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Solutions Manual, Chapter 2 13

2 Cost Concepts and Behavior

Solutions to Review Questions

2-1.

Cost is a more general term that refers to a sacrifice of resources and may be either an opportunity cost or an outlay cost. An expense is the write-off of an outlay cost against

revenues in a particular accounting period and usually pertains only to external financial reports.

2-2.

Product costs are those costs that are attributed to products, while period costs are those costs that are attributed to time periods. The determination of product costs varies depending on the approach used: full absorption, variable, or managerial costing.

2-3.

Outlay costs are those costs that represent a past, current, or future cash outlay. Opportunity cost is the value of what is given up by choosing a particular alternative.

2-4.

Common examples include the cost of lost sales by producing low quality products or substandard customer service. Another example is a firm operating at capacity. In this case, a sale to one customer precludes a sale to another customer.

2-5.

Yes. The costs associated with goods sold in a period are not expected to result in future benefits. They provided revenues for the period in which the goods were sold; therefore, they are expensed for financial accounting purposes.

2-6.

The costs associated with goods sold are a product costs for a manufacturing firm. They are the costs associated with the product and recorded in an inventory account until the product is sold.



14 Fundamentals of Cost Accounting

2-7.

Both accounts represent the cost of the goods acquired from an outside supplier, which include all costs necessary to ready the goods for sale (in merchandising) or production (in manufacturing).

The merchandiser expenses these costs as the product is sold, as no additional costs are incurred. The manufacturer transforms the purchased materials into finished goods and charges these costs, along with conversion costs to production (work in process inventory). These costs are expensed when the finished goods are sold.

2-8.

Direct materials: Materials in their raw or unconverted form, which become an integral part of the finished product are considered direct materials. In some cases, materials are so immaterial in amount that they are considered part of overhead.

Direct labor: Costs associated with labor engaged in manufacturing activities. Sometimes this is considered as the labor that is actually responsible for converting the materials into finished product. Assembly workers, cutters, finishers and similar “hands on” personnel are classified as direct labor.

Manufacturing overhead:

All other costs directly related to product manufacture. These costs include the indirect labor and materials, costs related to the facilities and equipment required to carry out manufacturing operations, supervisory costs, and all other direct support activities.

2-9.

Step costs change with volume in steps, such as when supervisors are added. Semivariable or mixed costs have elements of both fixed and variable costs. Utilities and maintenance are often mixed costs.

2-10.

Total variable costs change in direct proportion to a change in volume (within the

relevant range of activity). Total fixed costs do not change as volume changes (within the relevant range of activity).




Solutions to Critical Analysis and Discussion Questions

2-11.

The statement is not true. Materials can be direct or indirect. Indirect materials include items such as lubricating oil, gloves, paper supplies, and so on. Similarly, indirect labor includes plant supervision, maintenance workers, and others not directly associated with the production of the product.

2-12.

Statements such as this almost always refer to the full cost per unit mxing fixed and variable costs. Therefore, multiplying the cost per seat-mile by the number of miles is unlikely to give a useful estimate of flying one passenger. The variable costs will be very small.

2-13.

Marketing and administrative costs are treated as period costs and expensed for financial accounting purposes in both manufacturing and merchandising organizations. However, for decision making or assessing product profitability, marketing and administrative costs that can be reasonably associated with the product (product-specific advertising, for example) are just as important as the manufacturing costs.

2-14.

There is no “correct” answer to this allocation problem. Common allocation procedures would including (1) splitting the costs equally (25% each), (2) dividing the costs by the miles driven and charging based on the miles each person rides, (3) charging the incremental costs of the passengers (almost nothing) because you were going to drive to Texas anyway.

2-15.

Direct material costs include the cost of supplies and medicine. One possible direct labor cost would be nursing staff assigned to the unit. Indirect costs include the costs of hospital administration, depreciation on the building, security costs, and so on.




Solutions to Exercises

2-16. (15 min.) Basic Concepts.

a. False. This is an expense. For example, R&D costs are incurred in expectation of future benefits.

b. True. Each unit of a product has the same amount of direct material (same cost per unit), but producing more units requires more material (and more cost).

c. False. Variable costs can be direct (direct materials) or indirect (lubricating oil for machines.)


