to customer specifications. !or example, when a customer places an order for a 4ell computer on line, the company assembles 0ust the components reuested by the customer, loads the reuested reuested software, software, and ships ships the customi+ed customi+ed computer computer system. system. 5iewed 5iewed in this light, the term mass customi+ation is not internally inconsistent.
2-6 2-6
The The cost cost of idle idle time time is trea treate ted d as manuf manufac actu turi ring ng over overhe head ad beca becaus usee it is a norma normall cost of the manufacturing operation that should be spread out among all of the manufactured products. The alternative to this treatment would be to charge the cost of idle time to a particular 0ob that happens to be in process when the idle time occurs. #dle time often results from a random event, such as a power outage. harging the cost of the idle time resulting from such a random event to only the 0ob that happened to be in process at the time would overstate the cost of that 0ob.
2-7 2-7
8ver 8verti time me premi premium um is incl includ uded ed in manu manufa fact ctur urin ing g over overhe head ad in orde orderr to sprea spread d the the extra cost of the overtime over all of the products produced, since overtime often is a normal cost of the manufacturing operation. The alternative would be to charge the overtime premium to the particular 0ob in process during overtime. #n most cases, such treatment would overstate the cost of that 0ob, since it is only coincidental that a particular 0ob happened to be done on overtime. The need for overtime to complete a particula particularr 0ob results from the fact that other 0obs were completed completed during during regular regular hours.
2-9 2-9
The The phras phrasee :diff :differ eren entt costs costs for diffe differe rent nt purpo purpose ses; s; refe refers rs to the the fact fact that that the word word :cost; can have different meanings depending on the context in which it is used. ost data that are classified and recorded in a particular way for one purpose may be inappropriate for another use.
2-< 2-<
The The city city of Tampa Tampa woul would d use use cost cost info inform rmat atio ion n for for plan planni ning ng when when it devel develop oped ed a budget for its operations during the next year. #ncluded in that budget would be pro0 pro0ec ecte ted d cost costss for for poli police ce and and fire fire prot protec ecti tion on,, stre street et main mainte tena nanc nce, e, and and city city administration. /t the end of the year this budget would be used for cost control. The actual costs incurred would be compared to pro0ected costs in the budget. ity administrators would also use cost data in maing decisions, such as where to locate a new fire station.
2-1= 2-1=
/ fixed fixed cost remai remains ns consta constant nt in total total across across change changess in activity activity,, whereas whereas the the total total variable cost changes in proportion to the level of activity.
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2-11
The fixed fixed cost per unit unit declin declines es as the level level of of activity activity >or cost cost driver driver?? increase increases. s. The cost per unit is reduced because the total fixed cost, which does not change as activity changes, is spread over a larger number of activity units.
2-12 2-12
The varia variable ble cost cost per unit unit remain remainss constan constantt as the level level of activi activity ty >or cost cost driver driver?? changes. Total variable costs change in proportion to activity, and the additional variable cost when one unit of activity is added is the variable cost per unit.
2-1$ 2-1$
/ volumevolume-bas based ed cost cost driver, driver, such such as the the number number of pass passeng engers ers,, causes causes costs costs to be incurred because of the uantity of service offered by the airline. /n operationsbased cost driver, such as hub domination, affects costs because of the basic way in which the airline conducts its operations. "reater control over a hub airport@s facilities and services gives an airline greater ability to control its operating costs.
2-1& 2-1&
a. Aumber Aumber of stud student ents' s' volu volumeme-bas based ed cost cost drive driver. r. This This chara characte cteris ristic tic of the the colleg collegee relates to the uantity of services provided. b. Aumb Aumber er of disc discip ipli line ness offe offere red d for for stud study' y' oper operat atio ions ns-ba -base sed d cost cost driv driver er.. The The greater the diversity in a college@s course offerings, the greater will be the costs incurred, regardless of the overall si+e of the student body. c. Brban Brban versus versus rural rural locati location' on' operatio operationsns-bas based ed cost cost driver driver.. / colleg college@s e@s locatio location n will affect the type of housing and food facilities reuired, the cost of obtaining services, and the cost of transportation for college employees acting on behalf of the college.
2-13 2-13
xampl xamples es of direct direct costs costs of the the food and and beverag beveragee depart departmen mentt in a hotel inclu include de the mone moneyy spen spentt on the the food food and and beve bevera rage gess serv served ed,, the the wage wagess of tabl tablee serv servic icee personnel, and the costs of entertainment in the dining room and lounge. xamples of indirect costs of the food and beverage department include allocations of the costs of advertising for the entire hotel, of the costs of the grounds and maintenance department, and of the hotel general manager@s salary.
2-16 2-16
osts osts that that are liely liely to to be control controllab lable le by a city@s city@s airpor airportt manager manager inclu include de the wages wages of personnel hired by the airport manager, the cost of heat and light in the airport manager@s administrative offices, and the cost of some materials consumed in the proces processs of operat operating ing the airpor airport, t, such such as cleani cleaning, ng, painti painting, ng, and mainte maintenan nance ce materials. osts that are liely to be uncontrollable by the city@s airport manager include depreciation of the airport facilities, fees paid by the airport to the federal government for air traffic control services, and insurance for the airport employees and patrons.
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2-17
a. Bncontrollable cost b. ontrollable cost c. Bncontrollable cost
2-19
8ut-of-pocet costs are paid in cash at or near the time they are incurred. /n opportunity cost is the potential benefit given up when the choice of one action precludes the selection of a different action.
2-1<
/ sun cost is a cost that was incurred in the past and cannot be altered by any current or future decision. / differential cost is the difference in a cost item under two decision alternatives.
