MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual

CHAPTER 8
COST CONCEPTS AND CLASSIFICATIONS
I. Questions
1. The phrase different costs for different purposes refers to the fact that
the word cost can have different meanings depending on the context in
which it is used. Cost data that are classified and recorded in a particular
way for one purpose may be inappropriate for another use.
2. ixed costs remain constant in total across changes in activity! whereas
variable costs change in proportion to the level of activity.
". #xamples of direct costs of the food and beverage department in a hotel
include the money spent on the food and beverages served! the wages of
table service personnel! and the costs of entertainment in the dining room
and lounge. #xamples of indirect costs of the food and beverage
department include allocations of the costs of advertising for the entire
hotel! of the costs of the grounds and maintenance department! and of the
hotel general manager$s salary.
%. The cost of idle time is treated as manufacturing overhead because it is a
normal cost of the manufacturing operation that should be spread out
among all of the manufactured products. The alternative to this treatment
would be to charge the cost of idle time to a particular &ob that happens to
be in process when the idle time occurs. Idle time often results from a
random event! such as a power outage. Charging the cost of the idle time
resulting from such a random event to only the &ob that happened to be in
process at the time would overstate the cost of that &ob.
'. a. (ncontrollable cost
b. Controllable cost
c. (ncontrollable cost
). *roduct costs are costs that are associated with manufactured goods until
the time period during which the products are sold! when the product costs
become expenses. *eriod costs are expensed during the time period in
which they are incurred.
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Chapter 8 Cost Concepts and Classifications
+. The most important difference between a manufacturing firm and a
service industry firm! with regard to the classification of costs! is that the
goods produced by a manufacturing firm are inventoried! whereas the
services produced by a service industry firm are consumed as they are
produced. Thus! the costs incurred in manufacturing products are treated
as product costs until the period during which the goods are sold. ,ost of
the costs incurred in a service industry firm to produce services are
operating expenses that are treated as period costs.
-. *roduct costs are also called inventoriable costs because they are assigned
to manufactured goods that are inventoried until a later period! when the
products are sold. The product costs remain in the finished goods
inventory account until the time period when the goods are sold.
.. / sun0 cost is a cost that was incurred in the past and cannot be altered by
any current or future decision. / differential cost is the difference in a
cost item under two decision alternatives.
11. a. 2irect cost
b. 2irect cost
c. Indirect cost
d. Indirect cost
11. The two properties of a relevant cost are3
1. it differs between the decision options
2. it will be incurred in the future
12. The three types of product costs are3
1. direct materials 4 the materials used in manufacturing the product!
which become a physical part of the finished product.
2. direct labor 4 the labor used in manufacturing the product.
". factory overhead 4 the indirect costs for materials! labor! and facilities
used to support the manufacturing process! but not used directly in
manufacturing the product.
1". The three types of manufacturing inventories are3
1. materials inventory 4 the store of materials used in the manufacturing
process or in providing the service.
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Cost Concepts and Classifications Chapter 8
2. wor0 in process inventory 4 accounts for all costs put into the
manufacturing of products that are started but not complete at the
financial statement date.
". finished goods inventory 4 the cost of goods that are ready for sale.
1%. 2irect materials include the materials in the product and a reasonable
allowance for scrap and defective units! while indirect materials are
materials used in manufacturing that are not physically part of the finished
product.
II. Exercises
E!er"ise 1 (S"he#ule o$ Cost o$ Goo#s Manu$a"ture# an# Sol#% In"o&e
State&ent)
Requirement 1
/ma5ing /luminum Company
6chedule of Cost of 7oods ,anufactured
or the 8ear #nded 2ecember "1! 211'
2irect material3
9aw:material inventory! ;anuary 1............... * )1!111
/dd3 *urchases of raw material.................. 2'1!111
9aw material available for use..................... *"11!111
2educt3 9aw:material inventory! 2ecember
"1 +1!111
9aw material used *2%1!111
2irect labor....................................................... %11!111
,anufacturing overhead3
Indirect material * 11!111
Indirect labor 2'!111
2epreciation on plant and e<uipment 111!111
(tilities 2'!111
=ther
..............................................................
