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Solutions Manual, Chapter 2 13
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 opportunity cost or an outlay cost. An expense is the write-off of an outlay cost against
revenues in a particular accounting period and usually pertains only to external financial reports.
2-2.
Product costs are those costs that are attributed to products, while period costs are those costs that are attributed to time periods. The determination of product costs varies depending on the approach used: full absorption, variable, or managerial costing.
2-3.
Outlay costs are those costs that represent a past, current, or future cash outlay. Opportunity cost is the value of what is given up by choosing a particular alternative.
2-4.
Common examples include the cost of lost sales by producing low quality products or substandard customer service. Another example is a firm operating at capacity. In this case, a sale to one customer precludes a sale to another customer.
2-5.
Yes. The costs associated with goods sold in a period are not expected to result in future benefits. They provided revenues for the period in which the goods were sold; therefore, they are expensed for financial accounting purposes.
2-6.
The costs associated with goods sold are a product costs for a manufacturing firm. They are the costs associated with the product and recorded in an inventory account until the product is sold.
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14 Fundamentals of Cost Accounting
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 (in manufacturing).
The merchandiser expenses these costs as the product is sold, as no additional costs are incurred. The manufacturer transforms the purchased materials into finished goods and charges these costs, along with conversion costs to production (work in process inventory). These costs are expensed when the finished goods are sold.
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 cases, materials are so immaterial in amount that they are considered part of overhead.
Direct labor: Costs associated with labor engaged in manufacturing activities. Sometimes this is considered as the labor that is actually responsible for converting the materials into finished product. Assembly workers, cutters, finishers and similar “hands on” personnel are classified as direct labor.
Manufacturing overhead:
All other costs directly related to product manufacture. These costs include the indirect labor and materials, costs related to the facilities and equipment required to carry out manufacturing operations, supervisory costs, and all other direct support activities.
2-9.
Step costs change with volume in steps, such as when supervisors are added. Semivariable or mixed costs have elements of both fixed and variable costs. Utilities and maintenance are often mixed costs.
2-10.
Total variable costs change in direct proportion to a change in volume (within the
relevant range of activity). Total fixed costs do not change as volume changes (within the relevant range of activity).
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Solutions Manual, Chapter 2 15
Solutions to Critical Analysis and Discussion Questions
2-11.
The statement is not true. Materials can be direct or indirect. Indirect materials include items such as lubricating oil, gloves, paper supplies, and so on. Similarly, indirect labor includes plant supervision, maintenance workers, and others not directly associated with the production of the product.
2-12.
Statements such as this almost always refer to the full cost per unit mxing fixed and variable costs. Therefore, multiplying the cost per seat-mile by the number of miles is unlikely to give a useful estimate of flying one passenger. The variable costs will be very small.
2-13.
Marketing and administrative costs are treated as period costs and expensed for financial accounting purposes in both manufacturing and merchandising organizations. However, for decision making or assessing product profitability, marketing and administrative costs that can be reasonably associated with the product (product-specific advertising, for example) are just as important as the manufacturing costs.
2-14.
There is no “correct” answer to this allocation problem. Common allocation procedures would including (1) splitting the costs equally (25% each), (2) dividing the costs by the miles driven and charging based on the miles each person rides, (3) charging the incremental costs of the passengers (almost nothing) because you were going to drive to Texas anyway.
2-15.
Direct material costs include the cost of supplies and medicine. One possible direct labor cost would be nursing staff assigned to the unit. Indirect costs include the costs of hospital administration, depreciation on the building, security costs, and so on.
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16 Fundamentals of Cost Accounting
Solutions to Exercises
2-16. (15 min.) Basic Concepts.
a. False. This is an expense. For example, R&D costs are incurred in expectation of future benefits.
b. True. Each unit of a product has the same amount of direct material (same cost per unit), but producing more units requires more material (and more cost).
c. False. Variable costs can be direct (direct materials) or indirect (lubricating oil for machines.)
2-17. (15 min.) Basic Concepts.
Cost Item
Fixed (F)
Variable (V)
Period (P)
Product (M)
a. Assembly line workers’ wages ............................................. V M
b. Depreciation on office buildings for administrative staff ....... F P
c. Bonuses of top executives in the company .......................... F P
d. Overtime pay for assembly workers ..................................... V M
e. Transportation-in costs on materials purchased .................. V M
f. Training costs for operating plant machinery ....................... F M
g. Travel cost for sales personnel ............................................ V P
h. Administrative support for sales supervisors ........................ F P
i. Controller’s office rental ....................................................... F P
j. Cafeteria costs for the plant ................................................. F M
2-18. (10 min.) Basic Concepts.
a. Property taxes on the factory. ...................................................................... C
b. Wages for drivers delivering work-in-process from one plant to another. .... C
c. Transportation-in costs on materials purchased. ......................................... P
d. Assembly line worker’s salary. ..................................................................... B
e. Direct materials used in production process. ............................................... P
f. Lubricating oil for plant machines. ............................................................... C
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Solutions Manual, Chapter 2 17
2-19. (15 min.) Basic Concepts.