2.2=
/ marginal cost is the extra cost incurred in producing one additional unit of output. The average cost is the total cost of producing a particular uantity of product or service, divided by the number of units of product or service produced.
2.21
The process of registering for classes varies widely among colleges and universities, and the responses to this uestion will vary as well. xamples of information that might be useful include the credit reuirements and course reuirements to obtain a particular degree, and a list of the prereuisites for each of the elective courses in a particular ma0or. Cuch information could help the student plan an academic program over several semesters or uarters. /n example of information that might create information overload is a comprehensive listing of every course offered by the college in the past five years.
2-22
The purchase cost of the old bar code scanners is a sun cost, since it occurred in the past and cannot be changed by any future course of action. The manager is exhibiting a common behavioral tendency to pay too much attention to sun costs.
2-2$
a. 4irect cost b. 4irect cost c. #ndirect cost d. #ndirect cost
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SO&TIONS TO E'ERCISES DE#C 2-2& >1= %#ABTC? The general formula for solving all three cases is as follows' eginning inventory of finished goods
+
ost of goods manufactured during period
F
nding inventory of finished goods
=
ost-ofgoods sold expense
Bsing this formula, we can find the missing amounts as follows'
eginning inventory of finished goods............... /dd' ost of goods manufactured...................... Cubtract' nding inventory of finished goods... ost of goods sold................................................
ase ## G12,=== <3,=== 9,=== G<<,===H
# G 9&,===H &1<,=== <9,=== G&=3,===
### 7,=== $19,===H 21,=== G$=&,===
H/mount missing in exercise. DE#C 2-23 >1= %#ABTC? 1.
ours wored..................................................................................................... Wage rate............................................................................................................ Total compensation...........................................................................................
2.
lassification' 4irect labor >$3 hours G2=?....................................................................... 8verhead >idle time' 3 hours G2=?............................................................ Total compensation......................................................................................
&= G 2= G9==
G7== 1== G9==
DE#C 2-26 >1= %#ABTC? 1.
Eegular wages >&= hours G16?....................................................................... 8vertime wages >3 hours G2=?....................................................................... Total compensation...........................................................................................
G 6&= 1== G 7&=
2.
8vertime hours................................................................................................... 8vertime premium per hour >G2= G16?.......................................................... Total overtime premium.....................................................................................
3 hrs. G & G 2=
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DE#C 2-26 >8AT#AB4? $.
lassification' 4irect labor >&3 hours G16?....................................................................... 8verhead >overtime premium' 3 hours G&?............................................. Total compensation......................................................................................
G 72= 2= G 7&=
DE#C 2-27 >$= %#ABTC? %ass customi+ation is well suited to 4ell omputerIs operations because of the companyIs direct-selling approach, in which customers order customi+ed computer systems, often on line. Then 4ell orders 0ust the components necessary to assemble the computer systems that have been ordered, and delivery is made in a relatively short period of time. DE#C 2-29 >2= %#ABTC? 1.
Tire costs' Product cost, variable, direct material
2.
Cales commissions' Period cost, variable
$.
Wood glue' Product cost, variable, either direct material or manufacturing overhead >i.e., indirect material? depending on how significant the cost is
&.
Wages of security guards' Product cost, variable, manufacturing overhead
3.
Calary of financial vice-president' Period cost, fixed
6.
/dvertising costs' Period cost, fixed
7.
Ctraight-line depreciation' Product cost, fixed, manufacturing overhead
9.
Wages of assembly-line personnel' Product cost, variable, direct labor
<.
4elivery costs on customer shipments' Period cost, variable
1=.
Aewsprint consumed' Product cost, variable, direct material
11.
Plant insurance' Product cost, fixed, manufacturing overhead
12.
"lass costs' Product cost, variable, direct material
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DE#C 2-2< >23 %#ABTC? 1.
A&E'AN+RIA A&MINM COM,ANSC.E+&E O/ COST O/ 0OO+S MAN/ACTRE+ /OR T.E -EAR EN+E+ +ECEMBER $!1 #2'!
4irect material' Eaw-material inventory, (anuary 1......................................... /dd' Purchases of raw material............................................. Eaw material available for use................................................ 4educt' Eaw-material inventory, 4ecember $1..................... Eaw material used................................................................... 4irect labor.................................................................................... %anufacturing overhead' #ndirect material....................................................................... #ndirect labor............................................................................ 4epreciation on plant and euipment.................................... Btilities...................................................................................... 8ther......................................................................................... Total manufacturing overhead................................................ Total manufacturing costs........................................................... /dd' Wor-in-process inventory, (anuary 1............................... Cubtotal.......................................................................................... 4educt' Wor-in-process inventory, 4ecember $1..................... ost of goods manufactured........................................................ 2.
G 3=,=== 23=,=== G$==,=== 7=,=== G2$=,=== &==,=== G 1=,=== 23,=== 1==,=== 23,=== $=,=== 1<=,=== G92=,=== 12=,=== G<&=,=== 113,=== G923,===
A&E'AN+RIA A&MINM COM,ANSC.E+&E O/ COST O/ 0OO+S SO&+ /OR T.E -EAR EN+E+ +ECEMBER $!1 #2'!
!inished-goods inventory, (anuary 1............................................................ /dd' ost of goods manufactured................................................................ ost of goods available for sale.................................................................... 4educt' !inished-goods inventory, 4ecember $1........................................ ost of goods sold..........................................................................................
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G1==,=== 923,=== G<23,=== 163,=== G76=,===
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DE#C 2-2< >8AT#AB4? $.
A&E'AN+RIA A&MINM COM,ANINCOME STATEMENT /OR T.E -EAR EN+E+ +ECEMBER $!1 #2'!
