Solution Manual for Cost Accounting 16th Edition Horngren, Datar, Rajan

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// Solution Manual for Cost Accounting 16th Edition Horngren, Datar, Rajan Complete downloadale file at!

https!""#est$an%sCafe&eu"Solution'Manual'for'Cost'Accounting'16th'Edition' Horngren,'Datar,'Rajan ('1

Define cost object and give three examples.

A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, an activity, activity, and a department. d epartment. ('(

Define direct costs and indirect costs.

Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective way. !ndirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective way. way. "ost assignment assignment is a general general term that encompasses encompasses the assignment assignment of both direct costs and indirect costs to a cost object. Direct costs are traced  to  to a cost object, while indirect costs are  to a cost object. allocated  to (')

#hy do managers consider direct costs to be more accurate than indirect costs$

%anagers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. #hen costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. %anagers prefer to use more accurate costs in their decisions. ('*

 &ame three factors that will affect affect the classification of a cost as direct or indirect. 'actors affecting the classification of a cost as direct or indirect include the materiality of the cost in uestion  available information-gathering technology  design of operations 

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Define variable cost and fixed cost. )ive an example of each.

A variable cost  changes  changes in total in proportion proportion to changes in the related level of total activity or  volume. An example is sales commission paid as a percentage of each sales revenue dollar. A fixed cost  remains   remains unchanged in total for a given time period, despite wide changes in the related level of total activity activity or volume. volume. An example is the leasing cost of a machine that is unchanged for a given time period (such as a year regardless of the number of units of product  produced on the machine. ('6

#hat is a cost driver$ )ive one example.

A cost driver  is  is a variable, such as the level of activity or volume that causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs.

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Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// 'or example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line. ('

#hat is the relevant range$ #hat role does the relevant-range concept play in explaining how costs behave$

he relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in uestion. "osts are described as variable or fixed with respect to a particular relevant range. ('-

Explain why unit costs must often be interpreted with caution.

A unit cost is computed by dividing some amount of total costs (the numerator by the related number of units (the denominator. !n many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. !t is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or  volume levels. Describe how manufacturing-, merchandising-, and service-sector companies differ from ('. one another ano ther.. purchasee materi materials als and compone components nts and conver convertt them them into into  Manufacturing-sector companies purchas various finished goods, for example automotive and textile companies. purchase se and then then sell sell tangib tangible le produc products ts without without  Merchandising-sector companies purcha changing their basic form, for example retailing or distribution. Service-sector companies provide services or intangible products to their customers, for  example, legal advice or audits. ('1/

#hat are three different types of inventory that manufacturing companies hold$ %anufacturing companies have one or more of the following three types of inventory Direct ct mate materi rial alss in stoc stoc  and and awai awaiti ting ng use use in the the 1&  Direct materials inventory. Dire manufacturing process. partially y wored on but not yet completed. completed. Also (& Work-in-process inventory. )oods partiall called work in progress& )&  Finished goods inventory. )oods completed but not yet sold.

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Distinguish between inventoriable costs and period costs.

 nventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold. hese costs are includ included ed in wor-i wor-in-p n-proc rocess ess and finis finished hed goods goods invent inventory ory (they (they are /inven /inventor toried ied0 0 to accumulate the costs of creating these assets.  !eriod costs are all costs in the income statement other than cost of goods sold. hese costs are treated as expenses of the accounting period in which they are incurred because they are

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Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// expected expected not to benefit benefit future periods periods (because there is not suffici sufficient ent evidence to conclude conclude that such benefit exists. Expensing these costs immediately best matches expenses to revenues. Define ne the the foll follow owin ing g dire direct ct mate materi rial al cost costs, s, dire direct ct manuf manufac actu turi ring ng-l -lab abor or cost costs, s, ('1( Defi manufacturing overhead costs, prime costs, and conversion conv ersion costs.  Direct material costs are the acuisition costs of all materials that eventually become part of the cost object (wor in process and then finished goods and can be traced to the cost object in an economically feasible way. way.  Direct manufacturing labor costs include the compensation of all manufacturing labor  that can be traced to the cost object (wor in process and then finished goods in an economically feasible way.  Manufacturing overhead costs are all manufacturing costs that are related to the cost object (wor in process and then finished goods but cannot be traced to that cost object in an economically feasible way. way. are all all dire direct ct manu manufa fact ctur urin ing g cost costss (dir (direc ectt mate materi rial al cost costss and and dire direct ct  !rime costs are manufacturing labor costs. "onversion costs are all manufacturing costs other than direct material costs. ('1)

Describe the overtime-premium and idle-time categories of indirect labor.

#vertime premium is the wage rate paid to worers (for both direct labor and indirect labor in excess of their straight-time wage rates. subcla lass ssif ific icat atio ion n of indi indire rect ct labo laborr that that repr repres esent entss wage wagess paid paid for  for   dle time is a subc unproductive time caused by lac of orders, machine breadowns, material shortages, poor  scheduling, and the lie. ('1*

Define product cost. Describe three different purposes for computing product costs.

A product cost is the sum of the costs assigned to a product for a specific purpose. 1urposes for  computing a product cost include   pricing and product mix decisions, contracting with government agencies, and   preparing financial statements for external reporting under )AA1. )AA1.  ('1+

#hat are three common features of cost accounting acco unting and cost management$ hree common features of cost accounting and cost management are calculating the costs of products, services, and other cost objects   obtaining information for planning and control and performance evaluation analy2ing the relevant information for maing decisions 

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Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// ('16 Applewhite "orporation, a manufacturing company, is analy2ing its cost structure in a  project to achieve some cost savings. #hich of the following statements statements is4are correct$

!. he cost of the direct materials materials in Applewhite5s Applewhite5s products is considered a variable cost. !!. he cost of the depreciation of Applewhite5 Applewhite5ss plant machinery is considered a variable cost  because Applewhite Applewhite uses an accelerated depreciation method for both boo and income tax  purposes. !!!. he cost of electricity for Applewhite5s Applewhite5s manufacturing facility facility is considered considered a fixed cost, even if the cost of the electricity has both variable and fixed components. 1& !, !!, and !!! are correct. (& ! only is correct. )& !! and !!! only are correct. *&  &one of the listed choices is correct. S02#304

"hoice 6*6 is correct.his uestion ass which of a series of statements about costs is4are correct. 6All of the above6 is an available option.7tatement ! says that the cost of the direct materials in Applewhite8s products is considered a variable cost. he more Applewhite manufactures, the more the total cost of the direct materials will be. 7tatement ! is correct.7tatement !! says that the cost of depreciation of Applewhite8s plant machinery is considered a variable cost because Applewhite uses an accelerated depreciation method for both boo and income tax purposes. 9ust  because a cost changes over time (which is what using an accelerated depreciation method will cause does not mean that the cost is variable. he fact that Applewhite may use the same method for boo and tax purposes is irrelevant. 7tatement !! is wrong.7tatement !!! says that the cost of electricity for Applewhite8s Applewhite8s manufacturing facility is considered a fixed cost, even ev en if the cost of the electricity has both variable and fixed components. he cost of the electricity would  be considered a 6mixed6 cost, not a fixed cost. 7tatement !!! is wrong. ('1 "omprehensive "are &ursing :ome is reuired by statute and regulation to maintain a minimum 3 to + ratio of direct service staff to residents to maintain the licensure associated with the the &ursi &ursing ng :ome :ome beds. beds. h hee sala salary ry expen expense se asso associ ciat ated ed with with dire direct ct serv servic icee staf stafff for for the the "omprehensive "are &ursing :ome would most liely be classified as 1& (& )& *&

;ariable cost. 'ixed cost.
S02#304

"hoice 6*6 is correct."osts that maintain production capacity and do not vary regardless of utili2ation are classified as fixed costs. !n this instance, the salary costs of direct service staff are reuired to maintain capacity based on the number of residents (doctors and will be incurred whether the facility is full or empty. he costs are fixed."hoice 6+6 is incorrect. Direct labor costs mandated by statute do not vary with production, they vary with the compliance reuirement. "onseuently direct labor costs, in this instance, are fixed, not variable."hoice 636

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Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// is incorrect. Direct costs related to service provider salaries are considered to be direct costs of the service, not overhead costs."hoice 6=6 is incorrect. "omprehensive "are &ursing :ome is a service company and does not have any inventory and therefore no inventoriable costs. ('1- 'risco "orporation is analy2ing its fixed and variable costs within its current relevant range. As its cost driver activity changes within the relevant range, which of the following statements is4are correct$

!. !!. !!. !!!. !!!. 1& (& )& *&

As the the cos costt dri drive verr lev level el incr increa ease ses, s, tota totall fix fixed ed cost cost rem remai ains ns uncha unchang nged ed.. As the the cos costt dri drive verr lev level el incr increa ease ses, s, unit unit fix fixed ed cost cost incr increa ease ses. s. As the the cost cost dri drive verr level level decr decrea ease ses, s, unit unit var varia iabl blee cost cost decr decrea ease ses. s.

!, !!, and !!! are correct. ! and !! only are correct. ! only is correct. !! and !!! only are correct.

S02#304

"hoice 636 is correct.he uestion ass what happens to variable and fixed costs when cost driver activity changes (i.e., when the cost driver level increases or decreases. 7tatement ! says that, as the cost driver level increases, total fixed cost remains unchanged. 7tatement ! is correct. otal fixed cost will remain unchanged regardless of changes in the cost driver because total fixed cost is unaffected by changes in the cost driver.7tatement driver.7tatement !! says that, as the cost driver level increases, unit fixed cost increases. his statement is asing about unit fixed cost lie the  previous statement ased about total fixed cost. #hile #hile total fixed cost will remain unchanged regardless of changes in the cost driver, unit fixed cost will not. !f the cost driver level increases, total fixed cost will remain the same, but the total number n umber of units will increase, and unit fixed cost will decrease, not increase. 7tatement !! is incorrect. 7tatement !!! says that as the cost driver level decreases, unit variable cost decreases. his statement is asing about un it variable cost lie the previous statement ased about unit fixed cost. >nit variable cost will remain unchanged regardless of what happens to the cost driver. 7tatement !!! is incorrect.

d ata for the A@" "ompany is as follows ('1. ?ear + financial data 7ales

B,CCC,CCC

Direct materials

BC,CCC

Direct manufacturing labor

+,CC,CCC

;ariable ma manufacturing ov overhead

=CC,CCC

'ixed manufacturing overhead

BC,CCC

;ariable 7)FA

+BC,CCC

'ixed 7)FA

*BC,CCC

*-B

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// >nder the absorption method, ?ear + "ost of )oods sold will be a& *,BBC,CCC c& 3,+CC,CCC & *,GBC,CCC d& 3,CC,CCC S02#304

"hoice 6d6 is correct. >nder the absorption method, "ost of )oods 7old is calculated by adding direct materials, direct manufacturing labor, variable manufacturing overhead, and fixed manufacturing overhead. herefore, "ost of )oods 7old H BC,CCC I +,CC,CCC I =CC,CCC I BC,CCC H 3,CC,CCC."hoice 6a6 is incorrect. his calculation only taes into account direct materials and direct manufacturing labor. labor. "hoice 6b6 is incorrect. his calculation incorrectly excludes fixed manufacturing overhead. "hoice 6c6 is incorrect. his calculation includes variable 7)FA, bu t excludes fixed manufacturing overhead. followin ing g infor informat matio ion n was extra extracte cted d from from the accoun accounti ting ng record recordss of Joosev Joosevelt elt ('(/ he follow %anufacturing %anufacturing "ompany Direct materials purchased

