Chapter 3 – Basic Cost Management Concepts
3-26
3-51 Classification of Costs (15 Min)
Parts 1 and 2
Fixed(F) or
Product (P)
Variable (V)
Period (PD)
1.Technicians
F
P
2.Parts
V
P
3.Purchase of oil and tires
V
P
4.Supplies
V
P
5.Tools
F
P
6.Rental of each location
F
PD
7.Advertising
F
PD
8. Utilities
F
PD
9.Licenses and fees
F
PD
10.Employee training*
F
P
11.Security service
F
PD
12. Software for sales and reports
F
PD
13. Disposal of waste oil and used
tires
V
PD
Employee training is considered a product cost because it is related to
direct labor of the technicians.
3. The disposal of waste oil and used tires is the critical environmental
issue for Speedy Auto Service. Both the waste oil and used tires,
which would accumulate in significant quantities for this type of
Chapter 3 – Basic Cost Management Concepts
3-27
PROBLEMS
3-52 Executional Cost Drivers: Internet Retailer (20 min)
The example of an internet retailer such as Bikes.com is a good
example of the type of firm that must pay close attention to
executional cost drivers. The reason is that its success depends on
execution, execution. The fall off in sales growth could be an
indication of problems in customer sales returns, that is customer
satisfaction and loyalty. Bikes.com can review sales records to
investigate.
Specific executional steps that Bikes.com can take include
looking for possible improvements in the purchase and stocking of
merchandise and the shipping of customer orders – the upstream and
downstream activities that must work smoothly to get the orders to
the customers quickly and accurately. Also, Bikes.com should
consider the work flow in the company. Can it be streamlined? Are
there non-value-adding activities that can be eliminated? What are
the bottlenecks, if any, that slow the process of accurately filling a
customer’s order? Also, are employees aware of the importance of
executional issues? Are the employees working together to achieve
effective cost management can lower the costs of operation and
speed the arrival of profits.
3-28
3-53 Structural Cost Drivers (25 min)
Case A: A key structural issue for Food Fare is complexity. As the
menu has changed, so will costs and service. More complexity
means higher food purchasing costs, higher operating costs, and
more complex operations. This will require new types of training for
technology to streamline the process of order taking and order filling
are likely to be necessary. Scale might also be an important issue in
this case – how large must each restaurant become, and how many
restaurants must the chain have in order to justify the increased
purchasing and stocking costs, and the new training and technology
costs?
Case B: A key issue in this case is the speed with which Gilman can
provide customer service. The speed of service provides value to the
customer and also increases profitability. In order to increase the
speed of service, Gilman needs effective communication and
coordination among the service teams. This is probably being
accomplished now by cell phone. Gilman can research new and
more effective ways to accomplish this, perhaps using hand-held
internet access devices, iphones, or other modem-equipped devices.
The advantage of computer-based access is that computer-based
demand and profitability – in order to better understand which
services and which types of customers are most profitable.
3-29
© 2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any
manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3-53 (continued –1)
Is it in installation or service, Brand X or Brand Y, residential or
Chapter 3 – Basic Cost Management Concepts
3-30
3-54 Cost of Goods Manufactured and Sold (30 min)
Statement of Cost of Goods Manufactured
For The Year Ended December 31, 2013
Direct Materials Used
Direct Materials Inventory, Beginning 25,000$
Direct Materials Purchases 555,000
Total Direct Materials Available 580,000
Direct Materials Inventory, Ending $40,000
Direct Materials Used 540,000$
Direct Labor 310,000
Factory Overhead
Indirect Mateials 66,000$
Utilities for Plant 38,000
Indirect Labor 70,000
Factory Rent 380,000
Total Factory Overhead 554,000
Total Manufacturing Costs Incurred during year 1,404,000
Work-in-Process Inventory, Beginning 45,000
Total Manufacturing Costs to Account for 1,449,000
Work-in-Process Inventory, Ending 40,000
Cost of Goods Manufactured 1,409,000$
Cost of Goods Sold
Finished Goods Inventory, Beginning 135,000$
Cost of Goods Manufactured 1,409,000
Total Goods Available for Sale 1,544,000
Finished Goods Inventory, Ending 75,000
Cost of Goods Sold 1,469,000$
Hamilton, Inc
Chapter 3 – Basic Cost Management Concepts
3-55 Cost of Goods Manufactured and Sold (30 min)
Factory Overhead
For the Year Ended December 31, 2013
Statement of Cost of Goods Manufactured
Direct Materials Inventory, Ending
3-56 Cost of Goods Manufactured and Sold (30 min)
Household Furnishings, Inc.