Cales revenue.................................................................................................. )ess' ost of goods sold............................................................................... "ross margin................................................................................................... Celling and administrative expenses............................................................. #ncome before taxes........................................................................................ #ncome tax expense........................................................................................ Aet income.......................................................................................................
G1,1=3,=== 76=,=== G $&3,=== 11=,=== G 2$3,=== <&,=== G 1&1,===
&. #n the electronic version of the solutions manual, press the TE) ey and clic on the following lin' B#)4 / CPE/4CT =2-2<.D)C DE#C 2-$= >13 %#ABTC? Aumber of %uffler Eeplacements 3== 6== 7== Total costs' !ixed costs................................................................... 5ariable costs.............................................................. Total costs..............................................................
>a? G&2,=== >c? 23,=== >e? G67,===
G&2,=== $=,=== G72,===
>b? G&2,=== >d? $3,=== >f? G77,===
ost per muffler replacement' !ixed cost..................................................................... 5ariable cost................................................................ Total cost per muffler replacement......................
>g? G 9& >h? G 7= >0? 3= >? 3= >m? G1$& >n? G12=
>i? G 6= >l? 3= >o? G11=
xplanatory Aotes' >a?
Total fixed costs do not vary with activity.
>c?
5ariable cost per replacement J G$=,===K6== J G3= Total variable cost for 3== replacements J G3= 3== J G23,===
>g?
!ixed cost per replacement J G&2,===K3== J G9&
>0 ?
5ariable cost per replacement J G23,===K3== J G3=
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DE#C 2-$1 >13 %#ABTC? 1.
Phone bill, (anuary' G123 L >G.23 9,===?........................................ Phone bill, !ebruary' G123 L >G.23 3,===?.......................................
G2,123 G1,$73
2.
ost per call, (anuary' G2,123K9,===.................................................. ost per call, !ebruary' G1,$73K3,===................................................
G .266 >rounded? G .273
$.
!ixed component, (anuary................................................................. 5ariable component, (anuary' G.23 9,===...................................... Total.....................................................................................................
G 123 2,=== G2,123
&.
Cince each phone call costs G.23, the marginal cost of maing the 6,==1st call is G.23.
3.
The average cost of a phone call in (anuary >rounded? is G.266 >G2,123K9,===?.
DE#C 2-$2 >3 %#ABTC? %artin Chrood@s expenditure is a sunk cost. #t is irrelevant to any future decision %artin may mae about the land.
DE#C 2-$$ >3 %#ABTC? /nnual cost using uropean component' G9,<== 2=............................................ G179,=== /nnual cost using Part /2==' >G&,<== L G73=? 2=.................................................. 11$,=== /nnual differential cost............................................................................................... G63,===
DE#C 2-$& >3 %#ABTC? 1.
The G1&,=== is the opportunity cost associated with using the computer in the 4epartment of ducation for wor in the governor@s office.
2.
The G1&,=== leasing cost should be assigned to the governor@s office. #t was incurred as a result of activity in that office.
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DE#C 2-$3 >1= %#ABTC? 1.
Mour decision to see the game really cost you G23, the amount forgone when you refused to sell the ticet. / convenient way to thin about this is as follows' Mou could have sold the ticet for G23, thereby resulting in a profit on the deal of G13 >G23 sales proceeds minus G1= out-of-pocet purchase cost?. #nstead, you went to the game, which left you relieved of your G1= out-of-pocet cost. The difference between the G1= reduction in your wealth and the G13 profit you could have had is G23. Thus, G23 is the true cost of going to the game.
2.
The G23 is an opportunity cost. /t the time you made the decision to attend the game, the G1= you actually had paid for the ticet is a sunk cost. #t is not relevant to any future decision.
DE#C 2-$6 >13 %#ABTC? 1.
The marginal cost would include any food and beverages consumed by the passenger and perhaps an imperceptible increase in fuel costs.
2.
#n most cases, only the cost of the food and beverage consumed by the customer would be a marginal cost. #t is unliely that the restaurant would need to employ additional service personnel, dishwashers, and so on.
$.
The marginal cost of a flight would include the aircraft fuel, wages of the flight crew and airport maintenance personnel, and the food and beverages consumed by the passengers and crew.
&.
The marginal cost would include the additional wages or commissions earned by the branch ban employees and the additional electricity used for light, heat, and computer euipment.
3.
The marginal cost of the sis would include the direct material. #t is unliely that labor and other costs would change with the addition of only one more product unit.
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SO&TIONS TO ,ROB&EMS PE8)% 2-$7 >2= %#ABTC? 1.
1. 2. $. &. 3. 6. 7. 9. <. 1=. 11.
#ncome statement alance sheet #ncome statement #ncome statement ost-of-goods-manufactured schedule #ncome statement ost-of-goods-manufactured schedule ost of-goods-manufactured schedule alance sheet, cost-of-goods-manufactured schedule #ncome statement #ncome statement
2.
The asset that differs among these businesses is inventory. Cervice businesses typically carry no >or very little? inventory. Eetailers and wholesalers normally stoc considerable inventory. %anufacturers also carry significant inventories, typically subdivided into three categories' raw material, wor in process, and finished goods.
$.
The income statements of service business normally have separate sections for operating revenues, operating expenses, and other income >expenses?. #n contrast, those of retailers, wholesalers, and manufacturers disclose sales revenue, followed immediately by cost of goods sold and gross margin. 8perating expenses are listed next followed by other income >expenses?.
&.