 C ,C C C

Direct materials used

 K ,C CC

Direct manufacturing labor costs

+ C ,CC C

!ndirect manufacturing labor costs

+ * ,CC C

7ales salaries

+ = ,C C C


* * ,CC C

7elling and administrative expenses

*C ,CCC

#hat was the cost of goods manufactured$ 1& +*=,CCC )& +B=,CCC (& +*C,CCC *& +C,CCC S02#304

Explanation "hoice 6*6 is correct.!n this uestion, the problem is to calculate the cost of goods manufactured. "ertain cost data are provided. he problem assumes beginning and ending wor in  proce  process ss is 2ero. 2ero. he cost cost of goo goods ds manuf manufact acture ured d is is calcul calculate ated d as as indic indicat ated ed below below Direct materials materials used  K,CCC Direct manufacturing labor costs +C,CCC !ndirect manufacturing labor costs +*,CCC
%innesota
Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// (%<1 produces three different paper products at its ;aasa lumber plant 7upreme, Deluxe, and Jegular. Each product has its own dedicated production line at the plant. !t currently uses the foll follow owin ing g thre three-p e-par artt clas classi sifi ficat catio ion n for for its its manuf manufact actur urin ing g costs costs dire direct ct mate materi rial als, s, dire direct ct manufacturing labor, and manufacturing overhead costs. otal manufacturing overhead costs of  the plant in 9uly *C+ are +BC million (+B million of which are fixed. his total amount is allocated to each product line on the basis of the direct manufacturing labor costs of each line. 7ummary data (in millions for 9uly *C+ are as follows Supreme

Delu5e

Regular

Direct material costs

 G

 B

 KC

Direct manufacturing labor costs

 +K

 *K



%anufacturing overhead costs

 =

 

 *=

+* B

+ BC

+=C

>nits produced



Jeuired 1& "ompute the manufacturing cost per unit for each product produced in 9uly *C+. (& 7uppose that, in August *C+, production was +BC million units of 7upreme, +GC million units of Deluxe, and **C million units of Jegular. #hy might the 9uly *C+ information on manufacturing cost per unit be misleading when predicting total manufacturing costs in August *C+$ S02#304

(+B min.

Computing and interpreting manufacturing unit costs .

+.

Direct material cost Direct manuf. labor costs %anufacturing overhead costs otal manuf. costs 'ixed costs allocated at a rate of +B% +B% BC% BC% (dir (direc ectt mfg. mfg. labor eual to C.3C per dir. dir. manuf. labor dollar  (C.3C +KM *KM  ;ariable costs >nits produced (millions %anuf. cost per unit (otal manuf.   costs N units produced ;ariable manuf. cost per unit (;ariable manuf. costs >nits produced

Supreme  G.CC +K.CC =.CC +B3.CC

Delu5e  B.CC *K.CC .CC +K+.CC

(in millions Regular KC.CC .CC *=.CC G*.CC

=.C +=.*C +*B

.C +B3.*C +BC

*.=C G.KC +=C

+.**=C

+.C33

C.KB+

+.+BK

+.C*+3

C.K=CC

*-

#otal *CK.CC BC.CC +BC.CC =CK.CC

+B.CC 3G+.CC

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu//

*.

@ased on total manuf. cost  per unit (+.**=C +BCM +.C33 +GCM C.KB+ ** **C "orrect total manuf. costs based on variable manuf. costs plus fixed costs eual ;ariable costs (+.+BK +BCM +.C*+3 +GCM C.K= **C 'ixed costs otal costs

Supreme

(in millions Delu5e

Regular

#otal

+3.KC

*C3.G3

+==.BK

B3*.CG

+.=

+G=.CB

+=C.C

B+*.KG +B.CC B*.KG

he tota he totall manu manufa fact ctur urin ing g cost cost per per unit unit in reui reuire reme ment nt + incl includ udes es +B mill millio ion n of indi indire rect ct manufacturing costs that are fixed irrespective of changes in the volume of output per month, while the remaining variable indirect manufacturing costs change with the production volume. )iven the unit volume changes for August *C+, the use of total manufacturing cost per unit from the past month at a different unit volume level (both in aggregate and at the individual  product level will overestimate total costs of B3*.CG million in August *C+ relative to the correct total manufacturing costs of B*.KG million calculated using variable manufacturing cost  per unit times units produced plus the fixed costs of +B million. million. ('(( ('(( Direc Direct, t, indir indirec ect, t, fi5ed fi5ed,, and and aria ariale le costs& costs& "alifornia ires manufactures two types of  tires that it sells as wholesale products to various specialty retail auto supply stores. Each tire reuires a three-step process. he first step is mixing. he mixing department combines some of  the necessary direct materials to create the material mix that will become part of the tire. he second step includes the forming of each tire where the materials are layered to form the tire. his is an entirely automated process. he final step is finishing, which is an entirely manual  process. he finishing department includes curing and uality control.

Jeuired 1& "osts involved in the process are listed next. 'or each cost, indicate whether it is a direct variable, direct fixed, indirect variable, or indirect fixed cost, assuming /units of production of  each ind of tire0 is the cost object. "osts Jubber

%ixing department manager  

Jeinforcement cables

%aterial handlers in each department


"ustodian in factory

Depreciation on formers

&ight guard in factory

Depr Deprec ecia iati tion on on mixi mixing ng mach machin ines es

%ach %achin inis istt (run (runni ning ng the the mixi mixing ng mach machin ine e

Jent on factory bu building

%achine ma maintenance pe personnel in each de department

'ire 'ire ins insur uran ance ce on fact factor ory y build buildin ing g

%ain %ainte tena nance nce sup suppl plie iess for for fact factor ory y

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Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// 'actory utilities

"leaning supplies for factory

'inishing 'inishing department department hourly laborers laborers %achinist %achinist (running (running the forming forming machines machines

(& !f the cost object were the /mixing department0 rather than units of production of each ind of  tire, which preceding costs would now be direct instead of indirect costs$ S02#304

(+B min. Direct, indirect, fi5ed, and ariale costs& +. JubberOdirect, variable Jeinforcement cablesOdirect, variable
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Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu//    

%aterials handlers (of the %ixing Department %achinist (running the mixing machines %achine %aintenance personnel (of the %ixing Department %aintenance supplies (if separately identified for the %ixing Department


Jeuired "lassify each cost item 7A8H9 as follows a& Direct or indirect (D or ! costs of each individual focus g roup. & ;ariable or fixed (; or ' costs of how the total costs of %aret 'ocus change as the number  of focus groups conducted changes. (!f in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the number of groups conducted. ?ou will have two answers (D or !M ; or o r ' for each of the following items Cost 3tem

D or 3 ; or <

A& 1ayment to individuals in each focus group to provide comments on new  products $& Annual subscription of %aret 'ocus to "onsumer $eports maga2ine 'o cus staff member to confirm individuals C& 1hone calls made by %aret 'ocus will attend a focus group session (Jecords of individual calls are not ept. D& Jetainer paid to focus group leader to conduct + focus groups per year on new medical products E& Jecruiting cost to hire mareting specialists <& Pease payment by %aret 'ocus for corporate office =& "ost of tapes used to record comments made by individuals in a focus group session (hese tapes are sent to the company whose products are being tested. H& )asoline costs of %aret 'ocus staff for company-owned vehicles (7taff members submit monthly bills with no mileage breadowns. 3& "osts incurred to improve the design of focus groups to mae them more effective S02#304

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Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// (+BQ*C min. Classification of costs, serice sector& "ost object Each individual focus group "ost variability #ith #ith respect to the number of focus groups here may be some debate deba te over classifications of individual items, especially with regard to cost variability. Cost 3tem A @ " D E ' ) : !

D or 3 D ! ! ! ! ! D ! !

; or < ; ' 'a ' ; ' ; ; b '

a

7ome students will note that phone call costs are variable when each call has a separate charge. !t is a fixed cost if %aret 'ocus has a flat monthly charge for a line, irrespective of the amount of usage.  b )asoline costs are liely to vary with the number of focus groups. :owever, vehicles liely serve multiple multiple purposes, and detailed detailed records may be reuired reuired to examine examine how costs vary with changes in one of the many purposes served. ('(* Classification Classification of costs, costs, mercha merchandising ndising sector& sector& @and @ox Entertainment (@@E operates a large store in Atlanta, )eorgia. he store has both a movie (D;D section and a music ("D section. @@E reports revenues for the movie section separately from the music section.

Jeuired "lassify each cost item 7A8H9 as follows a& Direct or indirect (D or ! costs of the total number of D;Ds sold. & ;ariable or fixed (; or ' costs of how the total costs of the movie section change as the total number of D;Ds sold changes. (!f in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of D;Ds sold. ?ou will have two answers (D or !M ; or o r ' for each of the following items Cost 3tem A& $& C& D& E&

D or 3 ; or <

Annual retainer paid to a video distributor  "ost of store manager 5s salary "osts of D;Ds purchased for sale to customers 7ubscription to D%D &rends &rends maga2ine Peasing of computer software used for financial budgeting at the @@E store

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Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// <& "ost of popcorn provided free to all customers of the @@E store =& "ost of cleaning the store every night after closing H& 'reight-in costs of D;Ds purchased by @@E S02#304 (+BQ*C min. Classification of costs, merchandising sector&

"ost object D;Ds sold in movie section of store "ost variability #ith #ith respect to changes in the number of D;Ds sold here may be some debate deba te over classifications of individual items, especially with regard to cost variability. Cost 3tem A @ " D E ' ) :

D or 3 D ! D D ! ! ! D

; or < ' ' ; ' ' ; ' ;

hee "oope "ooperr 'urni 'urnitu ture re "ompa "ompany ny of  ('(+ ('(+ Classi Classifi ficat cation ion of cost costs, s, manufa manufactu cturi ring ng secto sectorr& h 1otomac, %aryland, assembles two types of chairs (Jecliners and Jocers. 7eparate assembly lines are used for each type of chair. Jeuired "lassify each cost item 7A839 as follows a& Direct or indirect (D or ! cost for the total number of Jecliners assembled. & ;ariable or fixed (; or ' cost depending on how total costs change as the total number of  Jecliners assembled changes. (!f in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of Jecliners assembled. ?ou will have two answers (D or !M ; or o r ' for each of the following items Cost 3tem

D or 3 ; or <

A& "ost of fabric used on Jecliners $& 7alary of public relations manager for "ooper 'urniture convention for furniture furniture manufacture manufacturersM rsM generally generally C& Annual convention "ooper 'urniture attends D& "ost of lubricant used on the Jecliner assembly line E& 'reight costs of Jecliner frames shipped from Durham to 1otomac, %D

*-+*

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D or 3 ; or <

Electrici icity ty costs costs for Jecli Jecliner ner assemb assembly ly line line (singl (singlee bill bill <& Electr covers entire plant ages paid paid to tempor temporary ary assemb assemblyly-li line ne worer worerss hired hired in =& #ages  periods of high Jecliner production (paid on hourly basis H& Annual fire-insurance policy cost for 1otomac, %D plant 3& #ages paid to plant manager who oversees the assembly lines for both chair types

S02#304

(+BQ*C min. Classification of costs, manufacturing sector& "ost object ype of chair assembled (Jecliners or Jocers "ost variability #ith #ith respect to changes in the number of Jecliners assembled here may be some debate over classifications of individual items, especially with regard to cost variability. Cost 3tem A @ " D E ' ) : !