..............................................................
"1!111
Total manufacturing overhead 1.1!111
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Chapter 8 Cost Concepts and Classifications
Total manufacturing costs.................................. *-"1!111
/dd3 >or0:in:process inventory! ;anuary 1....... 121!111
6ubtotal.............................................................
....................................................................
*.'1!111
2educt3 >or0:in:process inventory!
2ecember 1.................................................. 11'!111
Cost of goods manufactured............................... *-"'!111
Requirement 2
/ma5ing /luminum Company
6chedule of Cost of 7oods 6old
or the 8ear #nded 2ecember "1! 211'
inished goods inventory! ;anuary 1......................................... *1'1!111
/dd3 Cost of goods manufactured............................................ -"'!111
Cost of goods available for sale................................................ *.-'!111
2educt3 inished goods inventory! 2ecember "1...................... 1)'!111
Cost of goods sold.................................................................... *-21!111
Requirement 3
/ma5ing /luminum Company
Income 6tatement
or the 8ear #nded 2ecember "1! 211'
6ales revenue............................................................................ *1!11'!111
?ess3 Cost of goods sold.......................................................... -21!111
7ross margin............................................................................ * 2-'!111
6elling and administrative expenses.......................................... 111!111
Income before taxes.................................................................. * 1+'!111
Income tax expense................................................................... +1!111
@et income .............................................................................. * 11'!111
E!er"ise
Cost Item
Fixed (F)
Variable (V)
Period (P)
Product (R)
a. Transportation:in costs on materials
purchased A 9
b. /ssembly:line wor0ers$ wages A 9
c. *roperty taxes on wor0 in process
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Cost Concepts and Classifications Chapter 8
inventories A 9
d. 6alaries of top executives in the company *
e. =vertime premium for assembly wor0ers A 9
f. 6ales commissions A *
g. 6ales personnel office rental *
h. *roduction supervisory salaries 9
i. Controller$s office supplies *
&. #xecutive office heat and air conditioning *
0. #xecutive office security personnel *
l. 6upplies used in assembly wor0 A 9
m. actory heat and air conditioning 9
n. *ower to operate factory e<uipment A 9
o. 2epreciation on furniture for sales staff *
p. Aarnish used for finishing product A 9
<. ,ar0eting personnel health insurance *
r. *ac0aging materials for finished product A 9
s. 6alary of the <uality control manager
who chec0s wor0 on the assembly line 9
t. /ssembly:line wor0ers$ dental insurance 9
E!er"ise ' (Cost Classi$i"ations% Manu$a"turer)
1. a! d! g! i
2. a! d! g! &
". b! f
%. b! d! g! 0
'. a! d! g! 0
). a! d! g! &
+. b! c! f
-. b! d! g! 0
.. b! c and dB! e and f and gB! 0B
B The building is used or se!eral "ur"oses#
11. b! c! f
11. b! c! h
12. b! c! f
1". b! c! e
1%. b! c and d
C
! e and f and g
C
! 0
C
C
The building that the urnace heats is used or se!eral "ur"oses#
1'. b! d! g! 0
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Chapter 8 Cost Concepts and Classifications
E!er"ise ( (E"ono&i" Chara"teristi"s o$ Costs)
1. marginal cost
2. sun0 cost
". average cost
%. opportunity cost
'. differential cost
). out:of:poc0et cost
E!er"ise ) (Cost Classi$i"ations% *otel)
1. a! c! e! 0
2. b! d! e! 0
". d! e! i
%. d! e! i
'. a! d! e! 0
). a! d! e! 0
+. d! e! 0
-. b! d
C
! e! 0
C
$nless the dish%asher has been used im"ro"erl&#
.. h
11. a! d! eB! &
B The hotel general manager ma& ha!e some control o!er the total s"ace
allocated to the 'itchen#
11. i
12. &
1". a! c! e
1%. e! 0
E!er"ise +
*ic0up Truc0 =utput
3())) truc's *())) truc's +())) truc's
Aariable production costs * 2.!)%1!111 , )-.8/./// , 88.-/.///
ixed production costs '-.//./// ".!211!111 '-.//.///
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Cost Concepts and Classifications Chapter 8
Aariable selling costs %!'11!111 -.///./// 1'.)//.///
ixed selling costs 1"!))1!111 1"!))1!111 1'.++/.///
Total costs , 80.///./// ,11.1(/./// ,1)).8/.///
6elling price per truc0 %)!111 %1!111 "'!.11
(nit cost 2.!111 /.1-/ 10.)'