Cost Item

Fixed (F)

Variable (V)

Period (P)

Product (M)

a. Assembly line workers’ wages ............................................. V M

b. Depreciation on office buildings for administrative staff ....... F P

c. Bonuses of top executives in the company .......................... F P

d. Overtime pay for assembly workers ..................................... V M

e. Transportation-in costs on materials purchased .................. V M

f. Training costs for operating plant machinery ....................... F M

g. Travel cost for sales personnel ............................................ V P

h. Administrative support for sales supervisors ........................ F P

i. Controller’s office rental ....................................................... F P

j. Cafeteria costs for the plant ................................................. F M


a. Property taxes on the factory. ...................................................................... C

b. Wages for drivers delivering work-in-process from one plant to another. .... C

c. Transportation-in costs on materials purchased. ......................................... P

d. Assembly line worker’s salary. ..................................................................... B

e. Direct materials used in production process. ............................................... P

f. Lubricating oil for plant machines. ............................................................... C





Concept Definition

5 Period costs Costs that can more easily be attributed to time intervals.

9 Indirect costs Costs that cannot be directly related to a cost object.

11 Fixed costs Costs that do not vary with the volume of activity.

7 Opportunity costs The lost benefit from the best forgone alternative.

6 Outlay costs Past, present, or near-future cash flow.

10 Direct costs Costs that can be directly related to a cost object.

3 Expense The cost charged against revenue in a particular accounting period.

2 Cost A sacrifice of resources.

1 Variable costs Costs that vary with the volume of activity.

4 Full absorption cost Costs that are part of inventory.

8 Product costs Costs used to compute inventory value according to GAAP.


Cost Item

Fixed (F) Variable (V)

Period (P) Product (M)

a. Advertising costs .............................................................. F P

b. Depreciation on pollution control equipment in the plant .. F M

c. Office supplies for the plant manager............................... F M

d. Power to operate factory equipment ................................ V M

e. Commissions paid to sales personnel .............................. V P





a. Variable production cost per unit ($150 + $20 + $5 + $10) .. $185

b. Variable cost per unit. ($185 + $15) ..................................... $200

c. Full cost per unit. [$200 + ($38,000 ÷ 400 units)] ................. $295

d. Full absorption cost per unit. [$185 + ($20,000 ÷ 400)] ........ $235

e. Prime cost per unit: (labor + materials + outsource) ............ $175

f. Conversion cost per unit. (labor + overhead + outsource) ... $230

g. Contribution margin per unit. ($300 – $200)....................... $100

h. Gross margin per unit. ($300 – full absorption cost of $235) $65

i. Suppose the number of units increases to 500 units per month, which is within the relevant range, which of a through h will change. For each amount that will change, give the new amount for a volume of 500 units.

Full cost = $200 + ($38,000 ÷ 500) = $276

Full absorption cost = $185 + ($20,000 ÷ 500) = $225

Conversion costs = $150+$10 + ($20,000 ÷ 500) + $20 = $220

Gross margin = $300 – $225 = $75

c, d, f and h will

change

2-22. (15 min.) Cost Allocation—Ethical Issues

This problem is based on the experience of the authors’ research at several companies.

a. Answers will vary as there are several defensible bases on which to allocate the product development costs. Because the price for government sales depends on the allocated costs, using expected sales (units or revenues) leads to a potential circularity. Price depends on cost, which depends on sales, which depends on price.

b. The company has an incentive to allocate as much cost as possible to government sales. This cost will be reimbursed (and the government may be less price-sensitive). Of course, the government recognizes this and has detailed allocation guidelines in place and an agency (the Defense Contract Audit Agency) that

monitors contracts and the allocation of costs.




2-23. (15 min.) Cost Allocation—Ethical Issues

This problem is based on the experience of the authors’ research at several companies.

a. Answers will vary as there are several defensible bases on which to allocate the common costs. One possibility is relative revenues. (We ignore here whether we should allocate these costs, something we discuss in chapter 3.)

b. You should explain to Star that you cannot agree with the allocation basis, especially given the reason for selecting the basis. If this fails to persuade Star, you should disclose to Star’s boss your disagreement with the analysis and the relation between Star and the vendor.

2-24. (30 min.) Prepare Statements for a Manufacturing Company: MacBeth Manufacturing.

MacBeth Manufacturing Company Cost of Goods Sold Statement

For the Year Ended December 31

Beginning work in process inventory .............. $32,300

Manufacturing costs:

Direct materials:

Beginning inventory ................................... $24,500

Purchases .................................................. 50,400 (a)*

Materials available ................................... 74,900

Less ending inventory ................................ 27,200

Direct materials used ............................... $47,700

Other manufacturing costs ......................... 7,000 **

Total manufacturing costs ........................ 54,700 (c)

Total costs of work in process .................... 87,000

Less ending work in process ................... 29,000

Cost of goods manufactured.................. 58,000 (b)

Beginning finished goods inventory ................ 4,500

Finished goods available for sale ................... 62,500

Ending finished goods inventory .................... 6,500

Cost of goods sold ......................................... $56,000

* Letters (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c. ** Difference between total manufacturing costs and direct materials used.




