CHAPTER 3.docx

(1)

COST CONCEPTS AND CLASSIFICATIONS

Review Questions Review Questions 1.

1. Why is tWhy is the cost he cost of idlof idle time te time treatereated as manud as manufactufacturing ovring overheaerhead?d? 2.

2. IndicIndicate wheate whether eacther each of the follh of the followinowing costs is a dirg costs is a direct cost or an iect cost or an indirendirect cost of thct cost of the restaue restaurant in a hotrant in a hotel.el. a.

a. CoCost st of of fofood od seservrveded b.

b. CheChef’s f’s salsalary ary and and frifringe nge benbenefiefitsts c.

c. Part of thPart of the cost of maie cost of maintainntaining the groing the grounds arounds around the hotund the hotel, whiel, which is allocch is allocated to thated to the restaure restaurant.ant. d.

d. Part oPart of the cosf the cost of advert of advertisitising the hotng the hotel, whel, which is alich is allocatlocated to the red to the restauestaurantrant .

. !ist a!ist and brind briefly defly descriescribe the be the threthree ty"e ty"es of "es of "roducroduct cost costs.ts. #.

#. !ist an!ist and briefd briefly descly describe tribe the threhe three ty"es oe ty"es of manuff manufacturacturing inving inventorentories.ies. $.

$. %escr%escribe how the incoibe how the income statemme statement of a manufacent of a manufacturituring com"any ding com"any differffers from the incos from the income stateme statement of ament of a merchandising com"any.

merchandising com"any. &.

&. '( '( variable cost variable cost is a cost is a cost that varies that varies "er unit o"er unit of "roduct, wf "roduct, whereas a fi)ed hereas a fi)ed cost is conscost is constant "er unit tant "er unit of "roduct.* of "roduct.* %o you%o you agree? +)"lain.

agree? +)"lain. .

. Why is maWhy is manufacnufacturituring overng overhead conhead considersidered an indied an indirect crect cost of a uniost of a unit of "rodt of "roduct?uct? EXERCISES

EXERCISES

Exercise 1 (Scheu!e o" Cost o" #oos $%nu"%cture %n So!& Inco'e St%te'ent Exercise 1 (Scheu!e o" Cost o" #oos $%nu"%cture %n So!& Inco'e St%te'ent (ma-ing

(ma-ing (luminum (luminum Com"any, Com"any, a manufacturer of a manufacturer of recyclable soda cans, recyclable soda cans, had the followihad the following inventory balances at ng inventory balances at thethe beginning and end of 2$/

beginning and end of 2$/

IInnvveennttoorry y CCllaassssiiffiiccaattiioon n 00aannuuaarry y 11, , 22$$ %%eecceemmbbeer r 11, , 22$$ 

aawwaatteerriiaall PP&&,, PP,,

W

Woorr3 3 iin n ""rroocceesss s 1212,,  1111$$,,

4

4iinniisshheed d 55oooodds s 1$1$,,  11&&$$,,

%uring 2$, the com"any "urchased P

%uring 2$, the com"any "urchased P 2$, of raw material and s"ent 2$, of raw material and s"ent P #, on direct labor. anufacturingP #, on direct labor. anufacturing overhead costs were as follows/

overhead costs were as follows/

IInnddiirreecct t mmaatteerriiaal l P P 11,,

IInnddiirreecct t llaabboor r 22$$,,

%

%ee""rreecciiaattiioon n oon n ""llaannt t aannd d ee66uuii""mmeennt t 11,, 7

7ttiilliittiieess 22$$,,

8

8tthheerr ,,

9ales revenue was P 1,1$, for the

9ales revenue was P 1,1$, for the year. 9elliyear. 9elling and administrative e)"enses for the ng and administrative e)"enses for the year amounted to P 11,.year amounted to P 11,. :he firm’s ta) rate is # "

:he firm’s ta) rate is # " ercent.ercent. Re)uire*

Re)uire* 1.