Concept Definition
5 Period costs Costs that can more easily be attributed to time intervals.
9 Indirect costs Costs that cannot be directly related to a cost object.
11 Fixed costs Costs that do not vary with the volume of activity.
7 Opportunity costs The lost benefit from the best forgone alternative.
6 Outlay costs Past, present, or near-future cash flow.
10 Direct costs Costs that can be directly related to a cost object.
3 Expense The cost charged against revenue in a particular accounting period.
2 Cost A sacrifice of resources.
1 Variable costs Costs that vary with the volume of activity.
4 Full absorption cost Costs that are part of inventory.
8 Product costs Costs used to compute inventory value according to GAAP.
2-20. (15 min.) Basic Concepts.
Cost Item
Fixed (F) Variable (V)
Period (P) Product (M)
a. Advertising costs .............................................................. F P
b. Depreciation on pollution control equipment in the plant .. F M
c. Office supplies for the plant manager............................... F M
d. Power to operate factory equipment ................................ V M
e. Commissions paid to sales personnel .............................. V P
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18 Fundamentals of Cost Accounting
2-21. (15 min.) Basic Concepts.
a. Variable production cost per unit ($150 + $20 + $5 + $10) .. $185
b. Variable cost per unit. ($185 + $15) ..................................... $200
c. Full cost per unit. [$200 + ($38,000 ÷ 400 units)] ................. $295
d. Full absorption cost per unit. [$185 + ($20,000 ÷ 400)] ........ $235
e. Prime cost per unit: (labor + materials + outsource) ............ $175
f. Conversion cost per unit. (labor + overhead + outsource) ... $230
g. Contribution margin per unit. ($300 – $200)....................... $100
h. Gross margin per unit. ($300 – full absorption cost of $235) $65
i. Suppose the number of units increases to 500 units per month, which is within the relevant range, which of a through h will change. For each amount that will change, give the new amount for a volume of 500 units.
Full cost = $200 + ($38,000 ÷ 500) = $276
Full absorption cost = $185 + ($20,000 ÷ 500) = $225
Conversion costs = $150+$10 + ($20,000 ÷ 500) + $20 = $220
Gross margin = $300 – $225 = $75
c, d, f and h will
change
2-22. (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. Because the price for government sales depends on the allocated costs, using expected sales (units or revenues) leads to a potential circularity. Price depends on cost, which depends on sales, which depends on price.
b. The company has an incentive to allocate as much cost as possible to government sales. This cost will be reimbursed (and the government may be less price-sensitive). Of course, the government recognizes this and has detailed allocation guidelines in place and an agency (the Defense Contract Audit Agency) that
monitors contracts and the allocation of costs.
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Solutions Manual, Chapter 2 19
2-23. (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 common costs. One possibility is relative revenues. (We ignore here whether we should allocate these costs, something we discuss in chapter 3.)
b. You should explain to Star that you cannot agree with the allocation basis, especially given the reason for selecting the basis. If this fails to persuade Star, you should disclose to Star’s boss your disagreement with the analysis and the relation between Star and the vendor.
2-24. (30 min.) Prepare Statements for a Manufacturing Company: MacBeth Manufacturing.
MacBeth Manufacturing Company Cost of Goods Sold Statement
For the Year Ended December 31
Beginning work in process inventory .............. $32,300
Manufacturing costs:
Direct materials:
Beginning inventory ................................... $24,500
Purchases .................................................. 50,400 (a)*
Materials available ................................... 74,900
Less ending inventory ................................ 27,200
Direct materials used ............................... $47,700
Other manufacturing costs ......................... 7,000 **
Total manufacturing costs ........................ 54,700 (c)
Total costs of work in process .................... 87,000
Less ending work in process ................... 29,000
Cost of goods manufactured.................. 58,000 (b)
Beginning finished goods inventory ................ 4,500
Finished goods available for sale ................... 62,500
Ending finished goods inventory .................... 6,500
Cost of goods sold ......................................... $56,000
* Letters (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c. ** Difference between total manufacturing costs and direct materials used.
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20 Fundamentals of Cost Accounting
2-25. (10 min.) Prepare Statements for a Service Company: InterGalactic Strategic Consultants
Revenues .......................................... $40,000,000 (Given)
Cost of services sold (b) .................... 22,300,000 (Revenues – gross margin)
Gross margin ..................................... $17,700,000 (Given)
Marketing and administrative
costs (a) ............................................
