Chapter 02 – Basic Cost Management Concepts
CHAPTER 2
Basic Cost Management Concepts
ANSWERS TO REVIEW QUESTIONS
2-1 Product costs are costs that are associated with manufactured goods until the time
2-2 Product costs are also called inventoriable costs because they are assigned to
2-3 The most important difference between a manufacturing firm and a service industry
firm, with regard to the classification of costs, is that the goods produced by a
2-4 Product costs include the backpack’s direct material (e.g., fabric, stitching, zippers
2-5 The four types of production processes are as follows:
▪ Job shop: Low production volume; little standardization; one-of-a-kind
products. Examples include custom home construction, feature film
2-2
2-6 The cost of idle time is treated as manufacturing overhead because it is a normal
cost of the manufacturing operation that should be spread out among all of the
2-7 Overtime premium is included in manufacturing overhead in order to spread the
extra cost of the overtime over all of the products produced, since overtime often is
2-8 The phrase “different costs for different purposes” refers to the fact that the word
2-9 The city of Tampa would use cost information for planning when it developed a
budget for its operations during the next year. Included in that budget would be
2-11 The fixed cost per unit declines as the level of activity (or cost driver) increases. The
2-12 The variable cost per unit remains constant as the level of activity (or cost driver)
2-13 A volume-based cost driver, such as the number of passengers, causes costs to be
2-3
2-14 a. Number of students: volume-based cost driver. This characteristic of the college
b. Number of disciplines offered for study: operations-based cost driver. The
2-15 Examples of direct costs of the food and beverage department in a hotel include the
money spent on the food and beverages served, the wages of table service
2-16 Costs that are likely to be controllable by a city’s airport manager include the wages
of personnel hired by the airport manager, the cost of heat and light in the airport
2-4
2-17 a. Uncontrollable cost
2-18 Out-of-pocket costs are paid in cash at or near the time they are incurred. An
2-19 A sunk cost is a cost that was incurred in the past and cannot be altered by any
2-20 A marginal cost is the extra cost incurred in producing one additional unit of output.
2-21 The process of registering for classes varies widely among colleges and
universities, and the responses to this question will vary as well. Examples of
2-22 The purchase cost of the old bar code scanners is a sunk cost, since it occurred in
2-23 a. Direct cost
Chapter 02 – Basic Cost Management Concepts
2-5
SOLUTIONS TO EXERCISES
EXERCISE 2-24 (20 MINUTES)
1. Advertising costs: Period cost, fixed
EXERCISE 2-25 (10 MINUTES)
The general formula for solving all three cases is as follows:
2-6
EXERCISE 2-25 (CONTINUED)
Using this formula, we can find the missing amounts as follows:
Case
I
II
III
Beginning inventory of finished goods …………….
$ 21,000
*
$ 18,000
$ 3,500
Add: Cost of goods manufactured …………………..
104,750
*
Subtract: Ending inventory of finished goods ….
*Amount missing in exercise.
EXERCISE 2-26 (10 MINUTES)
1.
Hours worked …………………………………………………………………………………………..
40
Total compensation ………………………………………………………………………………….
2.
Classification:
Total compensation ……………………………………………………………………………..
EXERCISE 2-27 (10 MINUTES)
1.
Regular wages (40 hours $17) ……………………………………………………………..
$ 680
Total compensation ……………………………………………………………………………….
2.
Overtime hours ………………………………………………………………………………………
3
hrs.
Total overtime premium ………………………………………………………………………….
$ 15
3.
Classification:
Overhead (overtime premium: 3 hours $5) ……………………………………….
Total compensation …………………………………………………………………………..
Chapter 02 – Basic Cost Management Concepts
2-7
EXERCISE 2-28 (25 MINUTES)
1.
ALHAMBRA ALUMINUM COMPANY
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, January 1 …………………………………..
$ 55,000
Add: Purchases of raw material ………………………………………
Raw material available for use …………………………………………
Deduct: Raw-material inventory, December 31 …………………
Raw material used ………………………………………………………….
$220,000
Direct labor …………………………………………………………………………
Manufacturing overhead:
Indirect material ……………………………………………………………..
Indirect labor ………………………………………………………………….
Depreciation on plant and equipment ………………………………
Utilities …………………………………………………………………………..
Other ……………………………………………………………………………..
Total manufacturing overhead …………………………………………
Total manufacturing costs …………………………………………………..