The basic difference falls in the area of inventory. Traditional manufacturers produce finished goods, which are then placed in warehouses awaiting sale. #n contrast, with a direct-sales, mass-customi+ation firm, the receipt of a sales order triggers the manufacturing process as well as the purchasing system, the latter to acuire needed raw materials. !inished-goods and raw-material inventories >along with wor in process? of mass-customi+ers are, therefore, much lower than the inventories carried by traditional firms.
PE8)% 2-$9 >$= %#ABTC? 1.
%anufacturing overhead' #ndirect laborNNNNNNNNNNNN. G1=<,=== uilding depreciation >G9=,=== x 73O?.. 6=,=== 8ther factory costsNNNNNNNNN.. $&&,=== TotalNNNNNNNNNNNNNN... G31$,===
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PE8)% 2-$9 >8AT#AB4? 2.
ost of goods manufactured' 4irect material' Eaw-material inventory, (an. 1NNNNNN G 13,9== /dd' Purchases of raw materialNNNNN.. 173,=== Eaw material available for useNNNNNN. G1<=,9== 4educt' Eaw-material inventory, 4ec. $1N. 19,2== Eaw material usedNNNNNNNNNNN.. 4irect laborNNNNNNNNNNNNNNNN.. %anufacturing overheadNNNNNNNNNN.. Total manufacturing costsNNNNNNNNN.. /dd' Wor-in-process inventory, (an. 1NNN. CubtotalNNNNNNNNNNNNNNNN.. 4educt' Wor-in-process inventory, 4ec. $1N. ost of goods manufacturedNNNNNNNN..
$.
ost of goods sold' !inished-goods inventory, (an. 1NNNNN.. G 111,1== /dd' ost of goods manufacturedNNNNN <1$,2== ost of goods available for saleNNNNNN. G1,=2&,$== 4educt' !inished-goods inventory, 4ec. $1N <7,<== ost of goods soldNNNNNNNNNNNN. G <26,&==
&.
Aet income' Cales revenueNNNNNNNNNNNNNN.. )ess' ost of goods soldNNNNNNNNN. "ross marginNNNNNNNNNNNNNN... Celling and administrative expenses' CalariesNNNNNNNNNNNNNNN... G1$$,=== uilding depreciation >G9=,=== x 23O?N... 2=,=== 8therNNNNNNNNNNNNNNNNN 1<3,=== #ncome before taxesNNNNNNNNNNN.. #ncome tax expense >G22=,6== x $=O?NNN.. Aet incomeNNNNNNNNNNNNNNN...
G172,6== 23&,=== 31$,=== G<$<,6== $3,7== G<73,$== 62,1== G<1$,2==
G1,&<3,=== <26,&== G 369,6==
$&9,=== G 22=,6== 66,19= G 13&,&2=
3.
The company sold 11,3== units during the year >G1,&<3,=== G1$=?. Cince 16= of the units came from finished-goods inventory >1,$3= F 1,1<=?, the company would have manufactured 11,$&= units >11,3== F 16=?.
6.
#n the electronic version of the solutions manual, press the TE) ey and clic on the following lin' uild a Cpreadsheet =2-$9.xls
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PE8)% 2-$< >23 %#ABTC? Cince gross margin euals $=O of sales, cost of goods sold euals 7=O of sales, or G2$1,=== >G$$=,=== x 7=O?. Thus, the finished goods destroyed by the fire cost G&&,===, computed as follows' !inished-goods inventory, (an. 1 >given?NNNNN.. G $7,=== /dd' ost of goods manufacturedHNNNNNNNN 2$9,=== ost of goods available for sale >given?NNNNNN G273,=== 4educt' !inished-goods inventory, /pr. 12HNNNN &&,=== ost of goods sold >calculated above?NNNNNN.. G2$1,=== H!ill in these blans, given the other numbers in this table. 4irect material used' 4irect material averages 23O of prime costs >i.e., direct material L direct labor?. Thus' )et D J direct material used D J >D L G12=,===? x 23O =.73D J G$=,=== D J G&=,=== %anufacturing overhead' %anufacturing overhead euals 3=O of total production costs. Thus' )et M J manufacturing overhead M J >direct material used L direct labor L manufacturing overhead? x 3=O M J >G&=,=== L G12=,=== L M? x 3=O =.3=M J G9=,=== M J G16=,=== The wor in process destroyed by the fire cost G1=$,===, computed as follows' 4irect materialNNNNNNNNNNNNN.NNN 4irect labor >given?NNNNNNNNNNNNNN. %anufacturing overheadNNNNNNNNNNN... Total manufacturing costsNNNNNNNNNN... /dd' Wor-in-process inventory, (an. 1 >given?N CubtotalNNNNNNNNNNNNNNNNN.. 4educt' Wor-in-process inventory, /pr. 12HNN. ost of goods manufactured >from above?NNN.
G &=,=== 12=,=== 16=,=== G$2=,=== 21,=== G$&1,=== 1=$,=== G2$9,===
HG1=$,=== J G$&1,=== F G2$9,===
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PE8)% 2-&= >23 %#ABTC? 1.
!ixed manufacturing overhead per unit' G6==,=== 2&,=== units produced J G23 /verage unit manufacturing cost' 4irect materialNNNNNNNNN.. G 2= 4irect laborNNNNNNNNNNN $7 5ariable manufacturing overhead.. &9 !ixed manufacturing overheadNN 23 /verage unit costNNNNNN.. G1$= ProductionNNNNNNNNNNN. 2&,=== units CalesNNNNNNNNNNNNNN 2=,=== units nding finished-goods inventoryN &,=== units
ost of 4ecember $1 finished-goods inventory' &,=== units x G1$= J G32=,=== 2.
$.