10,100,000
(Gross margin – operating profit)
Operating profit ................................. $7,600,000 (Given)
2-26. (30 min.) Prepare Statements for a Manufacturing Company: Secol Machining Company
Secol Machining Company Cost of Goods Sold Statement
For the Year Ended December 31
Beginning work in process inventory ..... $ 108,600
Manufacturing costs:
Direct materials:
Beginning inventory .......................... $ 98,400
Purchases ......................................... 515,600
Materials available .......................... 614,000
Less ending inventory ....................... 109,800
Direct materials used ...................... $504,200 (a)*
Other manufacturing costs ................ 1,369,600 **
Total manufacturing costs ............... 1,873,800 (c)
Total costs of work in process ........... 1,982,400
Less ending work in process .......... 106,200
Cost of goods manufactured......... 1,876,200 (b)
Beginning finished goods inventory ....... 43,800
Finished goods available for sale .......... 1,920,000
Ending finished goods inventory ........... 45,000
Cost of goods sold ................................ $1,875,000
* Letters (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c. * Difference between total manufacturing costs and direct materials used.
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Solutions Manual, Chapter 2 21
2-27. (15 min.) Basic Concepts
a. Beginning Material Inventory
= Transferred out + Ending Balance – Transferred In
= 15,300 + 3,600 – 16,100 ...................................................
= $2,800
b. Transferred Out of Work in Process
= Beginning Balance + Transferred In – Ending Balance
= 2,700 + 55,550 – 3,800 .....................................................
(also can be found solving for Transferred In to Finished
Goods)
= $54,450
c. Revenue – Cost of Goods Sold = 103,300 – 56,050 ............ = $47,250
2-28. (15 min.) Prepare Statements for a Merchandising Company: Sun & Surf Apparel Shop
Sun & Surf Apparel Shop Cost of Goods Sold Statement
For the Year Ended December 31, This Year
Revenue .................................................................................................. $934,000
Cost of goods sold (see statement below) .............................................. 621,770
Gross margin ..........................................................................................
$312,230
Marketing and administrative costs ($73,200 + 42,850 + 14,400 + 2,730) ......................................................................................................
133,180
Operating profit .......................................................................................
$179,050
Sun & Surf Apparel Shop Cost of Goods Sold Statement
For the Year Ended December 31, This Year
Beginning inventory .............................................................. $ 37,400
Purchases .......................................................................... $615,950
Transportation-in .................................................................. 4,620
Total cost of goods purchased ............................................. 620,570
Cost of goods available for sale ........................................... 657,970
Ending inventory .................................................................. 36,200
Cost of goods sold ............................................................... $621,770
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22 Fundamentals of Cost Accounting
2-29. (30 min.) Prepare Statements for a Manufacturing Company: Pioneer Parts
Pioneer Parts Statement of Cost of Goods Sold For the Year Ended December 31
($000)
Work in process, Jan. 1 .......................................... $ 115
Manufacturing costs:
Direct materials:
Beginning inventory, Jan. 1 ................................ $ 86
Add material purchases ..................................... 8,240
Direct materials available ................................... 8,326
Less ending inventory, Dec. 31 .......................... 93
Direct materials used ......................................... $ 8,233
Direct labor ........................................................... 12,600
Manufacturing overhead:
Indirect factory labor .......................................... 2,890
Indirect materials and supplies .......................... 682
Factory supervision ......................................... 752
Factory utilities ................................................... 954
Factory and machine depreciation ..................... 11,640
Property taxes on factory ................................... 284
Total manufacturing overhead ......................... 17,202
Total manufacturing costs ............................. 38,035
Total cost of work in process during the year ......... 38,150
Less work in process, Dec. 31 ............................. 136
Costs of goods manufactured during the year ... 38,014
Beginning finished goods, Jan. 1 ........................... 1,640
Finished goods inventory available for sale ........... 39,654
Less ending finished goods inventory, Dec. 31 ...... 1,470
Cost of goods sold ................................................. $38,184
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Solutions Manual, Chapter 2 23
2-29. (continued)
Pioneer Parts Income Statement
For the Year Ended December 31
($000)
Sales revenue ............................................................................ $45,400
Less: Cost of goods sold ........................................................... 38,184
Gross margin ............................................................................. 7,216
Administrative costs ................................................................... $3,650
Marketing costs .......................................................................... 1,520
Total marketing and administrative costs ................................... 5,170
Operating profit .......................................................................... $ 2,046
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24 Fundamentals of Cost Accounting
2-30. (30 min.) Prepare Statements for a Manufacturing Company: Oakdale Tool & Die
.