1. Pre"Pre"are a are a schedschedule oule of cosf cost of t of goods goods manufmanufacturactured.ed. 2.

2. PrPre"ae"are a sre a schecheduldule of ce of cost oost of goof goods sods sold.ld. .

. PrPre"ae"are re an an inincomcome e stastatemtementent.. Exercise +

Exercise + 4or each of the

4or each of the following costs incurred in a manufacturing o"eration, indicate whether the costs would following costs incurred in a manufacturing o"eration, indicate whether the costs would be fi)ed orbe fi)ed or variable ;4 or <= and

variable ;4 or <= and whether they would be "eriod costs whether they would be "eriod costs or "roduct costs ;P or or "roduct costs ;P or , res"ectively= under full>absor"tion, res"ectively= under full>absor"tion costing.

costing. a.

a. :r:rans"orans"ortatitation>in on>in costs costs on mon materiaterials als "urch"urchasedased b.

b. (ss(ssembembly>ly>liline ne worwor3er’3er’s s wagwageses c.

c. PrPro"eo"erty trty ta)ea)es on wors on wor3 in "ro3 in "rocescess invs invententoriorieses d.

d. 9al9alariaries of tes of to" e)o" e)ecuecutivtives in tes in the cohe com"am"anyny e.

e. 8v8vertertime "ime "remremium fium for asor assemsembly wbly wor3or3ersers f.

f. 99alales es cocommmmisissisioonsns g.

g. 9al9ales es "er"ersonsonnel nel offoffice ice renrentaltal h.

h. PrProduoductiction on su"su"ervervisoisory ry salsalariarieses i.

i. CoContntrorollller’er’s s ofoffifice ce susu""""lilieses .

. +)ecutive off+)ecutive office heat and air ice heat and air conditioningconditioning 3.

3. +)+)ecuecutivtive ofe offifice sce secuecuririty "ty "ersersonnonnelel

l.

l. 9u9u""""lilies es usused ed in in asassesembmbly ly wowor3r3 m.

m. 4act4actory ory heat heat and and air air condiconditiontioninging n.

n. PowPower ter to o"o o"eraerate fte factactory ory e6ue6ui"i"menmentt o.

o. %e"%e"recreciatiation oion on furnn furnititure foure for salr sales staes staff ff ".

". <<ararnisnish useh used for d for finfinishishing ing "ro"roducductt 6.

6. arar3et3eting "ing "ersersonnonnel heel healtalth insh insuraurancence r.

r. PacPac3ag3aging ing matmaterierials als for for fifinisnished hed "ro"roductduct s.

s. 9ala9alary ory of thf the 6ue 6ualitality coy control ntrol managmanager wer who chho chec3sec3s wor3 on the assembly line

wor3 on the assembly line t.

t. (ss(ssembembly lly line ine wowor3er3ers’ rs’ dendental tal insinsuraurancence..

u. u.

v,

v, ExercExercise - ise - (Co(Cost Cst C!%ssi!%ssi"ic%t"ic%tionion& $%n& $%nu"%cu"%ctureturerr w.

w. %aisy yan 9hi%aisy yan 9hirt 9ho" manufacturrt 9ho" manufactures :>es :>9hirts and decorat9hirts and decorates them with ces them with custom designs for rustom designs for retail sale on theetail sale on the "remises. 9everal

"remises. 9everal costs incurred by the com"any are listed below. 4or each cost, indicate whicosts incurred by the com"any are listed below. 4or each cost, indicate which of the followingch of the following classifications best describes the cost. ore than one

classifications best describes the cost. ore than one classification may a""ly to the same cost classification may a""ly to the same cost item.item. ).

). CoCost clst clasassisifificacatitionon a

a.. <<aarriiaabbllee b b.. 44ii))eedd c c.. PPeerriioodd d d.. PPrroodduucctt e.

e. (d(dmimininiststraratitiveve ff.. 99eelllliinngg

g

g.. ananufufacactuturriingng h.

h. eeseseararch ach and dnd devevelelo"o"mementnt ii.. %%iirrecect t mmaatteerriiaall

.

. %irect labor %irect labor 3.

3. aanunufafactctururining g ovovererheheadad ll.. CCoosst t iitteemmss

1.

1. CosCost of t of fabfabric ric useused in d in :>:>shishirtsrts 2.

2. WaWageges s of of shshirirtmtma3a3ererss .

(2)

COST CONCEPTS AND CLASSIFICATIONS

#. Wages of the em"loyee who re"airs the firm’s sewing machines $. Cost of electricity used in the sewing de"artment

&. Wages of :>shirt designers and "ainters . Wages of sales "ersonnel

@. %e"reciation on sewing machines

A. ent on the building. Part of the building’s first floor is used to ma3e and "aint :>shirts. Part of it is used for the retail sales sho". :he second floor is used for administrative offices and storage of raw materials and finished goods

1. Cost of daily advertisements in local media

11. Wages of designers who e)"eriment with new fabrics, "aints, and :>shirt designs 12. Cost of hiring a "ilot to fly along the beach "ulling a banner advertising the sho" 1. 9alary of the owner’s secretary

1#. Cost of re"airing the gas furnace

1$. Cost of insurance for the "roduction of em"loyees

m.

n, Exercise ., (Econo'ic Ch%r%cteristics o" Costs

o. :he following terms are used to describe various economic characteristics of costs.

