MANAGERIAL ACCOUNTING

Hewlett-Packard 1

EXERCISE 1 - 12 Product Cost Flows; Product versus Period Costs
The Devon Motor Company produces motorcycles. During April, the company purchased 8,000
batteries at a cost oI $10 per battery. Devon withdrew 7,600 batteries Irom the storeroom during
the month. OI these, 100 were used to replace batteries in motorcycles used by the company`s
travelling sales staII. The remaining 7,500 batteries withdrawn Irom the storeroom were placed
in motorcycles being produced by the company. OI the motorcycles in production during April,
90° were completed and transIerred Irom work in process to Iinished goods. OI the motorcycles
completed during the month, 30° were unsold at April 30. There were no inventories oI any
type on April 1.

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1. Determine the cost oI batteries that would appear in each oI the Iollowing accounts at April
30:
a. Raw Materials.
b. Work in Process.
c. Finished Goods.
d. Cost oI Goods Sold.
e. Selling Expense.

2. SpeciIy whether each oI the above accounts would appear on the balance sheet or on the
income statement at April 30.

Summary:
atteries purchased.................. 8,000
Cost per battery..................... $10
atteries withdrawn Irom storeroom............ 7,600
atteries used in sales staII`s motorcycles.......... 100
atteries used in production................. 7,500
Motorcycles completed and transIerred to Finished Goods.... 90°
Motorcycles unsold at April 30............... 30°

Answer:

1. a. atteries purchased...................... 8,000
Deduct: atteries drawn Irom inventory................ 7,600
atteries remaining in inventory................. 400
Cost per battery......................... × $10
Cost in Raw Materials Inventory at April 30............. $4000

b. atteries used in production (7,600 100)............. 7,500
Deduct: Motorcycles completed and transIerred to Finished Goods
(90° × 7,500 ÷ 6,750)....................... 6,750
Motorcycles still in Work in Process at April 30............. 750
Cost per battery......................... × $10
Cost in Work in Process Inventory at April 30............. $7,500

c. Motorcycles completed and transIerred to Finish Goods
(90° × 7,500 ÷ 6,750)....................... 6,750
Deduct: Motorcycles sold during the month (70° × 6,750 ÷ 4,725)... 4,725
Motorcycles unsold in Finished Goods at April 30............ 2,025
Cost per battery......................... × $10
Cost in Finished Goods Inventory at April 30.............. $20,250
MANAGERIAL ACCOUNTING

Hewlett-Packard 2

d. Motorcycles sold during the month (70° × 6,750 ÷ 4,725)........ 4,725
Cost per battery......................... × $10
Cost in Cost oI Goods Sold at April 30............... $47,250

e. atteries used in sales staII`s motorcycles.............. 100
Cost per battery......................... × $10
Cost in Selling Expense at April 30.................. $1,000

2. a. Raw Materials Inventory, $4,000 alance sheet at April 30
b. Work in Process Inventory, $7,500 alance sheet at April 30
c. Finished Goods Inventory, $20,250 alance sheet at April 30
d. Cost oI Goods Sold, $47,250 Income statement at April 30
e. Selling Expense, $1,000 Income statement at April 30







































MANAGERIAL ACCOUNTING

Hewlett-Packard 3

PROBLEM 1-20A Classification of Various Costs
Staci Valek began dabbling in pottery several years ago as a hobby. Her work is quite creative,
and it has been so popular with Iriends and others that she has decided to quit her iob with an
aerospace company and manuIacture pottery Iull time. The salary Irom Staci`s aerospace iob is
$3,800 per month.
Staci will rent a small building near her home to use as a place Ior manuIacturing the
pottery. The rent will be $500 per month. She estimates that the cost oI clay and glaze will be $2
Ior each Iinished piece oI pottery. She will hire workers to produce the pottery at a labor rate oI
$8 per pot. To sell her pots, Staci Ieels that she must advertise heavily in the local area. An
advertising agency states that it will handle all advertising Ior a Iee oI $600 per month. Staci`s
brother will sell the pots; he will be paid a commission oI $4 Ior each pot sold. Equipment
needed to manuIacture the pots will be rented at a cost oI $300 per month.
Staci has already paid the legal and Iiling Iees associated with incorporating her business
in the state. These Iees amounted to $500. A small room has been located in a tourist area that
Staci will use as a sales oIIice. The rent will be $250 per month. A phone installed in the room
Ior taking orders will cost $40 per month. In addition, a recording device will be attached to the
phone Ior taking aIter-hours messages.
Staci has some money in savings that is earning interest oI $1,200 per year. These
savings will be withdrawn and used to get the business going. For the time being, Staci does not
intend to draw any salary Irom the new company.

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1. Prepare an answer sheet with the Iollowing column headings:

Period
(Selling and
oI the Direct Direct ManuIacturingAdministrative)
Cost Cost Cost Materials Labor Overhead Cost Cost Cost
Name
Fixed Variable Sunk Opportunity
Product Cost

List the diIIerent costs associated with the new company down the extreme leIt column (under
Name oI Cost). Then place an under each heading that helps to describe the type oI cost
involved. There may be `s under several column headings Ior a single cost. (That is, a cost
may be a Iixed cost, a period cost, and a sunk cost; you would place an under each oI these
column headings opposite the cost.)
Under the Variable Cost column, list only those costs that would be variable with respect
to the number oI units oI pottery that are produced and sold.

2. All oI the costs you have listed above, except one, would be diIIerential costs between the
alternatives oI Staci producing pottery or staying with the aerospace company. Which cost is
349diIIerential? Explain.










MANAGERIAL ACCOUNTING

Hewlett-Packard 4











































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