2-25. (10 min.) Prepare Statements for a Service Company: InterGalactic Strategic Consultants

Revenues .......................................... $40,000,000 (Given)

Cost of services sold (b) .................... 22,300,000 (Revenues – gross margin)

Gross margin ..................................... $17,700,000 (Given)

Marketing and administrative

costs (a) ............................................

10,100,000

(Gross margin – operating profit)

Operating profit ................................. $7,600,000 (Given)

2-26. (30 min.) Prepare Statements for a Manufacturing Company: Secol Machining Company

Secol Machining Company Cost of Goods Sold Statement


Beginning work in process inventory ..... $ 108,600


Direct materials:

Beginning inventory .......................... $ 98,400

Purchases ......................................... 515,600

Materials available .......................... 614,000

Less ending inventory ....................... 109,800

Direct materials used ...................... $504,200 (a)*

Other manufacturing costs ................ 1,369,600 **

Total manufacturing costs ............... 1,873,800 (c)

Total costs of work in process ........... 1,982,400

Less ending work in process .......... 106,200

Cost of goods manufactured......... 1,876,200 (b)

Beginning finished goods inventory ....... 43,800

Finished goods available for sale .......... 1,920,000

Ending finished goods inventory ........... 45,000

Cost of goods sold ................................ $1,875,000

* Letters (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c. * Difference between total manufacturing costs and direct materials used.




2-27. (15 min.) Basic Concepts

a. Beginning Material Inventory

= Transferred out + Ending Balance – Transferred In

= 15,300 + 3,600 – 16,100 ...................................................

= $2,800

b. Transferred Out of Work in Process

= Beginning Balance + Transferred In – Ending Balance

= 2,700 + 55,550 – 3,800 .....................................................

(also can be found solving for Transferred In to Finished

Goods)

= $54,450

c. Revenue – Cost of Goods Sold = 103,300 – 56,050 ............ = $47,250

2-28. (15 min.) Prepare Statements for a Merchandising Company: Sun & Surf Apparel Shop

Sun & Surf Apparel Shop Cost of Goods Sold Statement

For the Year Ended December 31, This Year

Revenue .................................................................................................. $934,000

Cost of goods sold (see statement below) .............................................. 621,770

Gross margin ..........................................................................................

$312,230

Marketing and administrative costs ($73,200 + 42,850 + 14,400 + 2,730) ......................................................................................................

133,180

Operating profit .......................................................................................

$179,050

Sun & Surf Apparel Shop Cost of Goods Sold Statement

For the Year Ended December 31, This Year

Beginning inventory .............................................................. $ 37,400

Purchases .......................................................................... $615,950

Transportation-in .................................................................. 4,620

Total cost of goods purchased ............................................. 620,570

Cost of goods available for sale ........................................... 657,970

Ending inventory .................................................................. 36,200

Cost of goods sold ............................................................... $621,770




2-29. (30 min.) Prepare Statements for a Manufacturing Company: Pioneer Parts

Pioneer Parts Statement of Cost of Goods Sold For the Year Ended December 31

($000)

Work in process, Jan. 1 .......................................... $ 115


Direct materials:

Beginning inventory, Jan. 1 ................................ $ 86

Add material purchases ..................................... 8,240

Direct materials available ................................... 8,326

Less ending inventory, Dec. 31 .......................... 93

Direct materials used ......................................... $ 8,233

Direct labor ........................................................... 12,600


Indirect factory labor .......................................... 2,890

Indirect materials and supplies .......................... 682

Factory supervision ......................................... 752

Factory utilities ................................................... 954

Factory and machine depreciation ..................... 11,640

Property taxes on factory ................................... 284

Total manufacturing overhead ......................... 17,202

Total manufacturing costs ............................. 38,035

Total cost of work in process during the year ......... 38,150

Less work in process, Dec. 31 ............................. 136

Costs of goods manufactured during the year ... 38,014

Beginning finished goods, Jan. 1 ........................... 1,640

Finished goods inventory available for sale ........... 39,654

Less ending finished goods inventory, Dec. 31 ...... 1,470

Cost of goods sold ................................................. $38,184




2-29. (continued)

Pioneer Parts Income Statement


($000)

Sales revenue ............................................................................ $45,400

Less: Cost of goods sold ........................................................... 38,184

Gross margin ............................................................................. 7,216

Administrative costs ................................................................... $3,650

Marketing costs .......................................................................... 1,520

Total marketing and administrative costs ................................... 5,170

Operating profit .......................................................................... $ 2,046




2-30. (30 min.) Prepare Statements for a Manufacturing Company: Oakdale Tool & Die

.