*rofit per truc0 10./// 1-.-1/ 18.+(0
III. Problems
,ro1le& 1
The relevant costs for this decision are the differential costs. These are3
=pportunity cost or lost wages Dta0e homeE
F*1!'11 x +1G x 12 monthsH........ *12!)11
Tuition..................................................... 2!211
Ioo0s and supplies.................................. "11
Total differential costs....................... *1'!111
9oom and board! clothing! car! and incidentals are not relevant because these
are presumed to be the same whether or not rancis goes to school. The
possibility of part:time wor0! summer &obs! or scholarship assistance could be
considered as reductions to the cost of school. If students are familiar with the
time value of money! then they should recogni5e that the analysis calls for a
comparison of the present value of the differential after:tax cash inflows with
the present value of differential costs of getting the education Dincluding the
opportunity costs of lost incomeE.
,ro1le&
Requirement (a)
=nly the differential outla& costs need be considered. The travel and other
variable expenses of *22 per hour would be the relevant costs. /ny amount
received in excess would be a differential! positive return to *at.
Requirement (b)
8-0
Chapter 8 Cost Concepts and Classifications
The opportunity cost of the hours given up would be considered in this
situation. (nless *at receives more than the *111 normal consulting rate! the
contract would not be beneficial.
Requirement (c)
In this situation *at would have to consider the present value of the contract
and compare that to the present value of the existing consulting business. The
final rate may be more or less than the normal *111 rate depending on the
outcome of *at$s analysis.
,ro1le& '
(tilities for the ba0ery 2!111
*aper used in pac0aging product .1
6alaries and wages in the ba0ery 1.!'11
Coo0ie ingredients "'!111
Ia0ery labor and fringe benefits 1!"11
Ia0ery e<uipment maintenance -11
2epreciation of ba0ery plant and e<uipment 2!111
(niforms %11
Insurance for the ba0ery .11
Ioxes! bags! and cups used in the ba0ery 1!111
Ia0ery overtime premiums 2!)11
Ia0ery idle time '11
Total product costs in pesos ))!2.1
,ro1le& (
/dministrative costs 1!111
9ent for administration offices 1+!211
/dvertising 1!.11
=ffice manager$s salary 1"!111
Total period costs in pesos ""!111
,ro1le& )
Requirement (a)
8-8
Cost Concepts and Classifications Chapter 8
6un0 costs not shown could include lost boo0 value on traded assets!
depreciation estimates for new investment! and interest costs on capital needed
during facilities construction.
Requirement (b)
The client might be used to differential cost as a decision tool! and believes
DcorrectlyE that use of differential analyses has several advantages ::: it is
<uic0er! re<uires less data! and tends to give a better focus to the decision. The
ban0er might suspect the client of hiding some material data in order to ma0e
the proposal more acceptable to the financing agency.
IA. Multiple Choice Questions
1. I +. C 1". 2 1.. / 2'. C
2. 2 -. 2 1%. 2
C
21. / B 2). I
". I .. C 1'. I
C
21. I 2+. I
%. / 11. C 1). /
C
22. I 2-. / BB
'. C 11. / 1+. C
C
2". C 2.. /
). 2 12. C 1-. C 2%. C "1. I
B Controllable costs are those costs that can be influenced by a specified
manager within a given time period.
BB The answer assumes absorption costing method is used.
C
6upporting Computations
1%. *)1 J *11 J *1- J *% K *.2 1). *)1 J *11 J *1- J *"2 K *121
1'. *"2 J *1) K *%- 1+. *% J *1) K *21
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