Which of the following costs is included in the cost of manufacturing a product?
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39.Which of the following costs is a period cost for a manufacturing company?a.controller's salaryb.wages of machine operatorsc.insurance on factory equipmentd.fringe benefits for factory employeesANS: APTS:1OBJ:2-2 Show
40.In a traditional manufacturing company, product costs includePTS:1OBJ:2-2  41.Which of the following costs is an indirect product cost?PTS:1OBJ:2-2 42.If total warehousing cost for the year amounts to $350,000, and 40% of the warehousing activity is as-sociated with finished goods and 60% with direct materials, how much of the cost would be charged asa product cost? PTS:1OBJ:2-243.All of Jill Enterprise's operations are housed in one building with the costs of occupying the buildingaccumulated in a separate account. The total costs incurred in May amounted to $24,000. The com-pany allocates these costs on the basis of square feet of floor space occupied. Administrative offices,sales offices, and factory operations occupy 9,000, 6,000, and 30,000 square feet, respectively. Howmuch will be classified as a product cost for May?a.$4,800b.$3,200c.$16,000d.$24,000ANS: CSUPPORTING CALCULATIONS:[30,000/(9,000 + 6,000 + 30,000)]×$24,000 = $16,000 PTS:1OBJ:2-2This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. This may not be resold,copied, or distributed without the prior consent of the publisher. CHAPTER 2AN INTRODUCTION TO COST TERMS AND PURPOSES2 Factors affecting the classification of a cost as direct or indirect include the materiality of the cost in question available information-gathering technology design of operations 2 A variable cost changes in total in proportion to changes in the related level of total activity or volume. An example is a sales commission that is a percentage of each sales revenue dollar. A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. An example is the leasing cost of a machine that is unchanged for a given time period (such as a year) regardless of the number of units of product produced on the machine. 2-6 A cost driver is a variable, such as the level of activity or volume, that causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. For example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line. 2-7 The relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in question. Costs are described as variable or fixed with respect to a particular relevant range. 2-8 A unit cost is computed by dividing some amount of total costs (the numerator) by the related number of units (the denominator). In many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. It is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels. 2-9 Manufacturing-sector companies purchase materials and components and convert them into various finished goods, for example automotive and textile companies. Merchandising-sector companies purchase and then sell tangible products without changing their basic form, for example retailing or distribution. Service-sector companies provide services or intangible products to their customers, for example, legal advice or audits. 2 Manufacturing companies have one or more of the following three types of inventory: 1. Direct materials inventory. Direct materials in stock and awaiting use in the manufacturing process. 2. Work-in-process inventory. Goods partially worked on but not yet completed. Also called work in progress. 3. Finished goods inventory. Goods completed but not yet sold. 2 Inventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold. These costs are included in work-in-process and finished goods inventory (they are “inventoried”) to accumulate the costs of creating these assets. Period costs are all costs in the income statement other than cost of goods sold. These costs are treated as expenses of the accounting period in which they are incurred because they are expected not to benefit future periods (because there is not sufficient evidence to conclude that such benefit exists). Expensing these costs immediately best matches expenses to revenues. 2-12 Direct material costs are the acquisition costs of all materials that eventually become part of the cost object (work in process and then finished goods) and can be traced to the cost object in an economically feasible way. Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object (work in process and then finished goods) in an economically feasible way. Manufacturing overhead costs are all manufacturing costs that are related to the cost object (work in process and then finished goods) but cannot be traced to that cost object in an economically feasible way. Prime costs are all direct manufacturing costs (direct material and direct manufacturing labor). Conversion costs are all manufacturing costs other than direct material costs. 2-13 Overtime premium is the wage rate paid to workers (for both direct labor and indirect labor) in excess of their straight-time wage rates. Idle time is a subclassification of indirect labor that represents wages paid for unproductive time caused by lack of orders, machine breakdowns, material shortages, poor scheduling, and the like. 2-14 A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include pricing and product mix decisions, contracting with government agencies, and preparing financial statements for external reporting under GAAP. 2-15 Three common features of cost accounting and cost management are calculating the costs of products, services, and other cost objects obtaining information for planning and control and performance evaluation analyzing the relevant information for making decisions 2-17 (15 min.) Direct, indirect, fixed, and variable costs. Wonder Bakery manufactures two types of bread, which it sells as wholesale products to various specialty retail bakeries. Each loaf of bread requires a three-step process. The first step is mixing. The mixing department combines all of the necessary ingredients to create the dough and processes it through high-speed mixers. The dough is then left to rise before baking. The second Machinist (running the mixing machine)—depends on how they are paid. If paid hourly and not under union contract, then indirect, variable. If salaried or under union contract, then indirect, fixed Machine maintenance personnel—indirect, probably fixed, if salaried, but may be variable if paid only for time worked and maintenance increases with increased production Maintenance supplies—indirect, variable Cleaning supplies—indirect, most likely fixed because the custodians probably do the same amount of cleaning every night