". 6. 8""ortunity cost r. 8ut>of>"oc3et cost s. 9un3 cost t. %ifferential cost u. arginal cost v. (verage cost w, x, Re)uire*

y. Choose one of the terms listed above to characteri-e each of the amounts described below.

1. :he cost of including one e)tra child in a day care center.

2. :he cost of merchandise inventory "urchased two years ago, which is now obsolete.

. :he cost of feeding $ children in a "ublic school cafeteria is P @ "er day, or P 1.& "er child "er day. What economic term describes this P 1.& cost?

#. :he management of a high>rise office building uses 2,$ s6uare feet of s"ace in the building for its own

management functions. :his s"ace could be rented for P 2$,. What economic term describes this P 2$, in lost rental revenue?

$. :he cost of building an automated assembly line in a factory is P @,. :he cost of building a manually o"erated assembly line is P $,. W hat economic term is used to describe the difference between these two amounts?

&. eferring to the "receding 6uestion, what economic term is used to describe the P @, cost of building the automated assembly line?

/,

%%, Exercise 0 (Cost C!%ssi"ic%tions& ote!

ab. 9everal costs incurred by Wow Botel and estaurant are listed below. 4or each cost, indicate which of the following classifications best describe the cost. ore than one classification may a""ly to the same cost item. ac. Cost classifications

a. %ifferential cost b. arginal cost c. 8""ortunity cost d. 9un3 cost

e. 8ut>of>"oc3et cost

f. %irect cost of the food and beverage de"artment

g. Indirect cost of the food and beverage de"artment h. Controllable by the 3itchen manager

i. 7ncontrollable by the 3itchen manager

. Controllable by the hotel general manager

3. 7ncontrollable by the hotel general manager

l.

m. Cost items

1. :he cost of food used in the 3itchen

2. :he cost of general advertising by the hotel, which is allocated to the food and beverage de"artment

. :he cost of s"ace ;de"reciation= occu"ied by a sauna ne)t to the "ool. :he s"ace could otherwise have been used for a maga-ine and boo3sho".

#. :he discount on room rates given as a s"ecial offer for a '!abor %ay 5ateway 9"ecial.* $. :he wages earned by table>service "ersonnel.

&. :he salary of the 3itchen manager.

. :he cost of leasing a com"uter used for reservations, "ayroll and general hotel accounting

@. :he wages of the hotel’s maintenance em"loyees, who s"ent 11 hours ;at P 1# "er hour= re"airing the dishwasher in the 3itchen.

A. :he difference in the total cost incurred by the hotel when one additional guest is registered. 1. :he cost of s"ace ;de"reciation= occu"ied by the 3itchen.

11. :he "rofit that would have been earned in a maga-ine and boo3sho", if the hotel had one.

12. :he cost of the refrigerator "urchased 1 months ago. :he unit was covered by a warranty for 12 months, during which time it wor3ed "erfectly. It con3ed out after 1 months, des"ite an original estimate that it would last five years.

1. :he cost of dishes bro3en by 3itchen em"loyees.

1#. :he cost of a "ool service that cleans and maintains the hotel’s swimming "ool.

n.

o, Exercise 2

".

6. :8P Pic3u"s is an u">scale, higher>"riced, s"ecialty "ic3u" truc3 ma3er based in inan, !aguna. :he management accountant for :8P Pic3u"s com"iled information for various levels of "ic3u" truc3 out"ut/ r.

(3)

COST CONCEPTS AND CLASSIFICATIONS

_t. u. v. , truc3s w. &,  truc3 s ). A,  truc3 s y. <ariable "roduction costs -. P 2A,&# , aa. P ab. P

ac. 4i)ed "roduction costs

ad. ae. A,2

, 

af.

ag. <ariable selling costs

ah. #,$ ,

ai. a.

a3. 4i)ed selling costs al. 1,&&

,

am.1,& &, 

an.

ao. :otalcosts a". a6. ar.

as. at. au. av.

aw. 9elling "rice "er truc3 a). #&,  ay. #,1  a-. $,A 

ba. 7nit cost bb. 2A,



bc. bd.

be. Profit "er truc3 bf. bg. bh.