Oakdale Tool & Die Statement of Cost of Goods Sold For the Year Ended December 31
Beginning work in process, Jan. 1...................... $ 31,000
Manufacturing costs:
Direct materials:
Beginning inventory, Jan. 1 ............................ $ 12,000
Add: Purchases ............................................. 3,650,000
Direct materials available ............................. 3,662,000
Less ending inventory, Dec. 31 ...................... 14,000
Direct materials used ................................... $3,648,000
Direct labor ....................................................... 845,000
Manufacturing overhead:
Indirect factory labor ...................................... 912,000
Factory supervision ........................................ 487,000
Indirect materials and supplies ...................... 685,000
Building utilities (80% of total) ........................ 1,000,000
Building & machine depreciation (85%) ......... 765,000
Property taxes—factory (75% of total) ........... 630,000
Total manufacturing overhead ..................... 4,479,000
Total manufacturing costs ......................... 8,972,000
Total cost of work in process during the year ..... 9,003,000
Less work in process, Dec. 31 ......................... 27,000
Costs of goods manufactured during the year
8,976,000
Beginning finished goods, Jan. 1 ....................... 54,000
Finished goods available for sale ....................... 9,030,000
Less ending finished goods, Dec. 31 ................. 65,000
Cost of goods sold ............................................. $ 8,965,000
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Solutions Manual, Chapter 2 25
2-30. (continued)
Oakdale Tool & Die Income Statement
For the Year Ended December 31
Sales revenue .............................................................. $12,970,000
Less: Cost of goods sold (per statement) ..................... 8,965,000
Gross profit .................................................................. $ 4,005,000
Marketing and administrative costs:
Depreciation (15% of total)......................................... $ 135,000
Utilities (20% of total) ................................................. 250,000
Property taxes (25% of total)...................................... 210,000
Administrative costs ................................................... 1,654,000
Marketing costs .......................................................... 871,000
Total marketing and administrative costs ................... 3,120,000
Operating profit ............................................................ $ 885,000
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26 Fundamentals of Cost Accounting
2-31. (10 Min.) Cost Allocation with Cost Flow Diagram: Coastal Computer
a.
(1) Main Street Lakeland Mall Total
Number of computers sold ........ 2,000 1,500 3,500
Percentage .............................. 57.143% 42.857% 100%
Allocated Accounting department cost ($175,000) ......
$100,000
$75,000
$175,000
(2) Main Street Lakeland Mall Total
Revenue ................................... $2,000,000 $3,000,000 $5,000,000
Percentage ............................... 40% 60% 100%
Allocated Accounting department cost ($175,000) ......
$70,000
$105,000
$175,000
b.
Accounting Department
$175,000Cost
pool
Main Street
$70,000
Lakeland Mall
$105,000
Cost
allocation
rule
Cost
objects
40%a
60%b%Revenue
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Solutions Manual, Chapter 2 27
a 40% = $2,000,000 ÷ ($2,000,000 + $3,000,000) b 60% = $3,000,000 ÷ ($2,000,000 + $3,000,000)
2-32. (10 min.) Cost behavior for Forecasting: Gibson Company.
The variable costs will be 40% higher (an increase of 21,000 – 15,000 = 6,000 units)
Variable costs:
Direct materials used ($1,056,000 x 1.4) ................................ $ 1,478,400
Direct labor ($1,995,000 x 1.4) ............................................... 2,793,000
Indirect materials and supplies ($240,000 x 1.4) .................... 336,000
Power to run plant equipment ($213,000 x 1.4) ..................... 298,200
Total variable costs ................................................................ $4,905,600
Fixed costs:
Supervisory salaries ............................................................... 930,000
Plant utilities (other than power to run plant equipment) ........ 288,000
Depreciation on plant and equipment ..................................... 144,000
Property taxes on building ...................................................... 195,000
Total fixed costs ..................................................................... 1,557,000
Total costs for 21,000 units ...................................................... $6,462,600
Fixed costs = $1,557,000 = $930,000 + $288,000 + $144,000 + $195,000
Note that the variable cost per unit is $233.60 at both 15,000 units and at 21,000 units.
Variable costs = $233.60 per unit = ($4,905,600 21,000 units) or ($3,504,000 15,000 units)
VariableCosts
4,905.6
$
15,000 21,000 Volume
3,504.0
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28 Fundamentals of Cost Accounting
2-33. (30 min.) Components of Full Costs: Ramirez Corporation
Full costof making
and sellingthe product
= $436
Direct materials= $180
Direct labor= $105
Variable manufacturing
overhead= $27
Fixed manufacturingoverhead
= $60
($108,000 1,800 units)
Variable marketingand administrative
= $24
Fixed marketingand administrative
= $40($72,000 1,800 units)
Full-absorptioncost
= $372
Variablemanufacturing
costs= $312
Variable
marketing and
administrative= $24
Unitvariable
cost= $336
a. Variable manufacturing cost: $180 + $105 + $27= $312
b. Variable cost: $180 + $105 + $27 + $24 = $336
c. Full absorption cost: $180 + $105 + $27 + ($108,000 ÷ 1,800 units) = $372
d. Full cost: $180 + $105 + $27 + $24 + ($108,000 ÷ 1,800 units) + ($72,000 ÷ 1,800 units) = $436
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Solutions Manual, Chapter 2 29
2-34. (15 min.) Components of Full Costs: Ramirez Corporation
a. Product cost = Direct materials + Direct labor + Manufacturing overhead.