Add: Work-in-process inventory, January 1 ………………………….
Deduct: Work-in-process inventory, December 31 …………………
Cost of goods manufactured ………………………………………………..
2.
ALHAMBRA ALUMINUM COMPANY
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1
Finished-goods inventory, January 1 ……………………………………………………
$160,000
Add: Cost of goods manufactured ……………………………………………………….
Cost of goods available for sale …………………………………………………………..
Deduct: Finished-goods inventory, December 31 ………………………………….
Cost of goods sold ………………………………………………………………………………
Chapter 02 – Basic Cost Management Concepts
2-8
EXERCISE 2-28 (CONTINUED)
3.
ALHAMBRA ALUMINUM COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1
Sales revenue ……………………………………………………………………………………..
$1,210,000
Less: Cost of goods sold …………………………………………………………………….
Gross margin ………………………………………………………………………………………
Selling and administrative expenses …………………………………………………….
Income before taxes …………………………………………………………………………….
Income tax expense (at 35%)………………………………………………………………..
Net income ………………………………………………………………………………………….
EXERCISE 2-29 (30 MINUTES)
EXERCISE 2-30 (15 MINUTES)
Number of Muffler Replacements
600
700
800
Total costs:
Fixed costs ………………………………………………………….
Variable costs ……………………………………………………..
Total costs ……………………………………………………..
Cost per muffler replacement:
Fixed cost ……………………………………………………………
*
(h) $ 80
2-9
EXERCISE 2-30 (CONTINUED)
Explanatory Notes:
EXERCISE 2-31 (5 MINUTES)
EXERCISE 2-32 (15 MINUTES)
2.
Cost per call, January: $1,250/7000 ……………………………………………
$ .179
Cost per call, February: $1,400/8000 …………………………………………..
3.
Fixed component, January ………………………………………………………..
$ 200
Total …………………………………………………………………………………………
$1,250
4.
Since each phone call costs $.15, the marginal cost of making the 7,001st call is $.15.
5.
The average cost of a phone call in January (rounded) is $.179 ($1,250/7,000).
Chapter 02 – Basic Cost Management Concepts
2-10
EXERCISE 2-33 (5 MINUTES)
EXERCISE 2-34 (10 MINUTES)
1. Your decision to see the game really cost you $100, the amount forgone when you
refused to sell the ticket. A convenient way to think about this is as follows: You
2. The $100 is an opportunity cost. At the time you made the decision to attend the
EXERCISE 2-35 (5 MINUTES)
Annual cost using European component: $9,100 15 ………………………………………
$136,500
EXERCISE 2-36 (15 MINUTES)
1. The marginal cost of a flight would include the aircraft fuel, wages of the flight crew
Chapter 02 – Basic Cost Management Concepts
2-11
EXERCISE 2-36 (CONTINUED)
4. The marginal cost would include any food and beverages consumed by the
Chapter 02 – Basic Cost Management Concepts
2-12
SOLUTIONS TO PROBLEMS
PROBLEM 2-37 (25 MINUTES)
1.
a.
Total prime costs:
Direct material ………………………………………………………………………..
$ 1,050,000
Direct labor:
Wages ………………………………………………………………………………..
Total prime costs ……………………………………………………………………
b.
Total manufacturing overhead:
Depreciation on factory building ……………………………………………..
$ 57,500
Indirect labor: wages ………………………………………………………………
Production supervisor’s salary ……………………………………………….
Service department costs ……………………………………………………….
Indirect labor: fringe benefits ………………………………………………….
Fringe benefits for production supervisor ……………………………….
Total overtime premiums paid …………………………………………………
Cost of idle time: production employees ………………………………….
Total manufacturing overhead ………………………………………………..
c.
Total conversion costs:
Direct labor ($242,500 + $47,500) …………………………………………….
Manufacturing overhead …………………………………………………………
Total conversion costs ……………………………………………………………
d.
Total product costs:
Direct material ………………………………………………………………………..
Direct labor …………………………………………………………………………….
Manufacturing overhead …………………………………………………………
Total product costs ………………………………………………………………..
Chapter 02 – Basic Cost Management Concepts
2-13
PROBLEM 2-37 (CONTINUED)
e.
Total period costs:
Advertising expense ……………………………………………………………….
$ 49,500
Administrative costs ………………………………………………………………
Rental of office space for sales personnel ……………………………….