Oakdale Tool & Die Statement of Cost of Goods Sold For the Year Ended December 31

Beginning work in process, Jan. 1...................... $ 31,000


Direct materials:

Beginning inventory, Jan. 1 ............................ $ 12,000

Add: Purchases ............................................. 3,650,000

Direct materials available ............................. 3,662,000

Less ending inventory, Dec. 31 ...................... 14,000

Direct materials used ................................... $3,648,000

Direct labor ....................................................... 845,000


Indirect factory labor ...................................... 912,000

Factory supervision ........................................ 487,000

Indirect materials and supplies ...................... 685,000

Building utilities (80% of total) ........................ 1,000,000

Building & machine depreciation (85%) ......... 765,000

Property taxes—factory (75% of total) ........... 630,000

Total manufacturing overhead ..................... 4,479,000

Total manufacturing costs ......................... 8,972,000

Total cost of work in process during the year ..... 9,003,000

Less work in process, Dec. 31 ......................... 27,000

Costs of goods manufactured during the year

8,976,000

Beginning finished goods, Jan. 1 ....................... 54,000

Finished goods available for sale ....................... 9,030,000

Less ending finished goods, Dec. 31 ................. 65,000

Cost of goods sold ............................................. $ 8,965,000




2-30. (continued)

Oakdale Tool & Die Income Statement


Sales revenue .............................................................. $12,970,000

Less: Cost of goods sold (per statement) ..................... 8,965,000

Gross profit .................................................................. $ 4,005,000

Marketing and administrative costs:

Depreciation (15% of total)......................................... $ 135,000

Utilities (20% of total) ................................................. 250,000

Property taxes (25% of total)...................................... 210,000

Administrative costs ................................................... 1,654,000

Marketing costs .......................................................... 871,000

Total marketing and administrative costs ................... 3,120,000

Operating profit ............................................................ $ 885,000




2-31. (10 Min.) Cost Allocation with Cost Flow Diagram: Coastal Computer

a.

(1) Main Street Lakeland Mall Total

Number of computers sold ........ 2,000 1,500 3,500

Percentage .............................. 57.143% 42.857% 100%

Allocated Accounting department cost ($175,000) ......

$100,000

$75,000

$175,000

(2) Main Street Lakeland Mall Total

Revenue ................................... $2,000,000 $3,000,000 $5,000,000

Percentage ............................... 40% 60% 100%

Allocated Accounting department cost ($175,000) ......

$70,000

$105,000

$175,000

b.

Accounting Department

$175,000Cost

pool

Main Street

$70,000

Lakeland Mall

$105,000

Cost

allocation

rule

Cost

objects

40%a

60%b%Revenue




a 40% = $2,000,000 ÷ ($2,000,000 + $3,000,000) b 60% = $3,000,000 ÷ ($2,000,000 + $3,000,000)

2-32. (10 min.) Cost behavior for Forecasting: Gibson Company.

The variable costs will be 40% higher (an increase of 21,000 – 15,000 = 6,000 units)

Variable costs:

Direct materials used ($1,056,000 x 1.4) ................................ $ 1,478,400

Direct labor ($1,995,000 x 1.4) ............................................... 2,793,000

Indirect materials and supplies ($240,000 x 1.4) .................... 336,000

Power to run plant equipment ($213,000 x 1.4) ..................... 298,200

Total variable costs ................................................................ $4,905,600

Fixed costs:

Supervisory salaries ............................................................... 930,000

Plant utilities (other than power to run plant equipment) ........ 288,000

Depreciation on plant and equipment ..................................... 144,000

Property taxes on building ...................................................... 195,000

Total fixed costs ..................................................................... 1,557,000

Total costs for 21,000 units ...................................................... $6,462,600

Fixed costs = $1,557,000 = $930,000 + $288,000 + $144,000 + $195,000

Note that the variable cost per unit is $233.60 at both 15,000 units and at 21,000 units.

Variable costs = $233.60 per unit = ($4,905,600 21,000 units) or ($3,504,000 15,000 units)

VariableCosts

4,905.6

$

15,000 21,000 Volume

3,504.0




2-33. (30 min.) Components of Full Costs: Ramirez Corporation

Full costof making

and sellingthe product

= $436

Direct materials= $180

Direct labor= $105

Variable manufacturing

overhead= $27

Fixed manufacturingoverhead

= $60

($108,000 1,800 units)

Variable marketingand administrative

= $24

Fixed marketingand administrative

= $40($72,000 1,800 units)

Full-absorptioncost

= $372

Variablemanufacturing

costs= $312

Variable

marketing and

administrative= $24

Unitvariable

cost= $336

a. Variable manufacturing cost: $180 + $105 + $27= $312

b. Variable cost: $180 + $105 + $27 + $24 = $336

c. Full absorption cost: $180 + $105 + $27 + ($108,000 ÷ 1,800 units) = $372

d. Full cost: $180 + $105 + $27 + $24 + ($108,000 ÷ 1,800 units) + ($72,000 ÷ 1,800 units) = $436




2-34. (15 min.) Components of Full Costs: Ramirez Corporation

a. Product cost = Direct materials + Direct labor + Manufacturing overhead.