Product cost per unit: $180 + $105 + $27 + ($108,000 ÷ 1,800 units) = $372
b. Period costs = Marketing and administrative costs.
Period costs for the period: $72,000 + ($24 x 1,800 units) = $115,200
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30 Fundamentals of Cost Accounting
2-35. (30 min.) Components of Full Cost: Larson Manufacturing.
Full costof making
and sellingthe product
= $177
Direct materials= $35
Direct labor
= $30
Variable manufacturingoverhead
= $20
Fixed manufacturingoverhead
= $45($225,000 5,000 units)
Variable marketingand administrative
= $8
Fixed marketingand administrative
= $39($195,000 5,000 units)
Full-absorptioncost
= $130
Variablemanufacturing
costs= $85
Variable
marketing and
administrative= $8
Unitvariable
cost= $93
a. Variable cost: $35 + $30 + $20 + $8 = $93
b. Variable manufacturing cost: $35 + $30 + $20 = $85
c. Full-absorption cost: $35 + $30 + $20 + ($225,000 ÷ 5,000 units) = $130
d. Full cost: $35 + $30 + $20 + $8 + ($225,000 ÷ 5,000 units) + ($195,000÷ 5,000 units) + $8 = $177
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Solutions Manual, Chapter 2 31
2-35. (continued)
e. Profit margin = Sales price – full cost = $195 – $177 = $18
f. Gross margin = Sales price – full absorption cost = $195 – $130 = $65
g. Contribution margin = Sales price – variable cost = $195 – $93 = $102
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32 Fundamentals of Cost Accounting
2-36. (20 Min.) Gross Margin and Contribution Margin Income Statements: Larson Manufacturing
Gross Margin Income Statement Contribution Margin Income Statement
Revenue(a) ..................... $975,000 Revenue ..............................
$975,000
Variable manufacturing costs (b) ..........................
425,000
Variable manufacturing costs 425,000
Fixed manufacturing costs 225,000 Variable marketing and administrative costs .............
40,000
Gross margin ................... $325,000 Contribution margin .............. $510,000 Variable marketing and administrative costs (c) ......
40,000
Fixed manufacturing costs ... 225,000
Fixed marketing and administrative costs .........
195,000
Fixed marketing and administrative costs .............
195,000
Operating profit ................. $90,000 Operating profit .................... $90,000
(a) $195 x 5,000 units = $975,000 (b) $85 x 5,000 units = $425,000 (c) $8 x 5,000 units = $40,000
2-37. (20 Min.) Gross Margin and Contribution Margin Income Statements: Cunha Products
Gross Margin Income Statement Contribution Margin Income Statement
Revenue ......................... $13,200 Revenue ..............................
$13,200
Variable manufacturing costsa ..............................
4,490
Variable manufacturing costs ....................................
4,490
Fixed manufacturing costs 2,200 Variable marketing and administrative costs .............
560
Gross margin ................... $ 6,510 Contribution margin ............. $ 8,150 Variable marketing and administrative costs .........
560
Fixed manufacturing costs... 2,200
Fixed marketing and administrative costs .........
1,600
Fixed marketing and administrative costs .............
1,600
Operating profit ............... $ 4,350 Operating profit .................... $ 4,350
a Variable manufacturing costs = $2,300 + $1,250 + $940 = $4,490
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Solutions Manual, Chapter 2 33
2-38. (20 Min.) Gross Margin and Contribution Margin Income Statements: Tosca Beverages
Gross margin income statement Contribution margin income statement
Revenuea $188,000 Revenue ............................ $188,000 Variable manufacturing costsb ................................
23,500
Variable manufacturing costs ..................................
23,500
Fixed manufacturing costsc
........................................ 54,050 Variable marketing and
administrative costs ...........
28,200
Gross margin ..................... $110,450 Contribution margin ........... $136,300 Variable marketing and administrative costsd .........
28,200
Fixed manufacturing costs . 54,050
Fixed marketing and administrative costse .........
68,150
Fixed marketing and administrative costs ...........
68,150
Operating profit ................. $14,100 Operating profit .................. $14,100
a Revenue = $8.00 x 23,500 = $188,000 b Variable manufacturing costs = ($0.55 + $0.30 + $0.15) x 23,500 = $23,500 c Fixed manufacturing costs = $2.30 x 23,500 = $54,050 d Variable marketing and administrative costs = $1.20 x 23,500 = $28,200 e Fixed marketing and administrative costs = $2.90 x 23,500 = $68,150
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34 Fundamentals of Cost Accounting
2-39. (30 min.) Value Income Statement: Gene’s Diner.
a.