Statement of Cost of Goods Manufactured
For the Year Ended December 31, 2013
Direct Materials Used
Direct Materials Inventory, Beginning $18,000
Direct Materials Purchases 155,000
Total Direct Materials Available 173,000
Direct Materials Inventory, Ending 25,000
Direct Materials Used $148,000
Direct Labor-–Wages 487,000
Factory Overhead
Heat, Light, & Power—Plant $44,000
Supplies–Plant 29,000
Property Taxes–Plant 34,000
Depreciation Expense–Plant and Equip.
88,000
Indirect Labor-–Wages 25,000
Supervisor’s Salary Plant 66,000
Total Factory Overhead 286,000
Total Manufacturing Costs Incurred during year 921,000
Work-in-Process Inventory, Beginning 23,000
Total Manufacturing Costs to Account for 944,000
Work-in-Process Inventory, Ending 9,000
Cost of Goods Manufactured $935,000
Household Furnishings, Inc.
Income Statement
Sales Revenue $1,500,000
Cost of Goods Sold
Finished Goods Inventory, Beginning $15,000
Cost of Goods Manufactured 935,000
Total Goods Available for Sale 950,000
Finished Goods Inventory, Ending 38,000
Cost of Goods Sold 912,000
Gross Margin 588,000
Sales Representatives’ Salaries $145,000
Supplies–Administrative Office 16,000
Depreciation Expense–Admin. Office 33,000
Total Selling & Administrative Expenses 194,000
For the Year Ended December 31, 2013
Chapter 3 – Basic Cost Management Concepts
3-33
3-57 Cost of Goods Manufactured and Sold (30 min)
Statement of Cost of Goods Manufactured
For The Year Ended December 31, 2013
Direct Materials Used
Direct Materials Inventory, Beginning 16,000$
Direct Materials Purchases 410,000
Total Direct Materials Available 426,000
Direct Materials Inventory, Ending 18,000
Direct Materials Used 408,000$
Direct Labor 512,000
Factory Overhead
Insurance on Plant 32,000$
Supplies–Plant 132,000
Work-in-Process Inventory, Beginning 31,000
Total Manufacturing Costs to Account for 1,860,000
Work-in-Process Inventory, Ending 39,000
Cost of Goods Manufactured 1,821,000$
For the Year Ended December 31, 2013
Finished Goods Inventory, Beginning 55,000$
Cost of Goods Manufactured 1,821,000
Total Goods Available for Sale 1,876,000
Finished Goods Inventory, Ending 43,000
Cost of Goods Sold 1,833,000
Gross Margin 1,052,000
Advertising Expenses 150,000$
Sales Representatives’ Salaries 325,000
Supplies–Administrative Office 78,000
Depreciation Expense--Admin. Office 75,000
Depreciation Expense – Delivery Trucks 45,000
Total Selling & Administrative Expenses 673,000
Operating Income 379,000$
Fair Wind Yachts
Fair Wind Yachts
Income Statement
Chapter 3 – Basic Cost Management Concepts
3-58 Cost of Good Manufactured and Income Statement (40 min)
Direct Materials Used
Direct Materials Inventory, April 30 28$
Direct Materials Purchases 510
Freight in 15
Total Direct Materials Available 553
Direct Materials Inventory, May 31 23
Direct Materials Used 530$
Direct Labor-Wages 260
Factory Overhead
Indirect factory labor 90$
Utilities 108
Property taxes–-Plant 60
Insurance 12
Depreciation 50
Total Factory Overhead 320
Total Manufacturing Cost Incurred During Month 1,110
Work-in–Process Inventory, April 30 150
Total Manufacturing Costs to Account for 1,260
Work-in–Process Inventory, May 31 220
Cost of Goods Manufactured 1,040$
Norton Industries
Statement of Cost of Goods Manufactured
For the Month Ended May 31, 2013
($000) omitted
Chapter 3 – Basic Cost Management Concepts
3-58(continued -1)
Sales Revenue 1,488$
Less: Sales Discounts 20
Net Sales 1,468
Cost of Goods Sold:
Finished Goods Inventory, April 30 247$
Cost of Goods Manufactured 1,040
Total Goods Available for Sale 1,287
Finished Goods Inventory, May 31 175
Cost of Goods Sold 1,112
Gross Margin 356$
General, Selling, & Administrative Expense:
Office Salaries 122$
Sales Salaries 42
Depreciation 4
Interest 6
Total General, Selling, & Administrative Expense 218
Income from operations 138
Other revenue 2
Net Income 140$
Norton Industries
Income Statement
For the Month Ended May 31, 2013
($000) omitted