Product cost per unit: $180 + $105 + $27 + ($108,000 ÷ 1,800 units) = $372

b. Period costs = Marketing and administrative costs.

Period costs for the period: $72,000 + ($24 x 1,800 units) = $115,200




2-35. (30 min.) Components of Full Cost: Larson Manufacturing.

Full costof making

and sellingthe product

= $177

Direct materials= $35

Direct labor

= $30

Variable manufacturingoverhead

= $20

Fixed manufacturingoverhead

= $45($225,000 5,000 units)

Variable marketingand administrative

= $8

Fixed marketingand administrative

= $39($195,000 5,000 units)

Full-absorptioncost

= $130

Variablemanufacturing

costs= $85

Variable

marketing and

administrative= $8

Unitvariable

cost= $93

a. Variable cost: $35 + $30 + $20 + $8 = $93

b. Variable manufacturing cost: $35 + $30 + $20 = $85

c. Full-absorption cost: $35 + $30 + $20 + ($225,000 ÷ 5,000 units) = $130

d. Full cost: $35 + $30 + $20 + $8 + ($225,000 ÷ 5,000 units) + ($195,000÷ 5,000 units) + $8 = $177




2-35. (continued)

e. Profit margin = Sales price – full cost = $195 – $177 = $18

f. Gross margin = Sales price – full absorption cost = $195 – $130 = $65

g. Contribution margin = Sales price – variable cost = $195 – $93 = $102




2-36. (20 Min.) Gross Margin and Contribution Margin Income Statements: Larson Manufacturing

Gross Margin Income Statement Contribution Margin Income Statement

Revenue(a) ..................... $975,000 Revenue ..............................

$975,000

Variable manufacturing costs (b) ..........................

425,000

Variable manufacturing costs 425,000

Fixed manufacturing costs 225,000 Variable marketing and administrative costs .............

40,000

Gross margin ................... $325,000 Contribution margin .............. $510,000 Variable marketing and administrative costs (c) ......

40,000

Fixed manufacturing costs ... 225,000

Fixed marketing and administrative costs .........

195,000

Fixed marketing and administrative costs .............

195,000

Operating profit ................. $90,000 Operating profit .................... $90,000

(a) $195 x 5,000 units = $975,000 (b) $85 x 5,000 units = $425,000 (c) $8 x 5,000 units = $40,000

2-37. (20 Min.) Gross Margin and Contribution Margin Income Statements: Cunha Products

Gross Margin Income Statement Contribution Margin Income Statement

Revenue ......................... $13,200 Revenue ..............................

$13,200

Variable manufacturing costsa ..............................

4,490

Variable manufacturing costs ....................................

4,490

Fixed manufacturing costs 2,200 Variable marketing and administrative costs .............

560

Gross margin ................... $ 6,510 Contribution margin ............. $ 8,150 Variable marketing and administrative costs .........

560

Fixed manufacturing costs... 2,200

Fixed marketing and administrative costs .........

1,600

Fixed marketing and administrative costs .............

1,600

Operating profit ............... $ 4,350 Operating profit .................... $ 4,350

a Variable manufacturing costs = $2,300 + $1,250 + $940 = $4,490




2-38. (20 Min.) Gross Margin and Contribution Margin Income Statements: Tosca Beverages

Gross margin income statement Contribution margin income statement

Revenuea $188,000 Revenue ............................ $188,000 Variable manufacturing costsb ................................

23,500

Variable manufacturing costs ..................................

23,500

Fixed manufacturing costsc

........................................ 54,050 Variable marketing and

administrative costs ...........

28,200

Gross margin ..................... $110,450 Contribution margin ........... $136,300 Variable marketing and administrative costsd .........

28,200

Fixed manufacturing costs . 54,050

Fixed marketing and administrative costse .........

68,150

Fixed marketing and administrative costs ...........

68,150

Operating profit ................. $14,100 Operating profit .................. $14,100

a Revenue = $8.00 x 23,500 = $188,000 b Variable manufacturing costs = ($0.55 + $0.30 + $0.15) x 23,500 = $23,500 c Fixed manufacturing costs = $2.30 x 23,500 = $54,050 d Variable marketing and administrative costs = $1.20 x 23,500 = $28,200 e Fixed marketing and administrative costs = $2.90 x 23,500 = $68,150




2-39. (30 min.) Value Income Statement: Gene’s Diner.

a.