Aet income' Cales revenue >2=,=== units x G193?NNNN ost of goods sold >2=,=== units x G1$=?N.. "ross marginNNNNNNNNNNNNNN. Celling and administrative expensesNNN.. #ncome before taxesNNNNNNNNNNN #ncome tax expense >G2&=,=== x $=O?NNN Aet incomeNNNNNNNNNNNNNNN.
G$,7==,=== 2,6==,=== G1,1==,=== 96=,=== G 2&=,=== 72,=== G 169,===
>a?
Ao change. 4irect labor is a variable cost, and the cost per unit will remain constant.
>b?
Ao change. 4espite the decrease in the number of units produced, this is a fixed cost, which remains the same in total.
>c?
Ao change. Celling and administrative costs move more closely with changes in sales than with units produced. /dditionally, this is a fixed cost.
>d?
#ncrease. The average unit cost of production will change because of the perunit fixed manufacturing overhead. / reduced production volume will be divided into the fixed dollar amount, which increases the cost per unit.
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PE8)% 2-&1 >&= %#ABTC? eginning inventory, raw material................................ nding inventory, raw material...................................... Purchases of raw material............................................. 4irect material used........................................................ 4irect labor...................................................................... %anufacturing overhead................................................ Total manufacturing costs............................................. eginning inventory, wor in process.......................... nding inventory, wor in process............................... ost of goods manufactured......................................... eginning inventory, finished goods............................ ost of goods available for sale.................................... nding inventory, finished goods................................. ost of goods sold......................................................... Cales................................................................................ "ross margin.................................................................. Celling and administrative expenses............................ #ncome before taxes....................................................... #ncome tax expense........................................................ Aet income......................................................................
ase / G6=,===H <=,=== 1==,=== 7=,=== 2==,===H 23=,=== 32=,=== $3,=== $=,===H 323,=== 3=,=== 373,===H $=,===H 3&3,=== 9==,===H 233,=== 1=3,===H 13=,=== &=,=== 11=,===H
ase G 1=,=== =H 93,=== <3,=== 1==,=== 13=,===H $&3,=== 2=,=== $3,=== $$=,===H &=,=== $7=,===H &=,===H $$=,=== 3==,===H 17=,=== 7=,=== 1==,===H &3,=== 33,===H
ase G 13,=== &3,=== 93,===H 33,===H 123,=== 16=,=== $&=,=== 13,===H 3,=== $3=,=== 2=,===H $7=,=== 23,=== $&3,===H &9=,=== 1$3,===H &3,===H <=,=== &=,===H 3=,===
H/mount missing in problem. PE8)% 2-&2 >23 %#ABTC? 1.
a.
Total prime costs' 4irect material................................................................................... 4irect labor' Wages............................................................................................ !ringe benefits.............................................................................. Total prime costs..............................................................................
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G 2,1==,=== &93,=== <3,=== G 2,69=,===
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PE8)% 2-&2 >8AT#AB4? b.
Total manufacturing overhead' 4epreciation on factory building..................................................... #ndirect labor' wages........................................................................ Production supervisor@s salary........................................................ Cervice department costs................................................................. #ndirect labor' fringe benefits........................................................... !ringe benefits for production supervisor...................................... Total overtime premiums paid......................................................... ost of idle time' production employees........................................ Total manufacturing overhead.........................................................
c.
G2,1==,=== 39=,=== 3$&,=== G$,21&,===
Total period costs' /dvertising expense......................................................................... /dministrative costs......................................................................... Eental of office space for sales personnel...................................... Cales commissions........................................................................... Product promotion costs.................................................................. Total period costs.............................................................................
2.
G 39=,=== 3$&,=== G1,11&,===
Total product costs' 4irect material................................................................................... 4irect labor........................................................................................ %anufacturing overhead................................................................... Total product costs...........................................................................
e.
G
113,=== 1&=,=== &3,=== 1==,=== $=,=== <,=== 33,=== &=,=== 3$&,===
Total conversion costs' 4irect labor >G&93,=== L G<3,===?..................................................... %anufacturing overhead................................................................... Total conversion costs.....................................................................
d.
G
G
<<,=== 13=,=== 13,=== 3,=== 1=,=== G 27<,===
The G13,=== in rental cost for sales office space rental is an opportunity cost. #t measures the opportunity cost of using the former sales office space for rawmaterial storage.
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PE8)% 2-&$ >$3 %#ABTC? 1.
SAN /ERNAN+O /AS.IONS COM,ANSC.E+&E O/ COST O/ 0OO+S MAN/ACTRE+ /OR T.E -EAR EN+E+ +ECEMBER $!1 #2'#
4irect material' Eaw-material inventory, (anuary 1............................................ /dd' Purchases of raw material................................................ Eaw material available for use................................................... 4educt' Eaw-material inventory, 4ecember $1........................ Eaw material used...................................................................... 4irect labor...................................................................................... %anufacturing overhead' #ndirect material.......................................................................... #ndirect labor............................................................................... Btilities' plant.............................................................................. 4epreciation' plant and euipment........................................... 8ther............................................................................................ Total manufacturing overhead................................................... Total manufacturing costs............................................................. /dd' Wor-in-process inventory, (anuary 1................................. Cubtotal........................................................................................... 4educt' Wor-in-process inventory, 4ecember $1...................... ost of goods manufactured......................................................... 2.
G &=,=== 2==,=== G2&=,=== 23,=== G213,=== 2==,=== G 1=,=== 13,=== &=,=== 9=,=== 9=,=== 223,=== G6&=,=== &=,=== G69=,=== 2=,=== G66=,===
SAN /ERNAN+O /AS.IONS COM,ANSC.E+&E O/ COST O/ 0OO+S SO&+ /OR T.E -EAR EN+E+ +ECEMBER $!1 #2'#
!inished goods inventory, (anuary 1............................................................ /dd' ost of goods manufactured................................................................ ost of goods available for sale.................................................................... 4educt' !inished-goods inventory, 4ecember $1........................................ ost of goods sold..........................................................................................