Gene’s Diner Value Income Statement
For the month ending August 31
Nonvalue-added
activities
Value-added
activities
Total
Sales Revenue ...................................... $120,000 $120,000
Cost of merchandise: ............................
Cost of food serveda ........................... $ 6,600 37,400 44,000
Gross margin ......................................... $ (6,600) $ 82,600 $ 76,000
Operating expenses: .............................
Employee salaries and wagesa ........... 2,400 13,600 16,000
Managers’ salariesb ............................ 4,800 19,200 24,000
Building costsc .................................... ________ 18,000 18,000
Operating income (loss) ........................ $(13,800) $ 31,800 $ 18,000
a 15% nonvalue-added activities b 20% nonvalue-added activities c A portion of these costs might be nonvalue-added if they can be reduced by reducing
nonvalue-added activities.
b. Gene can take steps to ensure that food is used prior to the expiration date, either by changing scheduling or purchasing procedures. He can also spend time training staff to take orders more carefully.
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Solutions Manual, Chapter 2 35
Solutions to Problems
2-40. (30 min.) Cost Concepts: Princeton Products.
a.
Prime costs = direct materials + direct labor
Direct materials = beginning inventory + purchases – ending inventory
= $36,000 + $84,000 – $30,000
= $90,000
Direct labor is given as $60,000
Prime costs = $90,000 + $60,000
= $150,000
b.
Conversion costs = Direct labor + Manufacturing overhead
Conversion costs = $60,000 +$80,000 = $140,000
c.
Total manufacturing costs = Direct materials + Direct labor + Manufacturing overhead
= $90,000 (from a above) + $60,000 + $80,000
= $230,000
d.
Cost of goods manufactured
=
Beginning Work In Process + Total manufacturing costs
– Ending Work In Process
= $18,000 + $230,000 (from c above) – $12,000
= $236,000
e.
Cost of Goods Sold
=
Cost of Goods
Manufactured
+
Beginning Finished Goods
Inventory
–
Ending Finished Goods
Inventory
= $236,000 + $54,000 – $72,000
(from d above)
= $218,000
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36 Fundamentals of Cost Accounting
2-41. (30 minutes) Cost Concepts: San Ysidro Fabrics.
a.
(1) $64
Variable manufacturing cost
= Manufacturing overhead + Direct labor + Direct materials
= $24 + $8 + $32
= $64
(2) $96
Full unit cost = All unit fixed costs + All unit variable costs
Unit fixed manufacturing = ($9,600 ÷ 800 units) = $12
Unit fixed marketing and administrative cost = ($12,800 ÷ 800 units) = $16
= $12 + $16 + $4 + $24 + $8 + $32
= $96
(3) $68
Variable cost = All variable unit costs
= $4 + $24 + $8 + $32
= $68
(4) $76
Full absorption cost = Fixed and variable manufacturing overhead + Direct labor +
direct materials
= $12 + $24 + $8 + $32
= $76
(5) $40.
Prime cost = Direct labor + Direct materials
= $8 + $32
= $40
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Solutions Manual, Chapter 2 37
2-41. (continued)
(6) $44
Conversion cost = Direct labor + Manufacturing overhead
= $8 + ($24 + $12)
= $44
(7) $32
Profit margin = Sales price – Full cost
= $128 – $96
= $32
(8) $60
Contribution margin = Sales price – Variable costs
= $128 – $68
= $60
(9) $52
Gross margin = Sales price – Full absorption cost
= $128 – $76
= $52
b. As the number of units increases (reflected in the denominator), fixed manufacturing cost per unit decreases. The numerator remains the same.
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38 Fundamentals of Cost Accounting
2-42. (20 Min.) Cost Allocation with Cost Flow Diagram: Pacific Business School.
a.
Undergraduate Graduate Total
Number of students ...................... 600 900 1,500
Percentage .............................. 40% 60% 100%
Credit Hours ................................. 8,500 25,500 34,000
Percentage .............................. 25% 75% 100%
Allocation of student-related
costsa.......................................
$450,000
$675,000
$1,125,000
Allocation of credit-hour costsb ..... 218,750 656,250 875,000
Total Allocations ....................... $668,750 $1,331,250 $2,000,000
a $450,000 = 40% x $1,125,000; $675,000 = 60% x $1,125,000.
b $218,750 = 25% x $875,000; $656,250 = 75% x $875,000.