Gene’s Diner Value Income Statement

For the month ending August 31

Nonvalue-added

activities

Value-added

activities

Total

Sales Revenue ...................................... $120,000 $120,000

Cost of merchandise: ............................

Cost of food serveda ........................... $ 6,600 37,400 44,000

Gross margin ......................................... $ (6,600) $ 82,600 $ 76,000

Operating expenses: .............................

Employee salaries and wagesa ........... 2,400 13,600 16,000

Managers’ salariesb ............................ 4,800 19,200 24,000

Building costsc .................................... ________ 18,000 18,000

Operating income (loss) ........................ $(13,800) $ 31,800 $ 18,000

a 15% nonvalue-added activities b 20% nonvalue-added activities c A portion of these costs might be nonvalue-added if they can be reduced by reducing

nonvalue-added activities.

b. Gene can take steps to ensure that food is used prior to the expiration date, either by changing scheduling or purchasing procedures. He can also spend time training staff to take orders more carefully.




Solutions to Problems

2-40. (30 min.) Cost Concepts: Princeton Products.

a.

Prime costs = direct materials + direct labor

Direct materials = beginning inventory + purchases – ending inventory

= $36,000 + $84,000 – $30,000

= $90,000

Direct labor is given as $60,000

Prime costs = $90,000 + $60,000

= $150,000

b.

Conversion costs = Direct labor + Manufacturing overhead

Conversion costs = $60,000 +$80,000 = $140,000

c.

Total manufacturing costs = Direct materials + Direct labor + Manufacturing overhead

= $90,000 (from a above) + $60,000 + $80,000

= $230,000

d.

Cost of goods manufactured

=

Beginning Work In Process + Total manufacturing costs

– Ending Work In Process

= $18,000 + $230,000 (from c above) – $12,000

= $236,000

e.

Cost of Goods Sold

=

Cost of Goods

Manufactured

+

Beginning Finished Goods

Inventory

–

Ending Finished Goods

Inventory

= $236,000 + $54,000 – $72,000

(from d above)

= $218,000




2-41. (30 minutes) Cost Concepts: San Ysidro Fabrics.

a.

(1) $64

Variable manufacturing cost

= Manufacturing overhead + Direct labor + Direct materials

= $24 + $8 + $32

= $64

(2) $96

Full unit cost = All unit fixed costs + All unit variable costs

Unit fixed manufacturing = ($9,600 ÷ 800 units) = $12

Unit fixed marketing and administrative cost = ($12,800 ÷ 800 units) = $16

= $12 + $16 + $4 + $24 + $8 + $32

= $96

(3) $68

Variable cost = All variable unit costs

= $4 + $24 + $8 + $32

= $68

(4) $76

Full absorption cost = Fixed and variable manufacturing overhead + Direct labor +

direct materials

= $12 + $24 + $8 + $32

= $76

(5) $40.

Prime cost = Direct labor + Direct materials

= $8 + $32

= $40




2-41. (continued)

(6) $44

Conversion cost = Direct labor + Manufacturing overhead

= $8 + ($24 + $12)

= $44

(7) $32

Profit margin = Sales price – Full cost

= $128 – $96

= $32

(8) $60

Contribution margin = Sales price – Variable costs

= $128 – $68

= $60

(9) $52

Gross margin = Sales price – Full absorption cost

= $128 – $76

= $52

b. As the number of units increases (reflected in the denominator), fixed manufacturing cost per unit decreases. The numerator remains the same.




2-42. (20 Min.) Cost Allocation with Cost Flow Diagram: Pacific Business School.

a.

Undergraduate Graduate Total

Number of students ...................... 600 900 1,500

Percentage .............................. 40% 60% 100%

Credit Hours ................................. 8,500 25,500 34,000

Percentage .............................. 25% 75% 100%

Allocation of student-related

costsa.......................................

$450,000

$675,000

$1,125,000

Allocation of credit-hour costsb ..... 218,750 656,250 875,000

Total Allocations ....................... $668,750 $1,331,250 $2,000,000

a $450,000 = 40% x $1,125,000; $675,000 = 60% x $1,125,000.

b $218,750 = 25% x $875,000; $656,250 = 75% x $875,000.