D or 3 D ! ! D D ! D ! !

; or < ; ' ' ; ; ; ; ' '

('(6 ;ariale ariale costs, costs, fi5ed fi5ed costs, costs, total total costs& costs& @ridget Ashton is getting ready to open a small restaurant. 7he is on a tight budget and must choose between the following long-distance phone  plans >lan A! 1ay +C cents per minute of long-distance calling.

monthly fee of +B for up to *=C long-distanc long-distancee minutes and  cents per  >lan $! 1ay a fixed monthly minute thereafter (if she uses fewer than *=C minutes in any month, she still pays +B for the month. >lan C! 1ay a fixed monthly fee of ** for up to B+C long-distance minutes and B cents per  minute thereafter (if she uses fewer than B+C minutes, she still pays ** for the month.

Jeuired 1& Draw a graph of the total monthly costs of the three plans for different levels of monthly longdistance calling. (& #hich plan should Ashton choose if she expects to mae +CC minutes of long-distance calls$

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(*C min. +.

;ariale costs, fi5ed costs, total costs&

Minutes"month >lan A 7?"month9 >lan $ 7?"month9 >lan C 7?"month9

/ C +B **

+/ 1// 1+/ (// (*/ )// )(&+ )+/ *// *+/ +1/ +*/ 6// 6+/ B +C +B *C *= 3C 3*.B 3B =C =B B+ B= KC KB +B +B +B +B +B +G.C ** *3.C *.C 3+ 3 +.C 3K.KC 3G =3.C =.C ** ** ** ** ** ** ** ** ** ** ** *3.BC *K.BC *G

*. !n each region, Ashton chooses the plan that has the lowest cost. 'rom the graph (or from calculationsR, we can see that if Ashton expects to use CQ+BC minutes of long-distance each month, she should buy 1lan AM for +BCQ3*.B minutes, 1lan @M and for more than 3*.B minutes, 1lan ". !f Ashton plans to mae +CC minutes of long-distance calls each month, she should choose 1lan AM for *=C minutes, choose 1lan @M for B=C minutes, choose 1lan ". RPet x be the number of minutes when 1lan A and 1lan @ have eual cost C.+C x H +B  x H +B N C.+C per minute H +BC minutes. Pet y be the number of minutes when 1lan @ and 1lan " have eual cost  y Q *=C H ** +B I C.C ( y C.C ( y  y Q *=C H ** Q +B H  AE  DE.B  y Q *=C H AC.CD  y H .B I *=C H 3*.B minutes =

('( ('( ;aria ariale le and and
1lant management costs, +,GG*,CCC per year  "ost of leasing euipment, +,G3*,CCC per year  #orers5 wages, CC per 7urfer vehicle produced produc ed Direct materials costs 7teel, +,=CC per 7urferM ires, +BC per tire, each 7urfer taes B tires (one spare. "ity license, which is charged monthly based on the number of tires used in production

*-+=

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 =C,C=C

BC+Q+,CCC tires

 KB,CCC

more than +,CCC tires

*=G,C

"onsolidated currently produces +C vehicles per month. Jeuired 1& #hat is the variable manufacturing cost per vehicle$ #hat is the fixed manufacturing cost  per month$ (& 1lot a graph for the variable manufacturing costs and a second for the fixed manufacturing costs per month. :ow does the concept of relevant range relate to your graphs$ Explain. )& #hat is the total manufacturing cost of each vehicle if C vehicles are produced each month$ *CB vehicles$ :ow do you explain the difference in the manufacturing cost per unit$ S02#304

(+BQ*C min. ;ariale costs and fi5ed costs& +.

;aria ariabl blee manuf manufac actu turi ring ng cost cost per per vehi vehicl clee 7teel +,=CC per 7urfer   ires BC per 7urfer   Direct manufacturing labor CC per 7urfer   otal *,GBC per 7urfer   'ixed manufacturing costs per month 1lan 1lantt mana managem gemen entt cost costss (+, (+,GG* GG*,C ,CCC CC N +* +*  +KK,C +KK,CCC CC "ost "ost of leas leasin ing g eui euipm pment ent (+ (+,G3 ,G3*, *,CCC CCC N +* +* +K+,C +K+,CCC CC "ity license (for +C surfers or BC tires KB,CCC otal fixed manufacturing costs 3G*,CCC 'ixed costs per month (+ surfer taes B tires C to +CC surfers per month H +KK,CCC I +K+,CCC I =C,C=C H 3K,C=C +C+ to *CC surfers per month H +KK,CCC I +K+,CCC I KB,CCC H 3G*,CCC %ore than *CC surfers surfers per month month H +KK,CCC I +K+,CCC I *=G,C H BK,C

*-+B

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he concept of relevant range is potentially relevant for both graphs. :owever, the uestion does not place restrictions on the unit variable costs. he relevant range for the total fixed costs is from C to +CC surfersM +C+ to *CC surfersM more than *CC surfers. #ithin these ranges, the total fixed costs do not change in total. 3. ;ehicles >roduced per Month 719 (a C

(b *CB

#ires >roduced per Month 7(9 @ 719  + =CC


+,C*B

BK,C

2nit
2nit ;ariale Cost per ;ehicle 7+9 *,GBC

2nit #otal Cost per ;ehicle 769 @ 7*9 B 7+9 ,B3

BK,C N *CB H *,+=

*,GBC

B,K=

he unit cost for C vehicles produced per month is ,B3, while for *CB vehicles it is only B,K=. his difference is caused by the fixed cost increment of *CG,3C (an increase of BCS, *CG,3C N 3K,C=C H BS being spread over an increment of +*B (*CB Q C vehicles (an increase of +BKS, +*B N C. he fixed cost per unit is therefore lower. ('(('(- ;aria ariale le costs costs,, fi5ed fi5ed cost costs, s, rele releant ant range& range& )ummy Pand "andies manufactures jaw breaer candies in a fully automated process. he machine that produces candies was purchased recently and can mae B,CCC per month. he machine costs K,BCC and is depreciated using straight-line depreciation over +C years assuming 2ero residual value. Jent for the factory space and warehouse and other fixed manufacturing overhead costs total +,*CC per month. )ummy Pand currently maes and sells sells 3,GCC jaw-breaer jaw-breaerss per month. )ummy Pand buys  just enough materials each month to mae the jaw-breaers it needs to sell. %aterials cost =CT  per jaw-breaer. jaw-breaer.  &ext year )ummy Pand expects demand to increase by +CCS. At this volume of materials  purchased, it will get a +CS discount on price. Jent and other fixed manufacturing overhead costs will remain the same.

*-+K

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// Jeuired 1& #hat is )ummy Pand5s current annual relevant range of output$ (& #hat is )ummy Pand5s current annual fixed manufacturing cost within the relevant range$ #hat is the annual variable manufacturing cost$ )& #hat will )ummy Pand5s relevant range of output be next year$ :ow, if at all, will total annual fixed and variable manufacturing costs change next year$ Assume that if it needs to )ummy Pand could buy an identical machine at the same cost as the one it already has. S02#304

(*C min. ;ariale costs, fi5ed costs, releant range& +. he produc productio tion n capacit capacity y is B,CCC B,CCC jaw jaw breae breaers rs per per month. month. her herefo efore, re, the the curren currentt annual annual relevant range of output is C to B,CCC jaw breaers U +* months H C to KC,CCC jaw breaers. *. "urren "urrentt annual annual fixed fixed manu manufac factur turing ing cost costss within within the the relev relevant ant range range are are +,*CC +,*CC U +* H +=,=CC for rent and other overhead costs, plus K,BCC N +C H KBC for depreciation, totaling +B,CBC. he variable costs, the materials, are =C cents per jaw breaer, or +,*C (C.=C per jaw  breaer U 3,GCC jaw breaers per month U +* months for the year. year. 3. !f dema demand nd change changess from from 3,GCC 3,GCC to to ,CC ,CC jaw jaw breae breaers rs per per month month,, or from from 3,GCC 3,GCC U +* H =K,CC to ,CC U +* H G3,KCC jaw breaers per year, )ummy Pand will need a second machine. Assuming )ummy Pand buys a second machine identical to the first machine, it will increase capacity from B,CCC jaw breaers per month to +C,CCC. he annual relevant range will be  between B,CCC U +* H KC,CCC and +C,CCC U +* H +*C,CCC jaw breaers. Assume the second machine costs K,BCC and is depreciated using straight-line depreciation over +C years and 2ero residual residual value, just lie the the first machine. his will add KBC of depreciation per year. 'ixed costs for next year will increase to +B,CC  +B,CC from +B,CBC for the current year I KBC (because rent and other fixed overhead costs will remain the same same at +=,=CC. hat is, total fixed costs for next year eual KBC K BC (depreciation on first machine I KBC (depreciation on second machine I +=,=CC (rent and other fixed overhead costs. he variable cost per jaw breaer next year will be GCS U C.=C H C.3K. otal variable costs eual C.3K per jaw breaer U G3,KCC jaw breaers H 33,KGK. !f )ummy Pand decides not to increase capacity and meet only that amount of demand for which it has available capacity (B,CCC jaw breaers per month or B,CCC U +* H KC,CCC jaw  breaers per year, the variable cost per unit will be the same at C.=C per jaw breaer. breaer. Annual total variable manufacturing costs will increase to C.=C U B ,CCC jaw breaers per month U +* months H *=,CCC. Annual total fixed manufacturing costs will remain the same, +B,CBC. ne w ('(. Cost driers driers and alue alue chain& chain& orrance echnology "ompany (" is developing a new touch-screen smartphone to compete in the cellular phone industry. he company will sell the  phones at a t wholesale prices to cell phone p hone companies, co mpanies, which will in turn sell them in retail stores to the final customer. " has undertaen the following activities in its value chain to bring its  product to maret

*-+

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1erform maret research on competing brands Design a prototype of the " smartphone %aret the new design to cell phone companies %anufacture the " smartphone 1rocess orders from cell phone companies Deliver the " smartphones to the cell phone companies 1rovide online assistance to cell phone users for use of the " smartphone %ae design changes to the smartphone based on customer feedbac 

During the process of product development, production, mareting, distribution, and customer  service, " has ept trac of the following cost drivers  &umber of smartphones shipped by "  &umber of design changes  &umber of deliveries made to cell phone companies Engineering hours spent on initial product design :ours spent researching competing maret brands "ustomer-service hours  &umber of smartphone orders processed %achine hours reuired to run the production euipment Jeuired 1& !dentify each value-chain activity listed at the beginning of the exercise with one of the following value-chain categories a& Design of products and processes & 1roduction c& %areting d& Distribution e& "ustomer service (& >se the list of preceding cost drivers to find one or more reasonable cost drivers for each of  the activities in "5s value chain. S02#304