Of course the yeast and flour will also be a direct cost of the Mixing Department, but it is already a direct cost of each kind of bread produced. 2-18 (15–20 min.) Classification of costs, service sector. Market Focus is a marketing research firm that organizes focus groups for consumer-product companies. Each focus group has eight individuals who are paid $60 per session to provide comments on new products. These focus groups meet in hotels and are led by a trained, independent marketing specialist hired by Market Focus. Each specialist is paid a fixed retainer to conduct a minimum number of sessions and a per session fee of $2,200. A Market Focus staff member attends each session to ensure that all the logistical aspects run smoothly. Required: Classify each cost item (A–H) as follows: a. Direct or indirect (D or I) costs of each individual focus group. b. Variable or fixed (V or F) costs of how the total costs of Market Focus change as the number of focus groups conducted changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the number of groups conducted.) You will have two answers (D or I; V or F) for each of the following items: Cost Item D or I V or F A. Payment to individuals in each focus group to provide comments on new products B. Annual subscription of Market Focus to Consumer Reports magazine C. Phone calls made by Market Focus staff member to confirm individuals will attend a focus group session (Records of individual calls are not kept.) D. Retainer paid to focus group leader to conduct 18 focus groups per year on new medical products E. Recruiting cost to hire marketing specialists F. Lease payment by Market Focus for corporate office G. Cost of tapes used to record comments made by individuals in a focus group session (These tapes are sent to the company whose products are being tested.) H. Gasoline costs of Market Focus staff for company-owned vehicles (Staff members submit monthly bills with no mileage breakdowns.) I. Costs incurred to improve the design of focus groups to make them more effective SOLUTION Cost object: Each individual focus group Cost variability: With respect to the number of focus groups There may be some debate over classifications of individual items, especially with regard to cost variability. Cost Item D or I V or F A D V B I F C I Va D I F E I V F I F G D V H I Vb I I F aSome students will note that phone call costs are variable when each call has a separate charge. It may be a fixed cost if Market Focus has a flat monthly charge for a line, irrespective of the amount of usage. bGasoline costs are likely to vary with the number of focus groups. However, vehicles likely serve multiple purposes, and detailed records may be required to examine how costs vary with changes in one of the many purposes served. 2-19 (15–20 min.) Classification of costs, merchandising sector. Band Box Entertainment (BBE) operates a large store in Atlanta, Georgia. The store has both a movie (DVD) section and a music (CD) section. BBE reports revenues for the movie section separately from the music section. Required: Classify each cost item (A–H) as follows: a. Direct or indirect (D or I) costs of the total number of DVDs sold. b. Variable or fixed (V or F) costs of how the total costs of the movie section change as the total number of DVDs sold changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of DVDs sold.) You will have two answers (D or I; V or F) for each of the following items: Cost Item D or I V or F F. Electricity costs for Teana assembly line (single bill covers entire plant) G. Wages paid to temporary assembly-line workers hired in periods of high Teana production (paid on hourly basis) H. Annual fire-insurance policy cost for Kitakyushu plant SOLUTION Cost object: Type of car assembled (Teana or Murano) Cost variability: With respect to changes in the number of Teanas assembled There may be some debate over classifications of individual items, especially with regard to cost variability. Cost Item D or I V or F A D V B I F C D F D D V E D V F I V G D V H I F 2-21 (20 min.) Variable costs, fixed costs, total costs. Bridget Ashton is getting ready to open a small restaurant. She is on a tight budget and must choose between the following long-distance phone plans: Plan A: Pay 10 cents per minute of long-distance calling. Plan B: Pay a fixed monthly fee of $15 for up to 240 long-distance minutes and 8 cents per minute thereafter (if she uses fewer than 240 minutes in any month, she still pays $ for the month). Plan C: Pay a fixed monthly fee of $22 for up to 510 long-distance minutes and 5 cents per minute there- after (if she uses fewer than 510 minutes, she still pays $22 for the month). Required:
SOLUTION
0 10 20 30 40 50 60 0 100 200 300 400 500 600 Total Cost Number of long-distance minutes Plan A Plan B Plan C