2-42. (continued)

b.

a 40% = 600 students ÷ (600 students + 900 students) b 60% = 900 students ÷ (600 students + 900 students) c 25% = 8,500 credit-hours ÷ (8,500 credit-hours + 25,000 credit-hours) d 75% = 8,500 students ÷ (8,500 credit-hours + 25,000 credit-hours)

Library Costs

$2,000,000Cost

pool

Credit-Hour

Related

$875,000

Student-Related

$1,125,000

Cost

allocation

rule

Cost

objects

25%a

Previous

Analysis

Undergraduate

Related

$668,750

Graduate

$1,331,250

Credit

Hours

Number of

Students

75%b

40%c

60%d




2-43. (40 Min.) Find the Unknown Account Balances.

a. Finished goods beginning inventory

+ Cost of goods manufactured

– Cost of goods sold

= Finished goods ending inventory

Finished goods beginning inventory

+ $21,776 – $21,760 = $3,520

Finished goods beginning inventory

= $ 3,504 (= $3,520 – $21,776 + $21,760)

b. Direct

materials used

+ Direct labor

+ Manufacturing

overhead =

Total

manufacturing costs

Direct materials

used + $ 3,040 + $5,760 = $18,880

Direct materials

used = $10,080 (= $18,880 – $3,040 – $5,760)

Alternative solution

Direct materials

used =

Beginning inventory

+ Materials

purchased –

Ending inventory

Direct materials

used = $2,800 + $9,600 – $2,320

Direct materials

used = $10,080

c. Sales revenue – Cost of goods sold = Gross margin

Sales revenue – $21,760 = $13,120

Sales revenue = $34,880 (= $13,120 + $21,760)

Gross margin % = $13,120 ÷ $34,880 = 37.6%




2-44. (40 min.) Cost Allocation and Regulated Prices: The City of Imperial Falls

a. The rate is 20 percent above the average cost of collection:

Total cost of collection = $160,000 + $640,000 + $200,000

= $1,000,000

Total waste collected (tons) = 2,500 + 7,500

= 10,000 tons

= 20,000,000 pounds

Average cost per pound = $1,000,000 ÷ 20,000,000 pounds

= $.05 per pound

Price per pound = $.05 x 1.20

= $.06 per pound

b.

First, allocate costs to the two cost objects: households and businesses:

Allocation of administrative costs and truck costs:

Total costs = $160,000 + $640,000

$800,000

Number of customers = 9,000+ 1,000

= 10,000 customers

Allocated cost per customer = $800,000 ÷ 10,000 customers

= $80 per customer

Allocation of other collection costs:

Total costs = $200,000

Total waste collected (tons) = 2,500 + 7,500

= 10,000 tons

Allocated cost per ton of waste = $200,000 ÷ 10,000 tons

= $20 per ton




2-44. (continued)

Allocation to customer types:

Households Business

Allocation of customer cost:

Allocated cost per customer ................ $80 $80

Number of customers .......................... 9,000 1,000

Allocated cost ...................................... $720,000 $80,000

Allocation of other costs

Allocated cost per ton .......................... $20 $20

Number of tons .................................... 2,500 7,500

Allocated cost ...................................... $50,000 $150,000

Total allocated cost .............................. $770,000 $230,000

Total number of tons ............................ 2,500 7,500

Number of pounds ............................... 5,000,000 15,000,000

Average allocated cost per pound ....... $.154 $.0153

Price (= 1.20 x average cost) ............... $.1848 $.01840

c. Answers will vary. This problem illustrates that cost allocation can have an important effect on decisions when the allocated costs are used as if they are actual costs. In the current example, the proposed allocation approach allows the company to compete for private business because they maintain a monopoly on the household business.




2-45. (30 min.) Reconstruct Financial Statements: Hunter Company.

Hunter Company Statement of Cost of Goods Sold For the Year Ended December 31

Work in process, January 1 ............................... $ 90,650


Direct materials:

Direct materials inventory, January 1 ............ $ 374,850 a

Direct materials purchased ........................... 1,260,000

Direct materials available for use ................ 1,634,850

Less materials inventory, December 31 ...... 297,500

Materials used ............................................ $1,337,350

Direct labor ................................................... 1,400,000 b


Indirect labor ................................................. 112,000 b

Plant utilities .................................................. 130,200

Building depreciation .................................... 226,800

Other plant costs ........................................... 111,650

Maintenance on plant machinery .................. 42,350

Insurance on plant machinery ....................... 66,500

Taxes on manufacturing property ................. 45,850

Total overhead ............................................ 735,350

Total manufacturing costs ........................ 3,472,700

Total cost of work in process during the year .... 3,563,350

Less work in process, December 31 ............... 86,100

Cost of goods manufactured this year .......... 3,477,250

Add finished goods, January 1 .......................... 280,000

Cost of goods available for sale ........................ 3,757,250

Less finished goods, December 31 ................... 315,000

Cost of goods sold (to income statement) ......... $ 3,442,250

aMaterials used is given, but this number is not. To obtain it, Beg. Bal. + Purchases = Mat. Used + End. Bal. Beg. Bal. = Mat. Used + End. Bal. – Purchases $374,850 = $1,337,350 + $297,500 – $1,260,000 b Total labor = Indirect labor + Direct labor = $1,512,000 = 0.08 Direct labor + Direct

labor Direct labor = $1,512,000 ÷ 1.08 = $1,400,000 Indirect labor = 0.08 x $1,400,000 = $112,000




