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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
2-2.
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
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
2-9.
2-13.
A value income statement typically uses a contribution margin framework, because the
contribution margin framework is more useful for managerial decision-making. In
Solutions to Critical Analysis and Discussion Questions
2-15.
The statement is not true. Materials can be direct or indirect. Indirect materials include
2-16.
2-17.
Marketing and administrative costs are treated as period costs and expensed for
2-21.
Answers will vary. The major cost categories include servers (mostly fixed), personnel
2-22.
2-23.
Answers will vary. Common suggestions are number of students in each program,
2-24.
No, R&D costs are relevant for many decisions. For example, should a program of
2-25.
This question can create a good discussion of the different roles of financial and
Solutions to Exercises
2-26. (15 min.) Basic Concepts.
2-27. (15 min.) Basic Concepts.
Cost Item
Fixed (F)
Variable (V)
Period (P)
Product (M)
a.
Depreciation on buildings for administrative staff offices ......
F
P
b.
Cafeteria costs for the factory ..............................................
F
M
2-28. (10 min.) Basic Concepts.
a.
Assembly line worker’s salary. .....................................................................
B
2-29. (15 min.) Basic Concepts.
Concept
Definition
9
Period cost ........................
Cost that can more easily be attributed to
time intervals.
2-30. (15 min.) Basic Concepts.
Cost Item
Fixed (F)
Variable (V)
Period (P)
Product (M)
a.
Power to operate factory equipment ................................
V
M
2-31. (15 min.) Basic Concepts.
a.
Variable production cost per unit: ($360 + $60 + $15 + $30) .......................
$465
b.
Variable cost per unit: ($465 + $45) .............................................................
$510
2-32. (15 min.) Basic Concepts: Intercontinental, Inc.
a.
Prime cost per unit: (materials + labor) ........................................................
$40
2-33. (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. As an example, many government-purchasing contracts
2-34. (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
2-35. (30 min.) Prepare Statements for a Manufacturing Company: Tappan
Parts.
Tappan Parts
Cost of Goods Sold Statement
For the Year Ended December 31
Beginning work in process inventory ..............
$1,354,000
Manufacturing costs:
Direct materials:
2-36. (10 min.) Prepare Statements for a Service Company: Chuck’s Brokerage
Service.
2-37. Prepare Statements for a Service Company: Where2 Services.
2-38. (10 min.) Prepare Statements for a Service Company: Remington
Advisors
Sales revenue ...................................
$1,700,000
(Given)
Cost of services sold (b) ....................
890,000
(Sales revenue – gross margin)
2-39. (20 min.) Prepare Statements for a Service Company: Lead! Inc.
You can solve this in the order shown below.
Lead!, Inc.
Income Statement
For the Month Ended April 30
Sales revenue .........................................................................................
$600,000
a
2-40. (30 min.) Prepare Statements for a Manufacturing Company: Crabtree
Machining Company.
Crabtree Machining Company
Cost of Goods Sold Statement
For the Year Ended December 31
Beginning work-in-process inventory ....
$ 139,200
Manufacturing costs:
Direct materials:
Beginning inventory .......................
$115,200
Purchases ......................................
717,600
Materials available ......................
$832,800
2-41. (15 min.) Basic Concepts: Monroe Fabricators
a.
From the basic inventory equation,
Beginning Inventory + Transferred in
2-42. (15 min.) Basic Concepts: Talmidge Co.
a.
From the basic inventory equation,
Beginning work-in-process inventory + Total manufacturing
cost
= Cost of goods manufactured + Ending work-in-process
inventory, so
2-43. (15 min.) Prepare Statements for a Merchandising Company: Angie’s
Apparel.
Angie’s Apparel
Income Statement
For the Month Ended July 31
Sales revenue .........................................................................................
$570,000
Cost of goods sold (see statement below) ..............................................
388,500
2-44. (15 min.) Prepare Statements for a Merchandising Company: University
Electronics.
University Electronics
Income Statement
For the Year Ended February 28
Sales revenue .........................................................................................
$4,000,000
Cost of goods sold (see statement below) ..............................................
2,830,000
Gross margin ..........................................................................................
$1,170,000
2-45. (10 min.) Cost Behavior for Forecasting: Dayton, Inc.
The variable costs will be 20 percent higher because there will be an increase of 36,000
– 30,000 = 6,000 units (20% = 6,000 ÷ 30,000).
Variable costs:
Direct materials used ($510,000 x 1.2) .................................