(*C min. Cost driers and alue chain& +. 1erform 1erform maret researc research h on competing competing brandsODesi brandsODesign gn of products products and processe processess Design a prototype of the " smartphoneODesign of products and processes %aret the new design to cell phone companiesO%areting %anufacture the " smartphoneO1roduction 1rocess orders from cell phone ph one companiesODistribution Deliver the " smartphones to the cell phone companiesODistribution 1rovide online assistance to cell phone users for use of the " smartphoneO"ustomer service

*-+

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;alue Chain C hain Categor Design of products and processes

Actiit 1erform maret research on competing brands

Cost Drier :ours spent researching competing maret  brands

Design a prototype of the " smartphone %ae design changes to the smartphone based on customer feedbac 

Engineering hours spent on initial product design  &umber of design changes

>roduction

%anufacture the " smartphones

%achine hours reuired to run the  production euipment

Mar%eting

%aret the new design to cell  phone companies

 &umber of smartphones shipped by "

Distriution

1rocess orders from cell phone companies Deliver the " smartphones to cell phone companies

 &umber of smartphone orders processed

1rovide on-line assistance to cell phone users for use of the " smartphone

"ustomer service hours

Customer serice

 &umber of deliveries made to cell phone companies

(')/ (')/ Cost Cost drier drierss and func functio tions& ns& he representative cost drivers in the right column of this table are randomi2ed so they do not match the list of functions in the left column.
Representatie Cost Drier

1& Accounts payable

A&  &umber of invoices sent

(& Jecruiting

$&  &umber of purchase orders

)&  &etwor %aintenance C&  &umber of units manufactured *& 1roduction

D&  &umber of computers on the networ 

+& 1urchasing

E&  &umber of employees hired

6& #arehousing

<&  &umber of bills received from vendors

& @illing

=&  &umber of pallets moved

*-+G

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// Jeuired 1& %atch each function with its representative cost driver. (& )ive a second example of a cost driver for each function. S02#304

(+CQ+B min. Cost driers and functions& 1&

+. *. 3. =. B. K. .


Representatie Cost Drier &umber of bills received from vendors &umber of employees hired &umber of computers on the networ  &umber of units manufactured &umber of purchase orders &umber of pallets moved &umber of invoices sent

+. *. 3. =. B. K. .


Representatie Cost Drier &umber of checs written &umber of interviews conducted &umber of computer transactions &umber of direct labor employees &umber of different types of materials purchased Distance of deliveries made &umber of credit sales transactions

*.

(')1 #otal costs costs and unit unit costs, costs, serice serice settin setting& g&  &ational raining recently started a business  providing training events for corporations. !n order to better understand the profitability of the  business, the owners ased you for an analysis of costsOwhat costs are fixed, what costs are variable, and so on, for each training session. ?ou ?ou have the following cost information

rainer ++,CCC per session %aterials *,BCC per session and 3B per attendee "atering "osts (subcontracted 'ood B per attendee 7etup4cleanup *B per attendee 'ixed fee B,CCC per training session  &ational raining is pleased p leased with the service they use for the catering and have allowed a llowed them to  place brochures on each dinner table as a form of advertising. !n exchange, the caterer gives  &ational raining raining a +,CCC discount per session. *-*C

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Jeuired 1& Draw a graph depicting fixed costs, variable costs, and total costs for each training session versus the number of guests. (& 7uppose +CC persons attend the next event. #hat is &ational raining5s total net cost and the cost per attendee$ )& 7uppose instead that +B persons attend$ #hat is &ational raining5s total net cost and the cost per attendee$ *& :ow should &ational raining charge customers for their services$ Explain briefly. S02#304

(*C min. #otal costs and unit costs 4umer of attendees ;ariable cost per attendee (%aterials 3B I 'ood, B I 7etup4"leanup, *B 'ixed "osts per session (rainer, ++,CCC I %aterials, *,BCC I "atering, B,CCC −
/

+/

1//

1+

(//

+3B

+3B

+3B

+3B

+3B

+,BCC

+,BCC

+,BCC

+,BCC

+,BCC

C +,BCC

K,BC *=,*BC

+3,BCC 3+,CCC

*3,K*B =+,+*B

*,CCC ==,BCC

+.

*. 4umer of attendees otal costs

/ +,BC ,BCC

+/ *=,*B ,*BC

*-*+

1// 3+,CCC

1+ =+,+* ,+*B

(// ==,BC ,BCC

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// (fixed I variable "osts per attendee (total costs number of attendees

3BB

*+B

+ +K.33

 +=B

As shown in the table above, for +CC attendees the total cost will be 3+,CCC, and the cost per  attendee will be 3+C.CC. 3. As shown in in the table in reuir reuirement ement *, for for +B attendees, attendees, the total total cost will will be =+,+*B, =+,+*B, and the cost per attendee will be *3B. =. &ational &ational raini raining ng should charge charge customers customers based based on the number number of attendees. attendees. As As the number  number  of attendees increase, national raining could offer price discounts because its fixed costs would be spread over a larger number of attendees. 'or +CC attendees, the fixed catering cost  per attendee would be =C (=,CCC N +CC guestsM g uestsM for *CC attendees, it would be *C (=,CCC N *CC attendees. &ational raining5s total cost per attendee would be ++B (variable cost per  attendee of B I fixed catering cost per attendee of =C for +CC attendees and GB per  attendee (variable cost per attendee of B I fixed catering cost per attendee of *C for *CC attendees. he lower cost per attendee as the number of attendees increases allows &ational raining to offer price discounts and still earn a profit. Altern Alternati ativel vely y, &ation &ational al rainin raining g could could charge charge a flat flat fee of *C,CCC *C,CCC plus plus +BC per  attendee. his would provide a margin of +B.CC per guest plus a *,BCC marup on the fixed costs. costs. At +CC attend attendees ees,, profit profit would be =,CCC =,CCC (*,BCC (*,BCC on fixed fixed costs costs I (+B.C (+B.CC C × +CC attendees. At +B attendees, profit would would be B,+*B (*,BCC on fixed costs I (+B.CC × +B attendees. )ayle5s )lasswors )lasswors maes glass flanges for  (')( (')( #otal otal and and un unit it cost cost,, deci decisi sion on ma%i ma%ing ng&& )ayle5 scientific use. %aterials cost + per flange, and the glass blowers are paid a wage rate of * per  hour. A glass blower blows +C flanges per hour. 'ixed manufacturing costs for flanges are *,CCC per period. 1eriod (nonmanufacturing costs associated with flanges are +C,CCC per   period and are fixed. Jeuired 1& )raph the fixed, variable, and total manufacturing cost for flanges, using units (number of  flanges on the x-axis. (& Assume )ayle5s )lasswors manufactures and sells B,CCC flanges this period. !ts competitor, 'lora5s 'lass, sells flanges for +C each. "an )ayle sell below 'lora5s price and still mae a  profit on the flanges$ )& :ow would your answer to reuirement * differ if )ayle5s )lasswors made and sold +C,CCC flanges this period$ #hy$ #hat does this indicate about the use of unit cost in decision maing$

*-**

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(*B min. #otal and unit cost, decision ma%ing& +.

 &ote that the production costs include the *,CCC of fixed manufacturing costs but not the +C,CCC of period costs. he variable cost is + per flange for materials, materials, and *.C per flange (* per hour divided by +C flanges per hour for direct manufacturing labor for a total of 3.C  per flange. *.

he inve he invent ntor oria iabl blee (ma (manuf nufact actur urin ing g cost cost per per unit unit for for B,CCC B,CCC flang flanges es is 3.C U B,CCC I *,CCC H =,CCC Average (unit cost H =,CCC N B,CCC units H G.=C per unit. his is below 'lora5s 'lora5s selling price of +C per flange. :owever, in order to mae a profit, )ayle5s )ayle5s )lasswors also needs to cover the period (non-manufacturing costs of +C, CCC, or +C,CCC N B,CCC H * per unit. hus total costs, both inventoriable (manufacturing and period (non-manufacturing, for the flanges is G.=C I * H ++.=C. )ayle5s )ayle5s )lasswors cannot sell below 'lora5s 'lora5s price of +C and still mae a profit on the flanges. Alternatively, At 'lora5s price of +C per flange Jevenue  +C ;ariable costs 3.C 'ixed costs
U B,CCC U B,CCC

H H

 B C ,C C C + G ,CCC 3  ,C C C  (,CCC

)ayle5s )ayle5s )lasswors cannot sell below +C per flange and mae a profit. At 'lora5s 'lora5s price of +C  per flange, the company has an operating loss of ,CCC. 3.

!f )ayle5s )ayle5s )lasswors produces +C,CCC units, then total inventoriable cost will be *-*3

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// ;ariable cost (3.C (3.C U +C,CCC I fixed manufacturing costs, costs, *,CCC H total total manufacturing costs, KK,CCC. Average (unit inventoriable (manufacturing (manufacturing cost will be KK,CCC N +C,CCC units H K.KC per flange >nit total cost including both inventoriable and period p eriod costs will be (KK,CCC I +C,CCC N +C,CCC H .KC per flange, and )ayle5s )lasswors will will be able to sell the flanges for less than 'lora5s price of +C per flange and still mae a profit. Alternatively, At 'lora5s price of +C per flange Jevenue +C U ;ariable costs 3.C U 'ixed costs
+C,CCC +C,CCC

H H

 +C C ,CC C 3  ,CC C 3  ,C C C  *= ,CCC

)ayle5s )ayle5s )lasswors can sell at a price below +C per flange and still mae a profit. he company earns operating income of *=,CCC at a price of +C per flange. he company will earn operating income as long as the price exceeds .KC per flange. he reason the unit cost decreases significantly is that inventoriable (manufacturing fixed costs and fixed period (non-manufacturing costs remain the same regardless of the number of units  produced. 7o, as )ayle5s )ayle5s )lasswors produces more units, fixed costs are spread over more units, and cost per unit decreases. his means that if you use unit costs to mae decisions about  pricing, and which product to produce, you must be aware that the unit cost only applies to a  particular level of output. (')) 3nentor 3nentoria iale le costs costs ersus ersus period period costs& costs& Each of the following cost items pertains to one of these companies @est @uy (a merchandising-sector company, VitchenAid (a manufacturingsector company, and :ughes&et (a service-sector company a& "ost of phones and computers available for sale in @est @uy5s electronics department & Electricity used to provide lighting for assembly-line worers at a VitchenAid manufacturing  plant c& Depreciation on :ughes&et satellite euipment used to provide its services d& Electricity used to provide lighting for @est @uy5s store aisles e& #ages for personnel responsible for uality testing of the VitchenAid products during the assembly process f& 7alaries of @est @uy5s mareting personnel planning local-newspaper advertising campaigns g& 1errier mineral water purchased by :ughes&et for consumption by its software engineers h& 7alaries of :ughes&et area sales managers i& Depreciation on vehicles used to transport VitchenAid products to retail stores

Jeuired 1& Distinguish between manufacturing-, merchandising-, and service-sector companies. (& Distinguish between inventoriable costs and period costs. )& "lassify each of the cost items ( a8i as an inventoriable cost or a period cost. Explain your  *-*=

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S02#304

(*CQ3C min. 3nentoriale costs ersus period costs& +. Manufacturing-sector companies purchase materials and components and convert them into different finished goods. purchase se and then then sell sell tangib tangible le produc products ts without without Merchandising-sector companies purcha changing their basic form. Service-sector companies provide services or intangible products to their customersOfor  example, legal advice or audits.
*-*B

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// (g 1errier mineral water consumed by :ughes&et5s :ughes&et5s software engineersOperiod engineersOperiod cost of a service company. :ughes&et has no inventory of goods for sale and, hence, no inventoriable cost. (h 7alaries 7alaries of :ughes&et5 :ughes&et5ss mareting mareting personnelOperi personnelOperiod od cost of a service service company company. :ughes&et has no inventory of goods for sale and, hence, no inventoriable cost. (i Deprec Depreciat iation ion on vehicle vehicless used used to transp transport ort VitchenA VitchenAid id produc products ts to retail retail storesO  storesO   period cost of a manufacturing company. company. his is a distribution cost, not an inventoriable cost.