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G 2=,=== 66=,=== G69=,=== 3=,=== G6$=,===
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PE8)% 2-&$ >8AT#AB4? $.
SAN /ERNAN+O /AS.IONS COM,ANINCOME STATEMENT /OR T.E -EAR EN+E+ +ECEMBER $!1 #2'#
Cales revenue.................................................................................................. )ess' ost of goods sold............................................................................... "ross margin................................................................................................... Celling and administrative expenses............................................................. #ncome before taxes........................................................................................ #ncome tax expense........................................................................................ Aet income....................................................................................................... &.
G<9=,=== 6$=,=== G$3=,=== 13=,=== G2==,=== <=,=== G11=,===
#n the electronic version of the solutions manual, press the TE) ey and clic on the following lin' uild a Cpreadsheet =2-&$.xls
PE8)% 2-&& >13 %#ABTC? 1.
Eegular hours' &= G12.................................................................................... 8vertime hours' 9 G16.................................................................................... Total cost of wages............................................................................................
G&9= 129 G6=9
2.
a. b. c. d.
G&36 12 $2 1=9 G6=9
4irect labor' $9 G12................................................................................... %anufacturing overhead >idle time?' 1 G12.............................................. %anufacturing overhead >overtime premium?' 9 >G16 F G12?................. %anufacturing overhead >indirect labor?' < G12...................................... Total cost of wages.......................................................................................
PE8)% 2-&3 >2= %#ABTC? 1.
a, d, g, i
2.
a, d, g, 0
$.
b, d, g,
&.
b, f
3.
b, d, g,
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PE8)% 2-&3 >8AT#AB4? 6.
a, d, g,
7.
a, d, g, 0
9.
b, c, f
<.
b, d, g,
1=.
b, c and dH, e and f and gH, H HThe building is used for several purposes.
11.
b, c, f
12.
b, c, h
1$.
b, c, f
1&.
b, c, e
13.
b, c and d , e and f and g , The building that the furnace heats is used for several purposes.
PE8)% 2-&6 >2= %#ABTC? 1.
$ hours >G12 L G$? J G&3 Aotice that the overtime premium on the flight is not a direct cost of the flight.
2.
$ hours G12 .3 J G19 This is the overtime premium, which is part of "aines@ overall compensation.
$.
The overtime premium should be included in overhead and allocated across all of the company@s flights.
&.
The G92 is an opportunity cost of using "aines on the flight departing from Topea on /ugust 11. The cost should be assigned to the /ugust 11 flight departing from Topea.
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PE8)% 2-&7 >13 %#ABTC? 1.
"raph of raw-material cost'
Eaw material cost G2,2==,===
G1,63=,===
•
G1,1==,===
•
G33=,===
•
1=,===
2.
Production )evel in Pounds 1 1= 1,===
McGraw-Hill/Irwin Inc. Managerial Accounting, 9/e Global Edition
2=,===
Bnit ost G33 per pound G33 per pound G33 per pound
$=,===
Eaw material >pounds?
Total ost G33 G33= G33,===
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PE8)% 2-&9 >23 %#ABTC? 1. "raph of fixed production cost'
!ixed production cost
G1==,===
1=,===
2.
Production )evel in Mards 1 1= 1=,=== &=,===
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2=,===
$=,===
Bnit !ixed ost G1==,=== per yard G1=,=== per yard G1= per yard G2.3= per yard
Production levels >yards?
&=,===
Total !ixed ost G1==,=== G1==,=== G1==,=== G1==,===
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PE8)% 2-&9 >8AT#AB4? $.
"raph of unit fixed production cost'
Bnit fixed production cost
G1=.==
G3.== G$.$$ G2.3= 1=,===
2=,===
$=,===
&=,===
Production levels >yards?
PE8)% 2-&< >1= %#ABTC? ost #tem Aumber 1. 2. $. &. 3.
4irect or #ndirect indirect indirect direct direct direct
Partially ontrollable by 4epartment Cupervisor no no yes no yes
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PE8)% 2-3= >1= %#ABTC? ost #tem Aumber 1. 2. $. &. 3. 6. 7. 9. <.
Product ost or Period ost periodH product product product product periodH product periodH product
HCervice industry firms typically treat all costs as operating expenses which are period expenses. Cuch firms do not inventory costs.
PE8)% 2-31 >13 %#ABTC?
4irect material............................................... 4irect labor.................................................... %anufacturing overhead Btilities >primarily electricity?................. 4epreciation on plant and euipment... #nsurance................................................. Cupervisory salaries............................... Property taxes......................................... Celling costs /dvertising.............................................. Cales commissions................................. /dministrative costs Calaries of top management and staff. . 8ffice supplies........................................ 4epreciation on building and euipment.....................................
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5ariable or !ixed 5 5
2=x2 !orecast G$,<==,=== 2,96=,===
xplanation G$,===,=== 1.$= G2,2==,=== 1.$=
5 ! ! ! !
192,=== 23=,=== 16=,=== $==,=== 21=,===
G1&=,=== 1.$= same same same same
! 5
1<3,=== 1$=,===
same G1==,=== 1.$=
! !
$72,=== &=,===
same same
!