$ 612,000
Direct labor ($1,120,000 x 1.2)..............................................
1,344,000
2-46. (30 min.) Components of Full Costs: Madrid Corporation
2-47. (15 min.) Components of Full Costs: Madrid Corporation.
2-48. (30 min.) Components of Full Cost: Larcker Manufacturing.
2-48. (continued)
2-49. (20 Min.) Gross Margin and Contribution Margin Income Statements:
Larcker Manufacturing.
Gross Margin Income Statement
Contribution Margin Income Statement
Sales revenue(a) .............
........................................
$2,370,000
Sales revenue .....................
$2,370,000
Variable manufacturing
costs (b) ..........................
1,710,000
Variable manufacturing
costs ...................................
1,710,000
2-50. (20 Min.) Gross Margin and Contribution Margin Income Statements: Niles
Castings.
Gross Margin Income Statement
Contribution Margin Income Statement
Sales revenue ................
$264,000
Sales revenue .....................
$264,000
Variable manufacturing
costsa ..............................
119,000
Variable manufacturing
costs ....................................
119,000
2-51. (20 Min.) Gross Margin and Contribution Margin Income Statements: Alpine
Coffee Roasters.
Gross Margin Income Statement
Contribution Margin Income Statement
Sales revenuea ......................
$230,400
Sales revenue ........................
$230,400
Variable manufacturing
costsb ....................................
126,000
Variable manufacturing
costs ......................................
126,000
2-52. (30 min.) Value Income Statement: Ralph’s Restaurant.
a.
Ralph’s Restaurant
Value Income Statement
For the year 2 ending December 31
Nonvalue-
added
activities
Value-
added
activities
Total
Sales revenue ........................................
$1,000,000
$1,000,000
Cost of merchandise ..............................
Cost of food serveda ..........................
$ 52,500
297,500
350,000
b. The information in the value income statement enables Ralph to identify nonvalue-
2-53. (30 min.) Value Income Statement: DeLuxe Limo Service.
a.
b. The information in the value income statement enables the managers at DeLuxe to
identify nonvalue-added activities. They could eliminate such activities without
Solutions to Problems
2-54. (30 min.) Cost Concepts: Chelsea, Inc.
a.
Prime costs = direct materials + direct labor
b.
e.
Cost of
Goods
=
Cost of
Goods
+
Beginning
Finished
–
Ending
Finished
2-55. (30 Minutes) Cost Concepts: Lawrence Components.
a. $58,000.
Prime costs
=
Direct materials used + Direct labor costs
b. $12,000.
Direct materials used
=
Beginning inventory + purchases – ending inventory
c. $120,000.
Total manufacturing
=
Prime costs + Conversion costs – Direct labor cost
2-55. (continued)
f. $10,000.
Cost of goods sold
=
Finished goods, beginning + Cost of goods
manufactured – Finished goods, ending
2-56. (30 minutes) Cost Concepts: Columbia Products.
a. Amounts per unit:
(1) $217.
2-56. (continued)
b. As the number of units increases (reflected in the denominator), fixed manufacturing
2-57. (30 min.) Prepare Statements for a Manufacturing Company: Yolo
Windows.
Yolo Windows
Statement of Cost of Goods Sold
For the Year Ended December 31
($000)
Work in process, Jan. 1 ..........................................
$ 48
Manufacturing costs:
Direct materials:
Beginning inventory, Jan. 1 .............................
$ 36
2-57. (continued)
Yolo Windows
Income Statement
For the Year Ended December 31
($000)
Sales revenue ............................................................................
$18,160
Less: Cost of goods sold ...........................................................
14,936
2-58. (30 min.) Prepare Statements for a Manufacturing Company: Mesa
Designs.
Mesa Designs
Statement of Cost of Goods Sold
For the Year Ended December 31
($000)
Work in process, Jan. 1 ..........................................
$ 152
Manufacturing costs:
Direct materials:
Beginning inventory, Jan. 1 .............................
$ 96
Add materials purchases ................................
10,300
Direct materials available ................................
$10,396
2-58. (continued)
Mesa Designs
Income Statement
For the Year Ended December 31
($000)
Sales revenue ............................................................................
$60,220
2-59. (30 min.) Prepare Statements for a Manufacturing Company: Billings Tool
& Die.
.
Billings Tool & Die
Statement of Cost of Goods Sold
For the Year Ended December 31
($ 000)
Beginning work in process, Jan. 1..............................