(')* Computin Computing g cost of goods goods purchas purchased ed and cost of goods goods sold& sold& he following data are for  %arvin Department 7tore. he account balances (in thousands are for *C+.

%areting, distribution, and customer-service costs

 3 3  ,C C C

%erchandise inventory, 9anuary +, *C+

* ,CCC

>tilities

+  ,C CC

)eneral and administrative costs

=3 ,CC C

%erchandise inventory, December 3+, *C+

3 = ,C C C

1urchases

+ B B ,C C C

%iscellaneous costs

= ,C C C

ransportation-in

 ,CCC

1urchase returns and allowances

= ,CC C

1urchase discounts

K ,C C C

Jevenues

*  C ,C C C

Jeuired 1& "ompute 7a9 the cost of goods purchased and 79 the cost of goods sold. (& 1repare the income statement for *C+.

*-*K

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S02#304

(*C min. +a.

Computing cost of goods purchased and cost of goods sold& Marin Department Store Schedule of Cost of =oods >urchased
1urchases Add transportation-in

+BB,CCC ,CCC   +K*,CCC

Deduct 1urchase returns and allowances 1urchase discounts

=,CCC K,CCC

"ost of goods purchased +b.

+B*,CCC

Marin Department Store Schedule of Cost of =oods Sold
@eginning merchandise inventory +4+4*C+ "ost of goods purchased (see above "ost of goods available for sale Ending merchandise inventory +*43+4*C+ "ost of goods sold *.

+C,CCC

 *,CCC +B*,CCC +G,CCC 3=,CCC +=B,CCC

Marin Department Store 3ncome Statement ear Ended Decemer )1, (/1 7in thousands9

Jevenues "ost of goods sold (see above )ross margin tilities )eneral and administrative costs %iscellaneous costs otal operating costs
*C,CCC +=B,CCC +3B,CCC

3,CCC +,CCC =3,CCC =,CCC +C+,CCC  3=,CCC

*-*

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(')+ Cost of goods goods purchas purchased, ed, cost of goods sold, and and income statement& statement& he following data are for Ari2ona Jetail
%areting and advertising costs

 BB,*CC

%erchandise inventory, 9anuary +, *C+

+C3,BCC

7hipping of merchandise to customers

=,KCC

Depreciation on store fixtures

G,KKC

1urchases

BG,CCC

)eneral and administrative costs

3,KCC

%erchandise inventory, December 3+, *C+

++G,KCC

%erchandise freight-in

*3,CCC

1urchase returns and allowances

*B,3CC

1urchase discounts

*C,CC

Jevenues

3K,CCC

Jeuired 1& "ompute 7a9 the cost of goods purchased and 79 the cost of goods sold. (& 1repare the income statement for *C+.

*-*

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S02#304

(*C min.

Cost of goods purchased, cost of goods sold, and income statement&

+a.

Ariona Retail 0utlet Stores Schedule of Cost of =oods >urchased
1urchases Add freightOin

BG,CCC *3,CCC K*+,CCC

Deduct 1urchase returns and allowances 1urchase discounts

*B,3CC *C,CC

"ost of goods purchased +b.

BB,CCC

Ariona Retail 0utlet Stores Schedule of Cost of =oods Sold
@eginning me merchandise in inventory +4 +4+4*C+ "ost of goods purchased (see above "ost of goods available for sale Ending merchandise inventory +*43+4*C+ "ost of goods sold *.

=K,CCC

+C3,BCC BB,CCC K,BCC ++G,KCC BB,GCC

Ariona Retail 0utlet Stores 3ncome Statement ear Ended Decemer )1, (/1 7in thousands9

Jevenues "ost of goods sold (see above )ross margin
3K,CCC BB,GCC +,+CC BB,*CC G,KKC =,KCC 3,KCC +=3,CKC  3=,C=C

*-*G

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Jena5ss :eaters :eaters select selected ed data data for
 +C B

Direct materials purchased

3 KB

Direct materials used

3 B

otal manufacturing overhead costs

=B C

;ariable manufacturing overhead costs

*K B

otal manufacturing co costs incurred du during
+,K+C

#or-in-process inventory +C4+4*C+

*3 C

"ost of goods manufactured

+,KKC

'inished-goods inventory +C4+4*C+

+ 3C

"ost of goods sold

+,C

Jeuired "alculate the following costs 1& Direct materials inventory +C43+4*C+ (& 'ixed manufacturing overhead costs for
(*C min.


(All numbers below are in millions. +. Direct materials inventory +C4+4*C+ Direct materials purchased Direct materials available for production Direct materials used Direct materials inventory +C43+4*C+





*. otal manufacturing overhead costs 7ubtract ;ariable manufacturing overhead costs 'ixed manufacturing overhead costs for
 

+ CB 3 KB = C (3B B

= BC (*KB + B

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3. otal manufacturing costs incurred during
 +,K+C (3B (=BC   B



* 3C +,K+C +,=C (+,K (+,KKC KC  + C



+ 3C +,KKC  +,GC

 +,GC (+,C  *C

(') Cost of goods goods manufactured manufactured,, income statement, statement, manufacturing manufacturing compan compan&& "onsider the following account balances (in thousands for the 1eterson "o mpany $eginning of (/1

End of (/1

Direct materials inventory

*+,CCC

*3,CCC

#or-in-process inventory

*K,CCC

*B,CCC

'inished-goods inventory

+3,CCC

*C,CCC

>eterson Compan

1urchases of direct materials

=,CCC

Direct manufacturing labor

**,CCC

!ndirect manufacturing labor

+,CCC

1lant insurance

,CCC

DepreciationOplant, building, and euipment

++,CCC

Jepairs and maintenanceOplant

3,CCC

%areting, distribution, and customer-

G+,CCC

*-3+

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*=,CCC

Jeuired 1& 1repare a schedule for the cost of goods manufactured for *C+. (& Jevenues for *C+ were 3+C million. 1repare the income statement for *C+. S02#304 (3CQ=C min. Cost of goods manufactured, income statement, manufacturing compan& +.

>eterson Compan Schedule of Cost of =oods = oods Manufactured ear Ended Decemer )1, (/1 7in thousands9

Direct materials cost @eginning inventory, 9anuary +, *C+  *+,CCC 1urchases of direct materials =,CCC "ost of direct materials available for use GB,CCC Ending inventory, December 3+, *C+ *3,CCC Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs !ndirect manufacturing labor +,CCC 1lant insurance ,CCC DepreciationOplant building F euipment ++,CCC Jepairs and maintenanceOplant 3,CCC otal indirect manufacturing costs %anufacturing costs incurred during *C+ Add beginning wor-in-process inventory, 9anuary +, *C+ otal manufacturing costs to account for Deduct ending wor-in-process inventory, December 3+, *C+ "ost of goods manufactured (to !ncome 7tatement

*.

 *,CCC **,CCC

3,CCC +3*,CCC *K,CCC +B,CCC *B,CCC +33,CCC

>eterson Compan 3ncome Statement ear Ended Decemer )1, (/1 7in thousands9

Jevenues "ost of goods sold @eginning finished goods, 9anuary +, *C+ "ost of goods manufactured "ost of goods available for sale Ending finished goods, December 3+, *C+ "ost of goods sold )ross margin

3+C,CCC  +3 +3,CCC +33,CCC +=K,CCC *C,CCC +*K,CCC +=,CCC

*-3*

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G+,C G+,CCC CC *=,CCC ++B,CCC  KG,CCC

(')- Cost of goods goods manufactured manufactured,, income statement, statement, manufacturing manufacturing compan compan&& "onsider the following account balances (in thousands for the "arolina "orporation "o rporation $eginning of (/1

Carolina Corporation

End of (/1

Direct materials inventory

+*=,CCC

3,CCC

#or-in-process inventory

+3,CCC

+=B,CCC

'inished-goods inventory

*=C,CCC

*CK,CCC

1urchases of direct materials

*K*,CCC

Direct manufacturing labor

*+,CCC

!ndirect manufacturing labor

G,CCC

1lant insurance

G,CCC

DepreciationOplant, building, and euipment

=B,CCC

1lant utilities

*K,CCC

Jepairs and maintenanceOplant

+*,CCC

Euipment leasing costs

KB,CCC

%areting, distribution, and customerservice costs

+*B,CCC

)eneral and administrative costs

+,CCC

Jeuired 1& 1repare a schedule for the cost of goods manufactured for *C+. (& Jevenues (in thousands for *C+ were +,3CC,CCC. 1repare the income statement for *C+. S02#304

(3CQ=C min. Cost of goods manufactured, income statement, manufacturing compan& Carolina Corporation Schedule of Cost of =oods = oods Manufactured ear Ended Decemer )1, (/1

*-33

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Direct materials costs @eginning inventory, 9anuary +, *C+ +*=,CCC 1urchases of direct materials *K*,CCC "ost of direct materials available for use 3K,CCC Ending inventory, December 3+, *C+= 3,CCC Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs !ndirect manufacturing labor G,CCC 1lant insurance G,CCC DepreciationOplant building F euipment =B,CCC 1lant utilities *K,CCC Jepairs and maintenanceOplant +*,CCC Euipment lease costs KB,CCC otal indirect manufacturing costs %anufacturing costs incurred during *C+ Add beginning wor-in-process inventory, 9anuary +, *C+ otal manufacturing costs to account for Deduct ending wor-in-process inventory, December 3+, *C+ "ost of goods manufactured (to !ncome 7tatement

3+3,CCC *+,CCC

*B=,CCC =,CCC +3,CCC GB,CCC +=B,CCC +*,CCC

Carolina Corporation 3ncome Statement ear Ended Decemer )1, (/1 7in thousands9

Jevenues "ost of goods sold @eginning finished goods, 9anuary +, *C+ "ost of goods manufactured "ost of goods available for sale Ending finished goods, December 3+, *C+ "ost of goods sold )ross margin
*-3=

+,3CC,CCC  *=C,CCC +*,CCC +,CB*,CCC *CK,CCC =K,CCC =B=,CCC +*B,CC ,CCC +,CCC +GK,CCC  *B,CCC

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('). ('). 3nco 3ncome me stat statem emen entt and and sche schedu dule le of cost cost of good goodss manu manufa fact ctur ured ed&& "orporation has the following account balances (in millions
hee :owe h :owell ll


Direct materials inventory, 9an. +, *C+

+ B

1urchases of direct materials

#or-in-process inventory, 9an. +, *C+

+C

Direct manufacturing labor

'inished goods inventory, 9an. +, *C+

C

DepreciationOplant and euipment

Direct materials inventory, Dec. 3+, *C+

*C

1lant supervisory salaries

#or or-in -in-process ess inven ventory, De Dec. 3+, 3+, *C+

B

%iscellaneou eous pla plant over verhead

3 *B + CC C B 3B

'inished goods inventory, Dec. 3+, *C+

BB

Jevenues

G BC

%areting, distribution, and customer-service costs

* =C

1lant supplies used

+C

1lant utilities

3C

!ndirect manufacturing labor

KC

Jeuired 1repare an income statement and a supporting schedule of cost of goods manufactured for the year ended December 3+, *C+. ('or additional uestions regarding these facts, see the next  problem.