3i, Re)uire*

b. ounding all calculations to the nearest "eso, fill in the blan3s with the correct figures.

34,

3!, $5LTIPLE COICES 1. Which statement is :7+?

a. (ll variable costs are direct costs

b. ecause of a cost>benefit tradeoff, some direct costs may be treated as indirect costs

c. (ll fi)ed costs are indirect costs

d. (ll direct costs are variable costs bm.

2. Indirect manufacturing costs

a. Can be traced to the "roduct that created the costs b. Can be easily identified with the cost obect

c. 5enerally include the cost of material and the cost of labor

d. ay include both variable and fi)ed costs bn.

. <ariable costs

a. (re always indirect costs

b. Increase in total when the actual level of activity increases

c. Include most "ersonnel costs and de"reciation on machinery

d. Can always be traced directly to the cost obect bo.

#. 4i)ed costs

a. ay include either direct or indirect costs b. <ary with "roduction or sales volumes

c. Includes "arts and materials used to manufacture a "roduct

d. Can be adusted in the short run to meet actual demands b".

$. Which one of the following is a variable costs in an insurance com"any? a. ent

b. President’s salary

c. 9ales commissions d. Pro"erty ta)es

&.

. 9ervice>sector com"anies re"ort a. 8nly merchandise inventory b. 8nly finished goods inventory

c. %irect materials inventory, wor3 in "rocess inventory, and finished goods inventory accounts

d. Do inventory accounts

@.

A. anufacturing sector com"anies re"ort a. 8nly merchandise inventory b. 8nly finished goods inventory

c. %irect materials inventory, wor3 in "rocess inventory, and finished goods inventory accounts

d. Do inventory accounts

1.

11. 4or a manufacturing com"any, direct material costs may be included in a. %irect materials inventory only

b. erchandise inventory only

c. oth wor3 in "rocess inventory and finished goods inventory

d. %irect materials inventory, wor3 in "rocess inventory and finished goods inventory accounts 12. 4or a manufacturing com"any, direct labor costs may be included in

a. %irect materials inventory only b. erchandise inventory only

(4)

COST CONCEPTS AND CLASSIFICATIONS

d. %irect materials inventory, wor3 in "rocess inventory and finished goods inventory 1.

1#. 4or a manufacturing com"any, indirect manufacturing costs may be included in a. %irect materials inventory only

b. erchandise inventory only

d. %irect materials inventory, wor3 in "rocess inventory and finished goods inventory 1$.

1&. :he income statement of a service>sector firm re"orts a. Period costs only

b. Inventoriable costs only

c. oth "eriod and inventoriable costs

d. Period and inventoriable costs but at different times, the re"orting varies 1.

1@. Inventoriable costs are e)"ensed on the income statement a. When direct materials for the "roduct are "urchased b. (fter the "roducts are manufactured

c. When the "roducts are sold

d. Dot at any "articular time, it varies 1A.

2. 4or merchandising com"anies, inventoriable costs include a. :he cost of the goods themselves

b. Incoming freight costs

c. Insurance costs for the goods

d. (ll of the above e, The "o!!owin6 in"or'%tion %77!ies to )uestions 1. throu6h 18,

f. :he (wit Com"any manufactures several different "roducts. 7nit costs associated with Product (C are as

follows/

g. %irect materials P &

h. %irect manufacturing labor 1

i. <ariable manufacturing overhead 1@

. 4i)ed manufacturing overhead 2

3. 9ales commissions ;2E of sales= #

l. (dministrative salaries 1&

m. :otal P 1#

21. What are the variable costs "er unit associated with Product (C?

a. P1@ b. P22 c. P@@ d. PA2

22.

2. What are the fi)ed costs "er unit associated with Product (C?

a. P12 b. P#@ c. P$2 d. P2

2#.

2$. What are the inventoriable costs "er unit associated with Product (C?

a. P12 b. P1# c. P$ d. P@@

2&.

2. What are the "eriod costs "er unit associated with Product (C?

a. P# b. P1& c. P2 d. P$2

2@.

2A. (ll of the cost categories listed below are usually found in a com"any’s accounting records, e)ce"t for/ a. 9un3 costs

b. Inventoriable costs

c. 8""ortunity costs d. ar3eting costs .