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Solutions Manual, Chapter 2 39
2-42. (continued)
b.
a 40% = 600 students ÷ (600 students + 900 students) b 60% = 900 students ÷ (600 students + 900 students) c 25% = 8,500 credit-hours ÷ (8,500 credit-hours + 25,000 credit-hours) d 75% = 8,500 students ÷ (8,500 credit-hours + 25,000 credit-hours)
Library Costs
$2,000,000Cost
pool
Credit-Hour
Related
$875,000
Student-Related
$1,125,000
Cost
allocation
rule
Cost
objects
25%a
Previous
Analysis
Undergraduate
Related
$668,750
Graduate
$1,331,250
Credit
Hours
Number of
Students
75%b
40%c
60%d
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40 Fundamentals of Cost Accounting
2-43. (40 Min.) Find the Unknown Account Balances.
a. Finished goods beginning inventory
+ Cost of goods manufactured
– Cost of goods sold
= Finished goods ending inventory
Finished goods beginning inventory
+ $21,776 – $21,760 = $3,520
Finished goods beginning inventory
= $ 3,504 (= $3,520 – $21,776 + $21,760)
b. Direct
materials used
+ Direct labor
+ Manufacturing
overhead =
Total
manufacturing costs
Direct materials
used + $ 3,040 + $5,760 = $18,880
Direct materials
used = $10,080 (= $18,880 – $3,040 – $5,760)
Alternative solution
Direct materials
used =
Beginning inventory
+ Materials
purchased –
Ending inventory
Direct materials
used = $2,800 + $9,600 – $2,320
Direct materials
used = $10,080
c. Sales revenue – Cost of goods sold = Gross margin
Sales revenue – $21,760 = $13,120
Sales revenue = $34,880 (= $13,120 + $21,760)
Gross margin % = $13,120 ÷ $34,880 = 37.6%
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Solutions Manual, Chapter 2 41
2-44. (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 = $160,000 + $640,000 + $200,000
= $1,000,000
Total waste collected (tons) = 2,500 + 7,500
= 10,000 tons
= 20,000,000 pounds
Average cost per pound = $1,000,000 ÷ 20,000,000 pounds
= $.05 per pound
Price per pound = $.05 x 1.20
= $.06 per pound
b.
First, allocate costs to the two cost objects: households and businesses:
Allocation of administrative costs and truck costs:
Total costs = $160,000 + $640,000
$800,000
Number of customers = 9,000+ 1,000
= 10,000 customers
Allocated cost per customer = $800,000 ÷ 10,000 customers
= $80 per customer
Allocation of other collection costs:
Total costs = $200,000
Total waste collected (tons) = 2,500 + 7,500
= 10,000 tons
Allocated cost per ton of waste = $200,000 ÷ 10,000 tons
= $20 per ton
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42 Fundamentals of Cost Accounting
2-44. (continued)
Allocation to customer types:
Households Business
Allocation of customer cost:
Allocated cost per customer ................ $80 $80
Number of customers .......................... 9,000 1,000
Allocated cost ...................................... $720,000 $80,000
Allocation of other costs
Allocated cost per ton .......................... $20 $20
Number of tons .................................... 2,500 7,500
Allocated cost ...................................... $50,000 $150,000
Total allocated cost .............................. $770,000 $230,000
Total number of tons ............................ 2,500 7,500
Number of pounds ............................... 5,000,000 15,000,000
Average allocated cost per pound ....... $.154 $.0153
Price (= 1.20 x average cost) ............... $.1848 $.01840
c. Answers will vary. This problem illustrates that cost allocation can have an important effect on decisions when the allocated costs are used as if they are actual costs. In the current example, the proposed allocation approach allows the company to compete for private business because they maintain a monopoly on the household business.
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Solutions Manual, Chapter 2 43
2-45. (30 min.) Reconstruct Financial Statements: Hunter Company.