*-3B

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S02#304

(*BQ3C min. 3ncome statement and schedule of cost of goods manufactured& Howell Corporation 3ncome Statement for the ear Ended Decemer )1, (/1 7in millions9

Jevenues "ost of goods sold @eginning finished goods, 9an. +, *C+ "ost of goods manufactured (below "ost of goods available for sale Ending finished goods, Dec. 3+, *C+ )ross margin %areting, distribution, and customer-service costs
G BC  C C K=B +B BB

K KC * GC * =C  BC

Howell Corporation Schedule of Cost of =oods Manufactured for the ear ear Ended Decemer Decem er )1, (/1 (/ 1 7in millions9

Direct materials costs @eginning inventory, 9an. +, *C+ 1urchases of direct materials "ost of direct materials available for use Ending inventory, Dec. 3+, *C+ Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs !ndirect manufacturing labor 1lant supplies used 1lant utilities DepreciationQQplant and euipment 1lant supervisory salaries %iscellaneous plant overhead %anufacturing costs incurred during *C+ Add beginning wor-in-process inventory, 9an. +, *C+ otal manufacturing costs to account for Deduct ending wor-in-process, Dec. 3+, *C+ "ost of goods manufactured

*-3K

 +B 3 *B 3= C *C 3 *C + CC KC +C 3C C B 3B

* *C K =C +C K BC B K =B

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('*/ 3nterpretation 3nterpretation of statements statements 7continuation 7continuation of (').9&

Jeuired 1& :ow would the answer to 1roblem *-3G be modified if you were ased for a schedule of cost of goods manufactured and sold instead of a schedule of cost of goods manufactured$ @e specific. (& #ould the sales manager5s salary (included in mareting, distribution, and customer-service costs be accounted for any differently if the :owell "orporation were a merchandisingsector company instead of a manufacturing-sector company$ )& >sing the flow of manufacturing costs outlined in Exhibit *-G (page ==, describe how the wages of an assembler in the plant p lant would be accounted for in this manufacturing company. *& 1lant supervisory salaries are usually regarded as manufacturing overhead costs. #hen might some of these costs be regarded as direct manufacturing costs$ )ive an example. +& 7uppose that both the direct materials used and the plant and euipment depreciation are related to the manufacture of + million units of product. #hat is the unit cost for the direct materials assigned to those units$ #hat is the unit cost for plant and euipment depreciation$ Assume that yearly plant and euipment depreciation is computed on a straight-line basis. 6& Assume that the implied cost-behavior patterns in reuirement B persist. hat is, direct material costs behave as a variable cost and plant and euipment depreciation behaves as a fixed cost. Jepeat the computations in reuirement B, assuming that the costs are being  predicted for the manufacture of +.* million units un its of product. :ow would the total costs be affected$ & As a management accountant, explain concisely to the president why the unit costs differed in reuirements B and K. S02#304

(+BQ*C min. 3nterpretation of statements 7continuation of (').9& +. hee sche h schedu dule le in in *-3G *-3G can can becom becomee a 7ched 7chedul ulee of "ost "ost of of )ood )oodss %anu %anufa fact ctur ured ed and and 7old 7old simply by including the beginning and ending finished goods inventory figures in the supporting schedule, rather than directly in the body of the income statement. &ote that the term  cost of    refers to the cost of goods brought to completion (finished during the  goods manufactured  refers accounting period, whether they were started before or during the current accounting period. 7ome of the manufacturing costs incurred are held bac as costs of the ending wor in processM similarly, similarly, the costs of the beginning wor in process inventory become a part of the cost of goods manufactured for *C+. *. hee sales h sales man manag ager er55s sala salary ry woul would d be char charge ged d as a mare mareti ting ng cost cost as as incu incurr rred ed by bot both h manufa manufactu cturin ring g and mercha merchandi ndisin sing g compan companies ies.. !t is basica basicall lly y a period period (opera (operati ting ng cost cost that that appears below the gross margin line on an income statement. 3. An asse assemb mble ler5 r5ss wages wages woul would d be assi assign gned ed to the the produ product ctss wore wored d on. hu hus, s, the the wage wagess cost would be charged to #or-in-1rocess and would not be expensed until the product is transferred through 'inished )oods !nventory to "ost of )oods 7old as the product is sold. *-3

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=. hee dire h direct ct-i -ind ndir irec ectt disti distinc ncti tion on can be reso resolv lved ed only only with with resp respec ectt to a part partic icul ular ar cost cost object. 'or example, in defense contracting, the cost object may be defined as a contract. contract. hen, a  plant supervisor woring only on that contract will have his or her salary charged directly and wholly to that single contract. B.

Direct materials used H 3* 3*C,CCC,CCC N +,CCC,CCC units H 3*C per unit Depreciation on plant euipment H C,CCC,CCC N +,CCC,CCC units H C per unit

K. Dire Direct ct mate materi rial alss unit unit cost cost would would be unch unchan ange ged d at 3*C 3*C per unit unit.. Depre Depreci ciat atio ion n cost cost per  unit would be C,CCC,CCC N +,*CC,CCC H KK.K per unit. otal direct materials costs would rise  by *CS to 3=,CCC,CCC 3=,CC C,CCC (3*C per unit U +,*CC,CCC +,*CC,CC C units, whereas total depreciation would be unaffected at C,CCC,CCC. . >nit costs costs are averages, averages, and they they must be interpr interpreted eted with with caution. caution. he 3*C direct direct materials materials unit cost is valid for predicting total costs because direct materials is a variable costM total direct materials costs indeed change as output levels change. :owever, fixed costs lie depreciation must be interprete interpreted d uite differently differently from variable variable costs. A common error in cost analysis is to regard all unit costs as one O as as if all the total costs to which they are related are variable costs. "hanges in output levels (the denominator will affect total variable costs, but not total fixed  costs. )raphs of the two costs may clarify this pointM it is safer to thin in terms of total costs rather than in terms of unit costs.

*-3

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('*1 3ncome statement statement and schedule schedule of cost of goods manufactur manufactured& ed& he following items (in millions pertain to 7chaeffer "orporation 7chaeffer5s manufacturing costing system uses a three-part classification of direct materials, direct manufacturing labor, and manufacturing overhead costs.

#or-in-process inventory, 9an. +, *C+

 +C

1lant utilities

Direct materials inventory, inventory, Dec. 3+, *C+

=

'inished-goods inventory, inventory, Dec. 3+, *C+

+K

DepreciationOplant and euipment

Accounts payable, Dec. 3+, *C+

*=

Jevenues

Accounts receivable, 9an. +, *C+

B3

%iscellaneous m maanufacturing overhead

+B

#or-in-process inventory, Dec. 3+, *C+

B

%areting, distribution, and customer-service costs

GC

'inished-goods inventory, inventory, 9an +, *C+

=K

Direct materials purchased



Accounts receivable, Dec. 3+, *C+

3*

Direct manufacturing labor

=C

Accounts payable, 9an. +, *C+

=B

1lant supplies used

G

Direct materials inventory, inventory, 9an. +, *C+

3=

1roperty taxes on plant

*

!ndirect manufacturing labor

  *+ K 3 BG

Jeuired 1repare an income statement and a supporting schedule of cost of goods manufactured. ('or additional uestions regarding these facts, see the next problem.

S02#304

(*BQ3C min. 3ncome statement and schedule of cost of goods manufactured&

*-3G

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// Schaeffer Corporation 3ncome Statement for the ear ear Ended Decemer Decem er )1, (/1 (/ 1 7in millions9

Jevenues "ost of goods sold @eginning finished goods, 9an. +, *C+ "ost of goods manufactured (below "ost of goods available for sale Ending finished goods, Dec. 3+, *C+= )ross margin %areting, distribution, and customer-service costs
3 BG  =K =K **= *C +K

* B= + CB GC  +B

Schaeffer Corporation Schedule of Cost of =oods Manufactured for the ear ear Ended Decemer Decem er )1, (/1 (/ 1 7in millions9

Direct material costs @eginning inventory, 9an. +, *C+ Direct materials purchased "ost of direct materials available for use Ending inventory, Dec. 3+, *C+ Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs 1lant supplies used 1roperty taxes on plant 1lant utilities !ndirect manufacturing labor costs DepreciationQQplant and euipment %iscellaneous manufacturing overhead costs %anufacturing costs incurred during *C+ Add beginning wor-in-process inventory, 9an. +, *C+ otal manufacturing costs to account for Deduct ending wor-in-process inventory, Dec. 3+, *C+ "ost of goods manufactured (to income statement

*-=C

 3=  +* * = ++ =C G *  *+ K +B

K+ * +G +C * *G B  * *=

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('*( #erminolog erminolog, interpreta interpretation tion of statements 7continuation 7continuation of ('*19&

Jeuired 1& "alculate total prime costs and total conversion costs. (& "alculate total inventoriable costs and period costs. Design costs costs and JFD costs costs are not consid considere ered d product product costs for financ financial ial statem statement ent )& Design  purposes. #hen might some of these costs be regarded as product costs$ )ive an example. *& 7uppose that both the direct materials used and the depreciation on plant and euipment are related to the manufacture of * million units of product. Determine the unit cost for the direct materials assigned to those units and the unit cost for depreciation on plant and euipment. Assume that yearly depreciation is computed on a straight-line basis. +& Assume that the implied cost-behavior patterns in reuirement = persist. hat is, direct material costs behave as a variable cost and depreciation on plant and euipment behaves as a fixed cost. Jepeat the computations in reuirement =, assuming that the costs are being  predicted for the manufacture of 3 million units of product. Determine the effect on total costs. 6& Assume that depreciation on the euipment (but not the plant is computed based on the number of units produced because the euipment deteriorates with units produced. he depreciation rate on euipment is +.BC per unit. "alculate the depreciation on euipment assuming (a * million units of product are produced and (b 3 million units of product are  produced. S02#304

(+BQ*C min. #erminolog, interpretation of statements 7continuation of (')69 . +.

*.