9=,===
same
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PE8)% 2-32 >13 %#ABTC? 1.
f, average cost
2.
e, marginal cost
$.
c, sun cost
&.
a, opportunity cost
3.
d, differential cost
6.
b, out-of-pocet cost
7.
e, marginal cost
PE8)% 2-3$ >2= %#ABTC? 1.
b, d, e,
2.
a, c, e,
$.
h
&.
a, d, eH, 0 HThe hotel general manager may have some control over the total space allocated to the itchen.
3.
d, e, i
6.
i
7.
d, e, i
9.
a, d, e,
<.
a, d, e,
1=.
0
11.
g >The G$== cost savings is a differential cost.?
12.
a, c, e
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PE8)% 2-3$ >8AT#AB4? 1$.
d, e,
1&.
e,
13.
b, dH, e, H
Bnless the dishwasher has been used improperly.
PE8)% 2-3& >&= %#ABTC? 1.
aterpillar is a manufacturing firm. #ts income statement highlights the firm@s costof-goods-sold expense, which is the cost of all of the processed food products sold during the year. ost of goods sold is subtracted from net sales to arrive at the gross profit. The company@s other operating expenses then are subtracted from the gross profit. Wal-%art Ctores, #nc. is a retail firm. #ts income statement also shows the firm@s cost of sales, which is another name for cost of goods sold. The cost of sales includes all of the costs of acuiring merchandise for resale. The company@s other operating expenses are identified separately from cost of sales. Couthwest /irlines ompany is an airline, which is a service industry firm. The company does not sell an inventoriable product, but rather provides air transportation service. Therefore, the company@s income statement does not list any cost-of-goods-sold expense. /ll of its expenses are operating expenses.
2.
ost-accounting data are used to measure all of the costs on all three companies@ income statements. !or example, the cost-accounting system at aterpillar measures the cost of direct labor, direct material, and manufacturing overhead incurred in the manufacturing process. Wal-%art Ctores@ cost-accounting system measures the cost of acuiring merchandise for resale. Couthwest /irlines@ costaccounting system measures the cost of aviation fuel consumed.
$.
The ticet agents@ salaries would be included in salaries, wages, and benefits. 4epreciation of the airline@s computer euipment would be included in depreciation.
&.
Wal-%art Ctores@ cost of newspaper advertising would be included in selling expenses. The cost of merchandise sold would be included in cost of sales >same as cost of goods sold?.
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PE8)% 2-3& >8AT#AB4? 3.
The salary for a aterpillar brand manager would be included in selling expenses. Production employees@ salaries are product costs, so they are part of the cost of goods sold. Cimilarly, raw-material costs are product costs, and they are included in cost of goods sold.
PE8)% 2-33 >1= %#ABTC? 1.
G&3=
>G<3=
2.
G$9=
>G1,7&=
G1,$6=?
$.
G$6=
>G2,1==
G1,7&=?
&.
G&73
>G<3=K2?
3.
G&$3
>G1,7&=K&?
6.
G&2=
>G2,1==K3?
G3==?
PE8)% 2-36 >23 %#ABTC? 1.
b, c, g, h, 0, m
2.
a, c, i, 0, l
$.
b, d, i, 0, m
&.
a, d, i, 0, l
3.
a, c, i, 0, l
6.
e
7.
a, c, i, 0, l
9.
f
<.
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1=.
a, c, i, 0, m
11.
b, c, i, 0, l
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a, c, i, 0, l
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PE8)% 2-37 >23 %#ABTC? 1.
8utput >.73 liter bottles? 1=,=== 13,=== 2=,===
alculation G137,===K1=,=== G173,3==K13,=== G1<&,===K2=,===
Bnit ost G13.7= G11.7= G<.7=
The unit cost is minimi+ed at a sales volume of 2=,=== bottles. 2.
8utput >.73 liter bottles? 1=,=== 13,=== 2=,===
Cales Eevenue G19=,=== 223,=== 2&=,===
Total osts Profit G137,=== G2$,=== 173,3== &<,3== 1<&,=== &6,===
Profit is maximi+ed at a production level of 13,=== bottles of wine. $.
The 13,===-bottle level is best for the company, since it maximi+es profit.
&.
The unit cost decreases as output increases, because the fixed cost per unit declines as production and sales increase. / lower price is reuired to motivate consumers to purchase a larger amount of wine.
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PE8)% 2-39 >13 %#ABTC? 1.
#f the company buys $=,=== units of Part %E2&, at a price of G X per unit, its total cost will be' >$=,=== G X ? L G6=,=== #f the company manufactures the parts, its total cost will be' >$=,=== G11? L G13=,=== y euating these two expressions for total cost, we can solve for the price, X, at which the total cost is the same under the two alternatives' $=,=== X + 6=,===
=
( $=,=== ) (11)
$=,=== X
=
&2=,===
X
=
1&
+
13=,===
Thus the firm will reali+e a net benefit by purchasing Part %E2& if the outside supplier charges a price less than G1&. 2.
#f the firm buys Y units of Part %E2& at a price of G12.973 per unit, the total cost will be'
( G12.973
×
Y
)
+
G6=,===
#f the company manufactures Y units of Part %E2&, the total cost will be' >G11
×
Y)
+
G13=,===
#f we euate these expressions, we can solve for the number of parts, Y, at which the firm will be indifferent between maing and buying Part %E2&. 12.973 Y
6=,===
=
11Y
1.973Y
=
<=,===
Y =
&9,===
+
+
13=,===
Thus, the company will be indifferent between the two alternatives if it reuires &9,=== units of Part %E2& each month.
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SO&TIONS TO CASES /C 2-3< >$= %#ABTC? 1.