1. :he term 'committed costs* refers to those

a. Costs which are governed mainly by "ast decisions that established the "resent levels of o"erating and organi-ational ca"acity and which only change slowly in res"onse to small changes in ca"acity

b. Costs which are li3ely to res"ond to the amount of attention devoted to them by a s"ecified manager

c. Costs which fluctuate in total in res"onse to small changes in the rate of utili-ation of ca"acity

d. (morti-ation of costs which were ca"itali-ed in "revious "eriods 2.

. :he term ' discretionary costs* refers to those

a. Costs which management decides to incur in the current "eriod to enable the com"any to achieve obectives other than the filling of orders "laced by customers

c. (morti-ation of costs which were ca"itali-ed in "revious "eriods

d. Costs which will be unaffected by current managerial decisions #.

(5)

COST CONCEPTS AND CLASSIFICATIONS

a. Costs which management decides to incur in the current "eriod to enable the com"any to achieve obectives other than the filling of orders "laced by customers

c. Costs which fluctuate in total in res"onse to small changes in the rate of utili-ation of ca"acity

d. Costs which will be unaffected by current managerial decisions &.

. In the "re"aration of the schedule of Cost of 5oods anufactured, the accountant incorrectly included as "art of manufacturing overhead the rental e)"ense on the firm’s retail facilities. :his inclusion would

a. 8verstate "eriod e)"ense on the income statement

b. 8verstate the cost of goods sold on the income statement

c. 7nderstate the cost of goods manufactured

d. Bave no effect on the cost of goods manufactured @.

A. Cost of goods manufactured will usually include/ a. 8nly costs incurred during the current "eriod b. 8nly direct labor and direct materials costs

c. 9ome costs incurred during the "rior "eriod as well as costs incurred during the current "eriod

d. 9ome "eriod costs as well as some "roduct costs #.

#1. (n e)am"le of a fi)ed cost that would be considered a direct cost is a. ( cost accountant’s salary when the cost obect is a unit of "roduct

b. :he rental cost of a warehouse to store finished goods when the cost obect is the Purchasing %e"artment

c. ( "roduction su"ervisor’s salary when the cost obective is the Production %e"artment

d. oard of %irectors’ fees when the cost obect is the ar3eting %e"artment

#2.

#. uffy Com"any rents out a small unused "ortion of its factory to another com"any for P 1, "er month. :he rental agreement will e)"ire ne)t month, and rather than renew the agreement uffy Com"any is thin3ing about using the s"ace itself to store materials. :he term to describe the P 1, "er month is

a. 9un3 cost b. Period cost

c. 8""ortunity cost d. <ariable cost

(6)

#$. :he cost associated with idle time should be a. Included as "art of direct labor costs

b. :reated as "art of manufacturing overhead

c. (dded directly to cost of goods sold for the "eriod

d. Included as "art of selling and administrative e)"enses #&.

#. ( direct labor overtime "remium should be charged to a s"ecific ob when the overtime is caused by the/ a. Increased overall level of activity in the factory

b. Customer’s re6uirement for early com"letion of the ob

c. anagement’s failure to include the ob in the "roduction schedule

d. anagement’s re6uirement that the ob be com"leted before the annual factory closure due to vacation #@.

#A. Costs which are inventoriable are

a. anufacturing costs incurred to "roduce units of out"ut

b. (ll costs associated with manufacturing other than direct labor costs and raw material costs

c. Costs which are associated with mar3eting, shi""ing, warehousing, billing activities

d. :he sum of direct labor costs and all factory overhead costs $.

$1. 4or e)ternal re"orting

a. Costs are classified as either inventoriable or "eriod costs b. Costs reflect current values

c. :here are no "rescribed rules since no one is e)actly sure how investors and creditors will use these numbers

d. Costs include amounts that reflect both current and future benefits $2.

$. yan 9oh is "aid P 1 an hour for straight>time and P 1$ an hour for overtime. 8ne wee3 he wor3ed #$ hours, which included $ hours of overtime, and  hours of idle time caused by materials shortages. Com"ensation would be

re"orted as

a. P  of direct labor and P 1$ of manufacturing overhead b. P #2 of direct labor and P $$ of manufacturing overhead

c. P #$ of direct labor and P 2$ of manufacturing overhead

d. P ##$ of direct labor and P  of manufacturing overhead $#.