Direct materials used Direct manufacturing labor costs 1rime costs

++ million =C million +B million

Direct manufacturing labor costs !ndirect manufacturing costs "onversion costs

 =C million K+ million +C+ million

!nvent !nventori oriabl ablee costs costs (in (in milli millions ons for ?ear *C+ 1lant utilities !ndirect manufacturing labor DepreciationOplant and euipment %iscellaneous manufacturing overhead Direct materials used Direct manufacturing labor 1lant supplies used 1roperty taxes on plant otal inventoriable costs

*-=+



 *+ K +B ++ =C G * *+G

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 GC

3. Desi Design gn cos costs ts and and JFD JFD cos costs ts may may be be rega regard rded ed as as produ product ct cos costs ts in in case case of of cont contra ract ctin ing g with with a governmental agency. 'or example, if the Air 'orce negotiated to contract with Pocheed to  build a new type of supersonic fighter plane, design costs and an d JFD costs may be included in the contract as product costs. =.

Direct materials used H ++,CCC,CCC N *,CCC,CCC units H BG per unit Depreciation on plant and euipment H K,CCC,CCC N *,CCC,CCC units H 3 per unit

B. Dire Direct ct mater materia ials ls unit unit cost cost would would be unch unchang anged ed at BG BG.. Depr Deprec ecia iati tion on unit cost cost woul would d be K,CCC,CCC N 3,CCC,CCC H * per unit. otal direct materials costs would increase by BCS to +,CCC,CCC (BG per unit U 3,CCC,CCC units. otal depreciation cost of K,CCC,CCC would remain unchanged. K. !n this this case case,, eui euipm pmen entt depr deprec ecia iati tion on is a vari variab able le cost cost in relat relatio ion n to the unit unit output output.. he amount amount of euipm euipment ent deprec depreciat iation ion will will change change in direct direct propor proporti tion on to the num number ber of units units  produced. (a Depreciation will be 3 million (+.BC U * million million when * million million units are are produced. (b Depreciation will be =.B million million (+.BC U 3 million million when 3 million units are are produced. David d Pett Petter erma man n wor worss in the the produ product ctio ion n ('*) ('*) aor aor cost, cost, oer oerti time me,, and and idle idle time time&& Davi department of &ortheast 1lastics (&E1 as a machine operator. David, a long-time employee of   &E1,  &E1, is paid on an hourly basis at a rate of *= per hour. David wors five five -hour shifts per wee  %ondayQ'riday (=C hours. Any time David wors over and above these =C hours is considered overtime for which he is paid at a rate of time and a half (3K per hour. !f the overtime falls on weeends, David is paid at a rate of double time (= per hour. David is also paid an additional *= per hour for any holidays wored, even if it is part of his regular =C hours. David is paid his regul regular ar wages wages even even if the the mach machin ines es are are down down (not (not oper operat atin ing g due due to regul regular ar mach machin inee main mainte tenan nance ce,, slow slow orde orderr peri period ods, s, or unex unexpec pecte ted d mech mechani anical cal prob proble lems ms.. h hes esee hour hourss are are considered /idle time.0 During December David wored the following hours Hours wor%ed including machine downtime

Machine downtime

Fee% 1

BC

K .C

Fee% (

==

* .C

Fee% )

=K

= .C

Fee% *

=B

3 .B

!ncluded in the total hours wored are two company holidays ("hristmas Eve and "hristmas Day during #ee #ee =. All overtime overtime wored by David was %ondayQ'riday %ondayQ'riday,, except for the hours wored in #ee #ee 3M all a ll of the #ee 3 overtime hours were wored on a 7aturday 7 aturday..

*-=*

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Jeuired 1& "alculate (a direct manufacturing labor, (b idle time, (c overtime and holiday premium, and (d total earnings for David in December. (& !s idle time and overtime premium a direct or indirect cost of the products that David wored on in December$ Explain. S02#304

(*C min. aor cost, oertime and idle time& +.(a otal cost of hours wored at regular rates rates BC hours U *= per hour == hours U *= per hour =K hours U *= per hour =B hours U *= per hour %inus idle time (K.C hours U *= per hour (*.C hours U *= per hour (=.C hours U *= per hour (3.B hours U *= per hour otal idle time Direct manufacturing labor costs

+,*CC +,CBK +,+C= +,CC   =,==C +== = GK = 3 * =,CK

(b !dle time H +B.B hours U *= per hour H (c
 3* 

+*C = + == KC 3 =  BK

=,CK 3 * BK B,+GK

*. !dle !dle time time caus caused ed by regu regula larr machi machine ne main mainte tena nanc nce, e, slow slow orde orderr perio periods ds,, or unex unexpe pect cted ed mechanical problems is an indirect cost of the product because it is not related to a specific  product.
*-=3

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// hours. !f, however, the the overtime is the result of a demanding /rush job,0 the overtime premium is a direct cost of that job. ('** ('** Missi Missing ng reco records rds,, comput computing ing inento inentor r costs& costs& Jon :oward recently too over as the contro controlle llerr of 9oh 9ohnso nson n @rothe @rothers rs %anufa %anufactu cturin ring. g. Past Past mon month, th, the previo previous us contro controlle llerr left left the company with little notice and left the accounting records in disarray. Jon needs the ending inventory balances to report first-uarter numbers. 'or the the prev previo ious us mo mont nth h (%ar (%arch ch *C+ *C+ Jon Jon was was able able to piec piecee toge togeth ther er the the foll followi owing ng information

Direct materials purchased

+*C,CCC

#or-in-process inventory, 34+4*C+

 3B,CCC

Direct materials inventory, 34+4*C+

 +* +*,BCC

'inished-goods inventory, 34+4*C+

+KC,CCC

"onversion costs

33C,CCC

otal manufacturing costs added adde d during the period

=*C,CCC

"ost of goods manufactured

= times direct materials used

)ross margin as a percentage of revenues Jevenues

*CS B+,BC

"alculate the cost of Jeuired 1& 'inished-goods inventory, 343+4*C+ inventory, 343+4*C+ (& #or-in-process inventory, )& Direct materials inventory, 343+4*C+ S02#304 (3CQ=C min.

+. *. 3.

Missing records, computing inentor costs&

'inished goods inventory, inventory, 343+4*C+ H +CB,CCC #or-in-process inventory, inventory, 343+4*C+ H GB,CCC Direct materials inventory, inventory, 343+4*C+ H =*,BCC

his problem is not as easy as it first appears. hese answers are obtained by woring from the nown no wn figur figures es to the unnown unnownss in the schedul schedulee below below.. he basic basic relati relations onship hipss betwee between n categories of costs are %anufacturing costs added during the period (given =*C,CCC "onversion costs (given 33C,CCC Direct Direct mater material ialss used H %anufac %anufactur turing ing costs costs added added Q "onversi "onversion on costs costs

*-==

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// H =*C,CCC =*C,CCC Q 33C,C 33C,CCC CC H GC,CCC GC,CCC "ost of goods manufactured H Direct %aterials %aterials >sed U = H GC,CCC U = H 3KC,CCC Schedule of Computations Direct materials inventory, 34+4*C+ (given +*,BCC Direct materials purchased (given Direct materials available for use Dire Direct ct mate materi rial alss inve invent ntor ory y, 343+ 343+4* 4*C+ C+  Direct materials used "onversion costs (given %anufacturing costs added during the period (given Add Add wor wor in proc proces esss inve invent ntor ory y, 34+4 34+4*C *C+ + (giv (given en %anufacturing costs to account for Dedu Deduct ct wor wor in proc proces esss inve invent ntor ory y, 343+4 343+4*C *C+ + "ost of goods manufactured (= U GC,CCC Add finished goods inventory, 34+4*C+ "ost of goods available for sale Deduct finished goods inventory, 343+4*C+ "ost of goods sold (CS U B+,BC



3H

*H

+H

+*C,CCC +3*,BCC =*,B =*,BCC CC GC,CCC 33C,CCC =*C,CCC 3B,C 3B,CCC CC =BB,CCC GB,C GB,CCC CC 3KC,CCC +KC,CCC B*C,CCC +CB,CCC =+B,CCC

7ome instructors may wish to place the ey amounts in a #or in 1rocess -account. his  problem can be used to introduce students to the flow of costs through the general ledger  (amounts in thousands Direct %aterials @eg !nv +*.B 1urch. +*C.C End !nv

=*.B

#or in 1rocess @eg !nv 3B D% used "<)% 3KC   (= (=*CQ33C GC "onversion 33 C o account for =BB

Available for sale

B*C

End !nv

End !nv

+C B

GB

'inished )oods @eg !nv +KC 3KC "<)7 =+B

"ost of  )oods 7old =+B

Atlanta
+=C,CCC ;

Direct manufacturing labor costs

**,CCC ;

1lant energy costs

B,CCC ;

!ndirect manufacturing labor costs

+,CCC ;

!ndirect manufacturing labor costs

+=,CCC '


,CCC ;

*-=B

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*K,CCC '

%areting, distribution, and customerservice costs

+*C,CCC ;

%areting, distribution, and customerservice costs

=3,CCC '

Administrative costs

B=,CCC '

;ariable manufacturing costs are variable with respect to units produced. ;ariable mareting, distribution, and customer-service costs are variable with respect to units sold. !nventory data are as follows $eginning! Ganuar 1, (/1

Ending! Decemer )1, (/1

Direct materials

C lb

*,3CC lbs

#or in process

C units

C units

'inished goods

C units

$ units

1roduction in *C+ was +CC,CCC units. wo pounds of direct materials are used to mae one unit of finished product. Jevenues in *C+ were =3,*CC. he selling price per unit and the purchase price per pound of direct materials were stable throughout the year. he company5s ending inventory of finished goods is carried at the average unit manufacturing cost for *C+. 'inished-goods inventory at December 3+, *C+, was *C,GC. Jeuired inventory, total cost, December 3+, *C+. 1& "alculate direct materials inventory, (& "alculate finished-goods inventory, total units, December 3+, *C+. )& "alculate selling price in *C+. *& "alculate operating income for *C+. S02#304

(3C min.

Comprehensie prolem on unit costs, product costs&

+. !f * poun pounds ds of dir direc ectt mater materia ials ls are are used used to to mae mae each each unit unit of fini finish shed ed prod produc uct, t, +CC, +CC,CC CCC C unit unitss ×  * lbs., or *CC,CCC lbs. were used at C.C per pound of direct materials (+=C,CCC ÷ *CC,CCC lbs.. (he direct material costs of +=C,CCC are direct materials used, not purchased. herefore, the ending inventory of direct materials is *,3CC lbs.  C.C H +,K+C.

*. Direct materials costs

Manufacturing Costs for 1//,/// units ;ariale
*-=K

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// Direct manufacturing labor costs 1lant energy costs !ndirect manufacturing labor costs
**,CCC B,CCC +,CCC ,CCC +G3,CCC

'inished goods inventory in units

>nits sold in *C+ H H 7elling price in *C+ H H

**,CCC B,CCC 3*,CCC 3=,CCC *33,CCC

*33,CCC ÷ +CC,CCC units H *.33 per unit A*C,GEC (given H A*.33 per unit H G,CCC units

Average unit manufacturing cost

3.