*Let x be the number of minutes when Plan A and Plan B have equal cost $0 = $ x = $15 ÷ $0 per minute = 150 minutes. Let y be the number of minutes when Plan B and Plan C have equal cost $15 + $0 (y – 240) = $ $0 (y – 240) = $22 – $15 = $ y – 240 = $7 87. $0. y = 87 + 240 = 327 minutes 2-22 (15–20 min.) Variable costs and fixed costs. Beacher Motors specializes in producing one specialty vehicle. It is called Surfer and is styled to easily fit multiple surfboards in its back area and top-mounted storage racks. Beacher has the following manufacturing costs: Plant management costs, $1,200,000 per year Cost of leasing equipment, $1,800,000 per year Workers’ wages, $700 per Surfer vehicle produced Direct materials costs: Steel, $1,500 per Surfer; Tires, $125 per tire, each Surfer takes 5 tires (one spare). City license, which is charged monthly based on the number of tires used in production: 0–500 tires $ 50, 501–1,000 tires $ 74, more than 1,000 tires $200, Beacher currently produces 110 vehicles per month. Required:
Vehicles Produced per Month Tires Produced per Month Fixed Cost per Month Unit Fixed Cost per Vehicle Unit Variable Cost per Vehicle Unit Total Cost per Vehicle (1) (2) = (1) × 5 (3) (4) = FC ÷ (1) (5) (6) = (4) + (5) (a) 100 500 $300,000 $300,000 ÷ 100 = $3,000 $2,825 $5, (b) 225 1,125 $450,000 $450,000 ÷ 225 = $2,000 $2,825 $4, The unit cost for 100 vehicles produced per month is $5,825, while for 225 vehicles it is only $4,825. This difference is caused by the fixed cost increment of $150,000 (an increase of 50%, $150,000 ÷ $300,000 = 50%) being spread over an increment of 125 (225 – 100) vehicles (an increase of 125%, 125 ÷ 100). The fixed cost per unit is therefore lower. 2-23 (20 min.) Variable costs, fixed costs, relevant range. Dotball Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 4,400 per month. The machine costs $9,500 and is depreciated using straight-line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other fixed manufacturing overhead costs total $1,300 per month. Dotball currently makes and sells 3,100 jaw-breakers per month. Dotball buys just enough materials each month to make the jaw-breakers it needs to sell. Materials cost 10 cents per jawbreaker. Next year Dotball expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% discount on price. Rent and other fixed manufacturing overhead costs will remain the same. Required:
SOLUTION
2-28 (20–30 min.) Inventoriable costs versus period costs. Each of the following cost items pertains to one of these companies: Star Market (a merchandising-sector company), Maytag (a manufacturing-sector company), and Yahoo! (a service-sector company): a. Cost of lettuce and tomatoes on sale in Star Market’s produce department b. Electricity used to provide lighting for assembly-line workers at a Maytag refrigerator- assembly plant c. Depreciation on Yahoo!’s computer equipment used to update its Website d. Electricity used to provide lighting for Star Market’s store aisles e. Depreciation on Maytag’s computer equipment used for quality testing of refrigerator components during the assembly process f. Salaries of Star Market’s marketing personnel planning local-newspaper advertising campaigns g. Perrier mineral water purchased by Yahoo! for consumption by its software engineers h. Salaries of Yahoo!’s marketing personnel selling advertising i. Depreciation on vehicles used to transport Maytag refrigerators to retail stores Required:
SOLUTION
2-29 (20 min.) Computing cost of goods purchased and cost of goods sold. The following data are for Marvin Department Store. The account balances (in thousands) are for 2014. Marketing, distribution, and customer-service costs $ 37, Merchandise inventory, January 1, 2014 27, Utilities 17, General and administrative costs 43, Merchandise inventory, December 31, 2014 34, Purchases 155, Miscellaneous costs 4, Transportation-in 7, Purchase returns and allowances 4, Purchase discounts 6, Revenues 280, Required:
Operating costs
2-30 (20 min.) Cost of goods purchased, cost of goods sold, and income statement. The following data are for Montgomery Retail Outlet Stores. The account balances (in thousands) are for 2014. Required:
SOLUTION 1a. Montgomery Retail Outlet Stores Schedule of Cost of Goods Purchased For the Year Ended December 31, 2014 (in thousands) Purchases $520, Add freight—in 20, 540, Deduct: Purchase returns and allowances $22, Purchase discounts 18,000 40, Cost of goods purchased $500, 1b. Montgomery Retail Outlet Stores Schedule of Cost of Goods Sold For the Year Ended December 31, 2014 (in thousands) Beginning merchandise inventory 1/1/2014 $ 90, Cost of goods purchased (see above) 500, Cost of goods available for sale 590, Ending merchandise inventory 12/31/2014 104, Marketing and advertising costs $ 48, Merchandise inventory, January 1, 2014 90, Shipping of merchandise to customers 4, Building depreciation 8, Purchases 520, General and administrative costs 64, Merchandise inventory, December 31, 2014 104, Merchandise freight-in 20, Purchase returns and allowances 22, Purchase discounts 18, Revenues 640, 1.Direct materials inventory 10/1/2014 $ 105 Direct materials purchased 365 Direct materials available for production 470 Direct materials used (385) Direct materials inventory 10/31/2014 $ 85
Which of the following costs is a product cost for a manufacturing company?Product cost refers to the costs incurred to create a product. These costs include direct labor, direct materials, consumable production supplies, and factory overhead.
Which of the following is included in product costs in a manufacturing environment?Product costs include direct material (DM), direct labor (DL), and manufacturing overhead (MOH).
Which of the following is an element of cost of a manufactured product?Traditionally, the product cost is divided into three—material, labour and other overhead expenses and these can further be analysed into different elements.
What are the 3 costs included in product costs?In general, three types of expenses are included in the cost of products: the cost of direct materials, direct labor costs and manufacturing overhead costs.
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