MEMORAN+M
4ate'
Today
To'
(ames assanitti
!rom'
#. %. Ctudent
Cub0ect'
osts related to Printer ase 4epartment
The G2<,3== building rental cost allocated to the Printer ase 4epartment is part of larger rental costs for the entire building. ven if the Printer ase 4epartment is closed down, ompTech still will occupy the entire building. Therefore, the entire rental cost, including the G2<,3== portion allocated to the Printer ase 4epartment, will be incurred whether or not the department closes. The real cost of the space occupied by the Printer ase 4epartment is the G$<,=== the company is paying to rent warehouse space. This cost would be avoided if the Printer ase 4epartment were closed, since the storage operation could be moved into the companyIs main building. The G$<,=== rental cost is the opportunity cost of using space in the main building for the Printer ase 4epartment. The supervisor of the Printer ase 4epartment will be retained by the company regardless of the decision about the Printer ase 4epartment. owever, if the Printer ase 4epartment is ept in operation the company will have to hire a new supervisor for the /ssembly 4epartment. The salary of that new supervisor is a relevant cost of continuing to operate the Printer ase 4epartment. /nother way of looing at the situation is to reali+e that with the Printer ase 4epartment in operation, the company will need two supervisors' the current Printer ase 4epartment supervisor and a new supervisor for the /ssembly 4epartment. /lternatively, if the Printer ase 4epartment is closed, only the current Printer ase 4epartment supervisor will be needed. e or she will move to the /ssembly 4epartment. The difference, then, between the two alternatives is the cost of compensation for the new /ssembly 4epartment supervisor if the Printer ase 4epartment is not closed.
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/C 2-3< >8AT#AB4? 2.
The controller has an ethical obligation to state accurately the pro0ected cost savings from closing the Printer ase 4epartment. The production manager and other decision maers have a right to now the financial implications of closing the department. Ceveral of the ethical standards for management accountants >listed in hapter 1? apply, including the following' Competence: •
•
•
•
%aintain an appropriate level of professional expertise by continually developing nowledge and sills. Perform professional duties in accordance with relevant laws, regulations, and technical standards. Provide decision support information and recommendations that are accurate, clear, concise, and timely. Eecogni+e and communicate professional limitations or other constraints that would preclude responsible 0udgment or successful performance of an activity.
Credibility: •
•
•
ommunicate information fairly and ob0ectively. 4isclose all relevant information that could reasonably be expected to influence an intended userIs understanding of the reports, analyses, or recommendations. 4isclose delays or deficiencies in information, timeliness, processing, or internal controls in conformance with organi+ation policy andKor applicable law.
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/C 2-6= >3= %#ABTC? 1.
a.
!astQ ompany would be indifferent to acuiring either the small-volume copier, 1=2&C, or the medium-volume copier, 1=2&%, at the point where the costs for 1=2&C and 1=2&% are eual. This point may be calculated using the following formula, where X euals the number of copies' >5ariable costS X S? L fixed costS
J >variable costM X M? L fixed costM
1=2&C
1=2&%
G.1& X L G9,=== J G.=< X L G11,=== G.=3 X J G$,=== X J 6=,=== copies
The conclusion is that !astQ ompany would be indifferent to acuiring either the 1=2&C or 1=2&% machine at an annual volume of 6=,=== copies. b.
/ decision rule for selecting the most profitable copier, when the volume can be estimated, would establish the points where !astQ ompany is indifferent to each machine. The volume where the costs are eual between alternatives can be calculated using the following formula, where X euals the number of copies' >5ariable costS X S? L fixed costS J >variable costM X M? L fixed costM !or the 1=2&C machine compared to the 1=2&% machine' 1=2&C
1=2&%
G.1& X L G9,=== J G.=< X L G11,=== G.=3 X J G$,=== X J 6=,=== copies
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/C 2-6= >8AT#AB4? !or the 1=2&% machine compared to the 1=2&" machine' 1=2&%
1=2&"
G.=< X L G11,=== J G.=3 X L G2=,=== G.=& X J G<,=== X J 223,=== copies
The decision rule is to select the alternative as shown in the following chart.
/nticipated /nnual 5olume = 6=,=== 6=,=== 223,=== 223,=== and higher 2.
8ptimal %odel hoice 1=2&C 1=2&% 1=2&"
a. The previous purchase price of the endor on hand, G3.== per gallon, and the average cost of the endor inventory, G&.73 per gallon, are sun costs. These costs were incurred in the past and will have no impact on future costs. They cannot be changed by any future action and are irrelevant to any future decision. /lthough the current price of endor is G3.3= per gallon, no endor will be purchased at this price. Thus, it too is irrelevant to the current special order. #f the order is accepted, the reuired 9== gallons of endor will be replaced at a cost of G3.73 per gallon. Therefore, the real cost of endor for the special order is G&,6== >9== G3.73?. b. The G2=,=== paid by /lderon for its stoc of tatooine is a sun cost. #t was incurred in the past and is irrelevant to any future decision. The current maret price of G11 per ilogram is irrelevant, since no more tatooine will be purchased. #f the special order is accepted, /lderon will use 1,3== ilograms of its tatooine stoc, thereby losing the opportunity to sell its entire 2,===-ilogram stoc for G1&,===. Thus, the G1&,=== is an opportunity cost of using the tatooine in production instead of selling it to Colo #ndustries. %oreover, if /lderon uses 1,3== ilograms of tatooine in production, it will have to pay G1,=== for its remaining 3== ilograms to be disposed of at a ha+ardous waste facility. This G1,=== disposal cost is an out-of-pocet cost. The real cost of using the tatooine in the special order is G13,=== >G1&,=== opportunity cost L G1,=== out-of-pocet cost?.
McGraw-Hill/Irwin Inc. Managerial Accounting, 9/e Global Edition
� 2011
The McGraw-Hill Companies,
2-$$