Q Q += ,CCC *K,CCC = C ,CC C

@eginning inventory I 1roduction Q Ending inventory C I +CC,CCC QG,CCC H G+,CCC units =3,*CC ÷ G+,CCC B.* B.*C C per per unit unit

=. Atlanta 0ffice Euipment 3ncome Statement ear Ended Decemer )1, (/1 7in thousands9

Jevenues (G+,CCC units sold U B.*C "ost of units sold @eginning finished goods, 9an. +, *C+ "ost of goods manufactured "ost of goods available for sale Ending finished goods, Dec. 3+, *C+ )ross margin
*-=

=3,*CC  C *33,CCC *33,CCC *C,GC

+K3,CCC B=,CCC

*+*,C3C *K+,+C

*+,CCC  ==,+C

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// Note: Although not required required the ull set o unit !aria"le #osts is: Direct materials cost (C.C U * lbs. Direct ma manufac facturing la labor co cost ( (**,CC ,CCC N +CC,CCC 1lant energy cost (B,CCC N +CC,CCC !ndi !ndire rect ct manu manufa fact ctur urin ing g labo laborr cost cost (+ (+,C ,CCC CC N +CC, +CC,CC CCC C
+.=CC C.** .** C.CB C.+ C.+ C.C

%areting, distribution, and customer-service costs $%&'(((( N )&,CCC

+.3 +.3*G *G per per uni unitt sol sold d

H +.G3 per unit manufactured

('*6 Differ Different ent meaning meaningss of produc productt costs& costs& here are at least 3 different purposes for which we measure product costs. hey are (+ pricing and product mix decisions, (* determining the appropriate charge for a government contract, and (3 for preparing financial statements for  external reporting following )enerally Accepted Accounting 1rinciples.
#pe of Cost

>urpose! >ricing">roduct Mi5

>urpose! =oernment Contract

>urpose! 9

Direct %aterial Direct %anufacturing Pabor  %anufacturing
(+B min. Different meanings of product costs Purpose:

Type of Cost Direct materials

Purpose: Pricing/Product Mix

Purpose: Government Contract

Financial Statement (using GAAP

Include

Include

Include

*-=

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// Direct manufacturing labor

Include

Include

Include

Manufacturing overhead

Include

Include

Include

Markeng costs

Include

Exclude*

Exclude

Distribuon expense

Include

Exclude*

Exclude

Customer service

Include

Exclude*

Exclude

R Q hese costs are generally excluded but may be included if specifically reuired for a specific contract.

1aul :oward :oward,, the new plant plant manage managerr of )arden )arden 7capes ('* ('* Cost Cost clas classi sifi fica cati tion onII ethi ethics cs&& 1aul %anufacturing 1lant &umber , has just reviewed a draft of his year-end financial statements. :oward receives a year-end bonus of ++.BS of the plant5s operating income before tax. he yearend income statement provided by the plant5s controller was disappointing to say the least. After  reviewing the numbers, :oward demanded that his controller go bac and /wor the numbers0 again. :oward insisted that if he didn5t see a better operating income number the next time around he would be forced to loo for a new controller. )arden 7capes %anufacturing classifies all costs directly related to the manufacturing of its  product as product costs. hese costs are inventoried and later expensed as costs of goods sold when the product is sold. All other expenses, including finished-goods warehousing costs of  3,K=C,CCC, are classified as period expenses. :oward had suggested that warehousing costs be included as product costs because they are /definitely related to our product.0 he company  produced *KC,CCC units during the period and sold *=C,CCC units. As the controller rewored the numbers, he discovered that if he included warehousing costs as product costs, he could improve operating income by *C,CCC. :e was also sure these new numbers would mae :oward happy. Jeuired 1& Show numerically how operating income would improve by *C,CCC just by classifying the  preceding costs as product costs instead of period expenses. (& !s :oward correct in his justification that these costs are /definitely related to our product0$ )& @y how much will :oward profit personally if the controller maes the adjustments in reuirement +$ *& #hat should the plant controller do$ S02#304

(*C-*B min. Classification of costsI ethics& +.

#arehousing costs per unit H

#arehousing costs

>nits produced 3,K=C,CCC  += per unit. H *KC,CCC units =

*-=G

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// !f the 3,K=C,CCC is treated as period costs, the entire amount would be expensed during the year as incurred. !f it is treated as a product cost, it it would be /uniti2ed0 at += per unit and expensed as each unit of the product is sold. herefore, if only *=C,CCC of the *KC,CCC units units are sold, only 3,3KC,CCC (+= per unit U *=C,CCC units of the 3,K=C,CCC would be expensed in the current period. he remaining 3,K=C,CCC Q 3,3KC,CCC H *C,CCC would be inventoried on the  balance sheet until a later period when the units are sold. he value of finished goods inventory can also be calculated directly to be *C,CCC (+= per unit U *C,CCC units. *. &o. #ith respect respect to to classi classifying fying costs as product product or or period period costs, costs, this this determinati determination on is is made made  by )AA1. )AA1. !t is not something that can be justified by the plant manager or plant controller. controller. Even though these costs are in fact related to the product, they are not direct costs of manufacturing the product. )AA1 reuires reuires that research and development, as well well as all costs related to warehousing and distribution of goods, be classified as period costs and expensed in the period they are incurred. 3.

1aul 1aul :owa :oward rd would would improv improvee his his pers personal onal bonus bonus and and taetae-hom homee pay pay by ++.BS U *C,CCC H 3*,*CC

=. he contr controll oller er should should not not reclass reclassif ify y costs costs as product product cost costss just just so the plan plantt can reap reap shortshortterm benefits, including the the increase in :oward5s :oward5s personal year-end year-end bonus. Jesearch and development costs, costs related to the shipping of finished goods, and costs related to warehousing finished goods are all period costs under )AA1 and must be treated as such. "hanging this classification on )arden 7capes %anufacturing5s financial statements would violate )AA1 and would liely be considered fraudulent. he idea of costs being classified as  product costs versus period costs is to properly properly reflect on the income statement those costs that are directly related to manufacturing (costs incurred to transform one asset, direct materials into another asset, finished goods and to properly reflect on the balance sheet those costs that will  provide a future benefit (inventory. he controller should not be intimidated by :oward. :oward stands to personally personally benefit from the reclassification reclassification of costs. he controller should insist that he must adhere to )AA1 so as not to submit fraudulent financial statements to corporate headuarters. !f :oward insists on the reclassification, the controller should raise the issue with the chief financial officer after informing :oward that he is doing so. !f, after taing all these steps, there is continued pressure to modify the numbers, the controller should consider resigning from the company rather than engage engag e in unethical behavior.

*-BC

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu//

('*('*-
Case (

7in thousands9

Accounts receivable, +*43+

 ,CCC

 3,+BC

A

3+,CC

Accounts payable, +4+

=,BCC

*,BBC

Accounts payable, +*43+

*,CC

*,*BC

@

,CCC

+,CCC

"

3,CCC

+,BCC

C

=,CC

B,CCC

,CCC

+3,CCC

+G,CCC

Direct manufacturing labor

=,BCC

,BCC

%anufacturing overhead costs

G,BCC

D

1urchases of direct materials

+3,BCC

+C,BCC

Jevenues

B*,CCC

B*,3CC

3,CCC

*,+CC

"ost of goods sold

'inished-goods inventory, +*43+ )ross margin #or-in-process inventory, +4+ #or-in-process inventory, +*43+ 'inished-goods inventory, +4+ Direct materials used

Accounts receivable, +4+ S02#304 (*CQ*B min.
Pet ) H given, ! H inferred 7tep + >se gross margin formula formula Jevenues "ost of goods sold )ross margin 7tep * >se schedule of cost of goods manufactured formula Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs %anufacturing costs incurred Add beginning wor in process, +4+ otal manufacturing costs to account for Deduct ending wor in process, +*43+ *-B+

Case 1 B*,CCC ) A 3=,CCC ! +,CCC )

Case ( B*,3CC ) 3+,CC ) * C,BC BCC C ! C *C,

+3,CCC ) =,BCC ) G,BCC ) *,CCC ! 3,CCC ) 3C,CCC ! C)

+G,CCC ) ,BCC ) ,BC , BCC C ! D 3B,CCC ! +,BCC ) 3K,BCC ! =,CC )

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// "ost of goods manufactured 7tep 3 >se cost of goods sold formula @eginning finished goods inventory, +4+ "ost of goods manufactured "ost of goods available for sale Ending finished goods inventory, +*43+ "ost of goods sold 'or case +, do steps +, *, and 3 in order. order. 'or case *, do steps +, 3, and then *.

3C,CCC !

3+,CC !

 B, B,CCC ) 3C,CCC ! 3B,CCC ! $ +,CCC ! 3=,CCC !

 ,CCC ) 3+,CC ! 3,CC ! ,CCC ) 3+,CC )

#r 3t ('1 Solution

he following table shows the total costs of gasoline and insurance and the cost per mile if the truc is driven (a *C,CCC miles and (b 3C,CCC miles. 4umer of Miles Drien 719

;ariale =asoline =a soline Costs 7(9 @ ?/&1+

719


7*9 @ 7(9 B 7)9

#otal Costs

Cost per Mile 7+9 @ 7*9

  *C *C,CCC

3,CCC

K,CCC

 G,CCC

C.=B

3C,CCC

=,BCC

K,CCC

+C,BCC

C.3B

*-B*

719

Full fle at hps://TestBanksCae.eu hps://TestBanksCae.eu// #r 3t ('( Solution

#e first calculate the cost of direct materials used and then total manufacturing costs incurred in *C+.  'he cost of direct direct materials used used is( @eginning inventory of direct materials, 9anuary +, *C+

+*,CCC

I 1urchases of direct materials in *C+

B,CCC

W Ending inventory of direct materials, December 3+, *C+

,CCC

H Direct materials used in *C+

GC,CCC

otal manufacturing costs incurred refers to all direct manufacturing costs and manufacturing overhead costs incurred during *C+ for all goods wored on during the year. year. Diana "orporation classies its manufacturing costs into the three categories descri!ed earlier. earlier. (i Direct materials used in *C+

 GC,CCC

(ii Direct manufacturing labor costs in *C+

3C,CCC

(iii %anufacturing overhead costs in *C+

=C,CCC

otal manufacturing costs incurred in *C+

+KC,CCC

#r 3t (') Solution

(a "ost of goods manufactured  refers  refers to the cost of goods brought broug ht to completion, whether they were started before or during the current accounting period. 7ome of the manufacturing costs incurred during *C+ are held h eld bac as the cost of the ending wor-in-process inventory. inventory. he cost of goods manufactured in *C+ for Diana "orporation is calculated as follows( @eginning wor-in-process inventory, 9anuary +, *C+



G,CCC

 otal manufacturing costs incurred in *C+

 +KC,CCC

 otal manufacturing costs to account for 

+KG,CCC

 =

 Ending wor-in-process inventory, December 3+, *C+

 

 "ost of goods manufactured in *C+

+K+,CCC

 =

,CCC

(b h hee cost of goods sold  is  is the cost of finished goods inventory sold to customers during the current accounting period. "ost of goods go ods sold is an expense that is matched against revenues. he cost of goods sold in *C+ for Diana "orporation is calculated as follows( @eginning inventory of finished goods, 9anuary +, *C+

 +B + B,CCC

 "ost of goods manufactured in *C+

+K+,CCC

 Ending inventory of finished goods, December 3+, *C+

  *+,CCC

 "ost of goods sold in *C+

+BB,CCC

  =

*-B3