Hunter Company Statement of Cost of Goods Sold For the Year Ended December 31
Work in process, January 1 ............................... $ 90,650
Manufacturing costs:
Direct materials:
Direct materials inventory, January 1 ............ $ 374,850 a
Direct materials purchased ........................... 1,260,000
Direct materials available for use ................ 1,634,850
Less materials inventory, December 31 ...... 297,500
Materials used ............................................ $1,337,350
Direct labor ................................................... 1,400,000 b
Manufacturing overhead:
Indirect labor ................................................. 112,000 b
Plant utilities .................................................. 130,200
Building depreciation .................................... 226,800
Other plant costs ........................................... 111,650
Maintenance on plant machinery .................. 42,350
Insurance on plant machinery ....................... 66,500
Taxes on manufacturing property ................. 45,850
Total overhead ............................................ 735,350
Total manufacturing costs ........................ 3,472,700
Total cost of work in process during the year .... 3,563,350
Less work in process, December 31 ............... 86,100
Cost of goods manufactured this year .......... 3,477,250
Add finished goods, January 1 .......................... 280,000
Cost of goods available for sale ........................ 3,757,250
Less finished goods, December 31 ................... 315,000
Cost of goods sold (to income statement) ......... $ 3,442,250
aMaterials used is given, but this number is not. To obtain it, Beg. Bal. + Purchases = Mat. Used + End. Bal. Beg. Bal. = Mat. Used + End. Bal. – Purchases $374,850 = $1,337,350 + $297,500 – $1,260,000 b Total labor = Indirect labor + Direct labor = $1,512,000 = 0.08 Direct labor + Direct
labor Direct labor = $1,512,000 ÷ 1.08 = $1,400,000 Indirect labor = 0.08 x $1,400,000 = $112,000
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44 Fundamentals of Cost Accounting
2-45 (continued)
Hunter Company Income Statement
For the Year Ended December 31
Sales revenue ........................................................ $5,687,500
Less: Cost of goods sold (per statement) ............... 3,442,250
Gross margin.......................................................... 2,245,250
Building depreciation ............................................ $ 56,700 a
Administrative salaries ......................................... 179,900
Marketing costs .................................................... 129,500
Distribution costs .................................................. 5,600
Legal fees 28,700
Total operating costs ............................................ 400,400
Operating profit ...................................................... $1,844,850
a Total depreciation = Depreciation on plant + Depreciation on administrative building portion
= $226,800 ÷ 0.80
= $283,500 Depreciation on administrative portion = $283,500 x (1.0 – 0.8)
= $56,700.
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Solutions Manual, Chapter 2 45
2-46. (30 min.) Analyze the Impact of a Decision On Income Statements: Tunes2Go.
a. This year’s income statement:
Baseline (Status Quo)
Rent Equipment
Difference
Revenue .........................................
$9,600,000 $9,600,000 0
Operating costs:
Variable .......................................
(1,200,000) (1,200,000) 0
Fixed (cash expenditures) ............ (4,500,000) (4,500,000) 0
Equipment depreciation ............... (900,000) (900,000) 0
Other depreciation ....................... (750,000) (750,000) 0
Loss from equipment write-off ...... 0 (5,100,000) a $5,100,000 lower
Operating profit (before taxes) ....... $2,250,000 $ (2,850,000) $5,100,000 lower
a Equipment write-off = $6 million cost – $900,000 accumulated depreciation for one year (equipment was purchased on January 1 of the year).
b. Next year’s income statement:
Baseline (Status Quo)
Rent Equipment
Difference
Revenue ......................................... $9,600,000 $10,272,000 a $672,000 higher
Operating costs:
Equipment rental .......................... 0 (1,380,000) 1,380,000 higher
Variable ........................................ (1,200,000) (1,200,000) 0
Fixed cash expenditures .............. (4,500,000) (4,230,000) b 270,000 lower
Equipment depreciation ............... (900,000) 0 900,000 lower
Other depreciation ....................... (750,000) (750,000) 0
Operating profit .............................. $2,250,000 $2,712,000 $462,000 higher
a $10,272,000 = 1.07 $9,600,000 b $2,230,000 = (1.00 – 0.06) $4,500,000
c. Despite the effect on next year’s income statement, the company should not rent the new machine because net cash inflow as a result of installing the new machine ($672,000 + $270,000) does not cover cash outflow for equipment rental ($1,380,000).
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46 Fundamentals of Cost Accounting
2-47. (20 Min.) Manufacturing Firm Finding Unknowns
a. Direct material cost per unit = Direct materials cost ÷ Units produced
= $3,000 ÷ 15,000 units = $0.20 per unit.
Direct material used per mug = 0.4 pounds.
Direct material cost per pound = $0.20 ÷ 0.4 pounds = $0.50 per pound.
Direct material inventory = 3,000 pounds $0.50 per pound = $1,500.
b. Finished goods inventory (in units)
= Finished goods inventory ÷ Manufacturing cost per unit.
Manufacturing cost per unit
= (Direct material + Direct labor + Indirect manufacturing cost) ÷ Units produced
= ($3,000 + $22,500 + $1,050 + $4,200) ÷ 15,000 = $30,750 ÷ 15,000
= $2.05 per unit.
Finished goods inventory (in units) December 31, Year 1 = $4,100 ÷ $2.05
= 2,000 units
c. Selling price per unit = Revenues ÷ Units sold
= Revenues ÷ (Units produced – units in ending finished goods inventory)
= $48,750 ÷ (15,000 – 2,000) = $48,750 ÷ 13,000 = $3.75.
d. Operating income for the year:
Revenues ................................................................. $ 48,750
Cost of goods sold (13,000 x $2.05) ........................ 26,650
Gross margin ............................................................ $ 22,100
Less marketing and administrative costs
Variable marketing and administrative costs ....... $2,250
Fixed marketing and administrative costs ........... 12,000 14,250
Operating profit ........................................................ $ 7,850