2-45 (continued)

Hunter Company Income Statement


Sales revenue ........................................................ $5,687,500

Less: Cost of goods sold (per statement) ............... 3,442,250

Gross margin.......................................................... 2,245,250

Building depreciation ............................................ $ 56,700 a

Administrative salaries ......................................... 179,900

Marketing costs .................................................... 129,500

Distribution costs .................................................. 5,600

Legal fees 28,700

Total operating costs ............................................ 400,400

Operating profit ...................................................... $1,844,850

a Total depreciation = Depreciation on plant + Depreciation on administrative building portion

= $226,800 ÷ 0.80

= $283,500 Depreciation on administrative portion = $283,500 x (1.0 – 0.8)

= $56,700.




2-46. (30 min.) Analyze the Impact of a Decision On Income Statements: Tunes2Go.

a. This year’s income statement:

Baseline (Status Quo)

Rent Equipment

Difference

Revenue .........................................

$9,600,000 $9,600,000 0

Operating costs:

Variable .......................................

(1,200,000) (1,200,000) 0

Fixed (cash expenditures) ............ (4,500,000) (4,500,000) 0

Equipment depreciation ............... (900,000) (900,000) 0

Other depreciation ....................... (750,000) (750,000) 0

Loss from equipment write-off ...... 0 (5,100,000) a $5,100,000 lower

Operating profit (before taxes) ....... $2,250,000 $ (2,850,000) $5,100,000 lower

a Equipment write-off = $6 million cost – $900,000 accumulated depreciation for one year (equipment was purchased on January 1 of the year).

b. Next year’s income statement:

Baseline (Status Quo)

Rent Equipment

Difference

Revenue ......................................... $9,600,000 $10,272,000 a $672,000 higher

Operating costs:

Equipment rental .......................... 0 (1,380,000) 1,380,000 higher

Variable ........................................ (1,200,000) (1,200,000) 0

Fixed cash expenditures .............. (4,500,000) (4,230,000) b 270,000 lower

Equipment depreciation ............... (900,000) 0 900,000 lower

Other depreciation ....................... (750,000) (750,000) 0

Operating profit .............................. $2,250,000 $2,712,000 $462,000 higher

a $10,272,000 = 1.07 $9,600,000 b $2,230,000 = (1.00 – 0.06) $4,500,000

c. Despite the effect on next year’s income statement, the company should not rent the new machine because net cash inflow as a result of installing the new machine ($672,000 + $270,000) does not cover cash outflow for equipment rental ($1,380,000).




2-47. (20 Min.) Manufacturing Firm Finding Unknowns

a. Direct material cost per unit = Direct materials cost ÷ Units produced

= $3,000 ÷ 15,000 units = $0.20 per unit.

Direct material used per mug = 0.4 pounds.

Direct material cost per pound = $0.20 ÷ 0.4 pounds = $0.50 per pound.

Direct material inventory = 3,000 pounds $0.50 per pound = $1,500.

b. Finished goods inventory (in units)

= Finished goods inventory ÷ Manufacturing cost per unit.

Manufacturing cost per unit

= (Direct material + Direct labor + Indirect manufacturing cost) ÷ Units produced

= ($3,000 + $22,500 + $1,050 + $4,200) ÷ 15,000 = $30,750 ÷ 15,000

= $2.05 per unit.

Finished goods inventory (in units) December 31, Year 1 = $4,100 ÷ $2.05

= 2,000 units

c. Selling price per unit = Revenues ÷ Units sold

= Revenues ÷ (Units produced – units in ending finished goods inventory)

= $48,750 ÷ (15,000 – 2,000) = $48,750 ÷ 13,000 = $3.75.

d. Operating income for the year:

Revenues ................................................................. $ 48,750

Cost of goods sold (13,000 x $2.05) ........................ 26,650

Gross margin ............................................................ $ 22,100

Less marketing and administrative costs

Variable marketing and administrative costs ....... $2,250

Fixed marketing and administrative costs ........... 12,000 14,250

Operating profit ........................................................ $ 7,850

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