$ 192
Manufacturing costs:
Direct materials:
Beginning inventory, Jan. 1 .................................
$ 72
Add: Purchases ...................................................
21,900
2-59. (continued)
Billings Tool & Die
Income Statement
For the Year Ended December 31
($ 000)
Sales revenue ..............................................................
$77,820
Less: Cost of goods sold (per statement) .....................
54,234
Gross profit ..................................................................
$ 23,586
Marketing and administrative costs:
2-60. (10 Min.) Cost Allocation with Cost Flow Diagram: Coastal Computer.
a.
(1)
Main Street
Lakeland Mall
Total
Number of computers sold ........
2,000
1,600
3,600
(2)
Main Street
Lakeland Mall
Total
b.
2-61. (20 Min.) Cost Allocation with Cost Flow Diagram: Wayne Casting, Inc.
a.
(1)
Chillicothe
Metals
Ames
Supply
Total
Material purchased (tons) .........
130
120
250
2-61. (continued)
b.
2-62. (20 Min.) Cost Allocation with Cost Flow Diagram: Pacific Business School.
a.
Undergraduate
Graduate
Total
Number of students ......................
900
600
1,500
2-62. (continued)
b.
2-63. (40 Min.) Find the Unknown Information.
a.
Finished goods
beginning inventory
+
Cost of goods
manufactured
–
Cost of
goods sold
=
Finished goods
ending inventory
b.
Direct
materials
used
+
Direct
labor
+
Manufacturing
overhead
=
Total
manufacturing
costs
c.
Gross margin %
=
Gross margin
÷
Sales revenue
=
(Sales revenue – COGS)
÷
Sales revenue
Rearranging,
2-64. (40 Min.) Find the Unknown Information.
a.
Cost of
goods sold
=
Finished goods
beginning inventory
+
Cost of goods
manufactured
–
Finished goods
ending inventory
b.
Total
manufacturing
costs
=
Direct
materials
used
+
Direct
labor
+
Manufacturing
overhead
c.
Direct
materials
used
=
Beginning
inventory
+
Materials
purchased
–
Ending
inventory
d.
Gross margin %
=
Gross margin
÷
Sales revenue
38%
=
(Sales revenue –
Cost of goods sold)
÷
Sales revenue
2-65. (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
=
$400,000 + $1,280,000 + $320,000
b.
First, allocate costs to the two cost objects: households and businesses:
Allocation of administrative costs and truck costs:
Total costs
=
$400,000 + $1,280,000
2-65. (continued)
Allocation to customer types:
Households
Business
Allocation of customer cost:
Allocated cost per customer ................
$112
$112
c. Answers will vary. This problem illustrates that cost allocation can have an important
2-66. (30 min.) Reconstruct Financial Statements: San Ysidro Company.
2-66 (continued)
a Total depreciation = Depreciation on plant + Depreciation on administrative building
portion
Depreciation on plant is 80% of the total depreciation, so total depreciation is,
2-67. (20 Min.) Finding Unknowns: Mary’s Mugs.
a. $2,812.50.
Direct materials cost per unit = Direct materials cost ÷ Units produced
2-68. (40 Min.) Finding Unknowns: BS&T Partners.
Note: This problem is challenging, because there is no indication of how to begin or the
order in which to solve for the unknowns.
We begin by computing the following unit costs:
Manufacturing cost per unit = Direct materials + Direct labor + Manufacturing overhead
Full cost per unit = Manufacturing cost per unit + Selling, general & administrative
= $27.00 + $12.00 = $39.00
2-68 (continued)
c. Full costs = Cost of goods sold + Selling, general, and administrative costs
Then,
Operating profit = Sales revenue – Cost of goods sold – Selling, general, and
d. Sales revenue = Selling price per unit x Units sold
e. Finished goods ending (units) = Finished goods beginning (units) + Units produced
– Units sold
Solutions to Integrative Case
2-69. (30 min.) Analyze the Impact of a Decision on Income Statements:
Tunes2Go.
a. This year’s income statement:
Baseline
(Status Quo)
Rent
Equipment
Difference
Sales revenue ................................
$4,800,000
$4,800,000
0
b. Next year’s income statement:
Baseline
(Status Quo)
Rent
Equipment
Difference
Sales revenue ................................
$4,800,000
$5,136,000
a
$336,000
higher
Operating costs:
Equipment rental ........................
0
(690,000)
690,000
higher
Variable ......................................
(600,000)
(600,000)
0
