TUTORIAL QUESTIONS – COST CLASSIFICATION

1. Classify the following costs as direct (D) or indirect (ID)

(a) Factory supervisors salary(b) Factory supplies-stationery(c) Depreciation of factory equipment(d) Leather used in the manufacture of shoes(e) Lubricants for machines(f) Fringe benefits-machinists(g) Wood in making furniture(h) Glue in tube-making(i) Janitorial Supplies

2. Classify the following costs as variable (V) , fixed (F) or semi-variable (S) in terms of their behaviour with respect to production and sales activity.

(a) Property taxes(b) Utilities(c) Sales agent’s salary(d) Direct Materials(e) Insurance(f) Sales Agent’s commission(g) Rent

3. Classify the following costs as either manufacturing (M), selling (S) or administrative (A) expenses in terms of their functions

(a) Factory Supplies(b) Advertising(c) Auditing Expenses(d) Rent on general office building(e) Legal expenses(f) Cost of idle time(g) Freight-out(h) Bad Debts(i) Freight-in(j) Employer’s payroll taxes-factory(k) Employer’s payroll taxes-sales office(l) President’s salary(m) Samples(n) Small tools(o) Sanding material used in furniture making(p) Cost of machine break down - factory

4. Classify the following costs as product costs (PC) or period expenses (PE)

(a) Pears in a fruit cocktail(b) Overtime premium – production workers(c) Legal fees(d) Insurance on office equipment(e) Advertising expenses(f) Fringe benefits-general office(g) Production workers compensation(h) Health benefits-direct labour(i) Travel Expenses paid to sales reps.(j) Rework on defective products

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5. Which of the following costs are likely to be fully controllable, partially controllable or not controllable by the manager of the production department.

(a) Wages paid to direct labour(b) Rent on factory building(c) Production manager’s salary(d) Utilities(e) Direct materials used(f) Insurance on factory equipment(g) Advertising(h) Price paid for materials and supplies

6 Ron Weber is considering replacing an old machine, which he purchase for $15,000. The old machine is being depreciated at $1,500 per month. The following alternative equipment options are available for consideration.

Machine A The purchase price of Machine A is $25,000 with yearly cash operating cost of $5,000

Machine B The purchase price of machine B is $28,000 with yearly cash operating costs of $4,500.

The useful life of both machines is six (6) years.

(a) Which machine would you choose?

(b) What are the incremental costs if any, in this alternative choice situation? (c) What are the sunk costs, if any, in this situation?

7. Central Medical Supply, Inc., a manufacturer of medical testing equipment, has $240,000 worth of an obsolete line of testing equipment. The obsolete equipment can be adapted to fit another line of testing equipment at a cost of $64,000; the market value would then be $136,000. However, Tripac Ltd. has offered to purchase the obsolete equipment as is for $88,000.

(a) Which alternative would you choose?(b) Identify relevant costs, sunk costs, opportunity cost, incremental costs ( if any) in this problem.

8. Classify the following fixed costs as either committed or discretionary costs.

(a) Patent amortization(b) Advertising(c) Depreciation(d) Property taxes(e) Research and development(f) Training(g) Insurance(h) Public relations(i) Rent(j) Executive salaries

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9. The BAA Company has established a budget of $50,000 for the production of 1000 units. Half of this amount is fixed.

At an actual production level of 500 units,

(a) determine the variable cost per unit(b) determine the fixed cost per unit(c) determine total fixed cost(d) determine total variable cost(e) determine total costs

10. Some selected cost data for a batch of 2000 units of Product C are given below

Direct materials + Direct labour $125,000Factory Overheads(all indirect, 40% variable) $37500 Administration Expenses(20% variable) $60,000Selling & Distribution $60,000($20,000 Variable)

Determine the following:

(a) prime cost per unit (b) total fixed costs(c) variable costs per unit

11. Some selected sales and cost data for job order 515 are given below.

Direct Material used $100,000Direct labour $150,000Factory overhead(all indirect, 40% variable) $75,000Selling and administrative expenses(50% direct, 60% variable) $120,000

Compute the following:

(a) prime cost(b) conversion cost(c) direct cost(d) indirect cost(e) product cost(f) period expense(g) variable cost(h) fixed cost

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Question 12

Use the graphs below (A – E) to represent the cost behavior as described.

[A] [B] [C]

[D] [E]

1. The cost of telephone service, which is based on the number of message units per month. The charge is $60 per message for up to 650 message units. Additional message units above 650 are free. ____________

2. The cost of outsourcing diagnostic blood testing by a hospital. The hospital pays an independent lab a fee of $80,000 per month plus $3 for each test done. __________

3. The salaries of the security personnel at a factory. The security guards are on duty around the clock. _______________

4. The cost of sheet metal used to manufacture automobiles. _______________

5. The cost of electricity during peak-demand periods is based on the following schedule.

Up to 10,000 kilowatt-hours (kWh) ……………….. $120 per kWh Above 10,000 kilowatt-hours ……………………… $300 per kWh __________

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