Sales commissions ………………………………………………………………..
Product promotion costs ………………………………………………………..
Total period costs …………………………………………………………………..
PROBLEM 2-38 (15 MINUTES)
1.
Regular hours: 40 $14 …………………………………………………………………………
$560
Overtime hours: 9 $19 …………………………………………………………………………
Total cost of wages ………………………………………………………………………………..
2.
a. Direct labor: 41 $14 ………………………………………………………………………..
$574
c. Manufacturing overhead (overtime premium): 9 ($19 – $14) ……………..
Total cost of wages ……………………………………………………………………………
2-14
PROBLEM 2-39 (20 MINUTES)
1. These costs would appear on the following statements or schedules.
1. Income statement
2. The asset that differs among these businesses is inventory. Service businesses
3. The income statements of service businesses normally have separate sections for
4. The basic difference falls in the area of inventory. Traditional manufacturers
2-15
PROBLEM 2-40 (10 MINUTES)
Cost Item Number
Product Cost or Period Cost
1.
Product
2.
3.
Product
4.
5.
Product
6.
7.
Product
8.
Product
9.
Product
PROBLEM 2-41 (10 MINUTES)
Cost Item
Number
Direct or
Indirect
Partially Controllable by
Department Supervisor
1.
direct
yes
2.
direct
3.
direct
yes
PROBLEM 2-42 (20 MINUTES)
Chapter 02 – Basic Cost Management Concepts
2-16
PROBLEM 2-42 (CONTINUED)
PROBLEM 2-43 (35 MINUTES)
1.
LAREDO LUGGAGE COMPANY
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X2
Direct material:
Raw-material inventory, January 1 …………………………………….
$ 20,000
Add: Purchases of raw material …………………………………………
Raw material available for use …………………………………………..
Deduct: Raw-material inventory, December 31 ……………………
Raw material used …………………………………………………………….
Direct labor ………………………………………………………………………….
Manufacturing overhead:
Indirect material ………………………………………………………………..
Indirect labor ……………………………………………………………………
Utilities: plant……………………………………………………………………
Depreciation: plant and equipment …………………………………….
Other ………………………………………………………………………………..
Total manufacturing overhead …………………………..………………
Total manufacturing costs ……………………………………………………
Add: Work-in-process inventory, January 1 …………………………..
Subtotal ……………………………………………………………………………….
Deduct: Work-in-process inventory, December 31 ………………….
Cost of goods manufactured …………………………………………………
2.
LAREDO LUGGAGE COMPANY
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X2
Finished goods inventory, January 1 ……………………………………………………
$ 10,000
Cost of goods available for sale …………………………………………………………..
$315,000
PROBLEM 2-43 (CONTINUED)
3.
LAREDO LUGGAGE COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X2
Sales revenue ……………………………………………………………………………………..
Less: Cost of goods sold …………………………………………………………………….
Gross margin ………………………………………………………………………………………
Selling and administrative expenses …………………………………………………….
Income before taxes …………………………………………………………………………….
Income tax expense …………………………………………………………………………….
Net income ………………………………………………………………………………………….
PROBLEM 2-44 (30 MINUTES)
1. Manufacturing overhead:
Indirect labor……………………………….
$ 218,000
Building depreciation ($160,000 x 75%)..
Other factory costs………………………..
688,000
$1,026,000
2. Cost of goods manufactured:
Direct material:
Raw–material inventory, Jan. 1………………
$ 31,600
Add: Purchases of raw material……………..
350,000
Raw material available for use……………….
$381,600
Raw material used……………………………..
Direct labor…………………………………………..
Manufacturing overhead…………………………..
Total manufacturing costs………………………..
Add: Work-in–process inventory, Jan. 1……….
Deduct: Work-in-process inventory, Dec. 31….
2-18
PROBLEM 2-44 (CONTINUED)
3. Cost of goods sold:
Finished-goods inventory, Jan. 1……………..
$ 222,200
Add: Cost of goods manufactured……………
Cost of goods available for sale……………….
$2,048,600
Cost of goods sold……………………………….
$1,852,800
4. Net income:
Sales revenue……………………………………..
$2,990,000
Less: Cost of goods sold……………………….
Gross margin………………………………………
$1,137,200
Building depreciation ($160,000 x 25%)…...
686,000
Income before taxes……………………………..
Net income…………………………………………