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. Fixed costs remain constant in total across changes in activity, whereas
variable costs change in proportion to the level of activity.
3. Examples 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. Examples 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 managers salary.
4. 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 job 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 job that happened to be in
process at the time would overstate the cost of that job.
5. a. Uncontrollable cost
b. Controllable cost
c. Uncontrollable cost
6. Product 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. Period costs are expensed during the time period in
which they are incurred.
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Chapter 8 Cost Concepts and Classifications

7. 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. Most of
the costs incurred in a service industry firm to produce services are
operating expenses that are treated as period costs.
8. Product 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.
9. A sunk cost is a cost that was incurred in the past and cannot be altered by
any current or future decision. A differential cost is the difference in a
cost item under two decision alternatives.
10. a.
b.
c.
d.

Direct cost
Direct cost
Indirect cost
Indirect cost

11. The two properties of a relevant cost are:

1. it differs between the decision options
2. it will be incurred in the future
12. The three types of product costs are:
1. direct materials the materials used in manufacturing the product,
which become a physical part of the finished product.
2. direct labor the labor used in manufacturing the product.
3. factory overhead the indirect costs for materials, labor, and facilities
used to support the manufacturing process, but not used directly in
manufacturing the product.
13. The three types of manufacturing inventories are:
1. materials inventory 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. work in process inventory accounts for all costs put into the
manufacturing of products that are started but not complete at the
financial statement date.
3. finished goods inventory the cost of goods that are ready for sale.
14. Direct 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
Exercise 1 (Schedule of Cost of Goods Manufactured and Sold; Income
Statement)
Requirement 1
Amazing Aluminum Company
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2005
Direct material:
Raw-material inventory, January 1...............
Add: Purchases of raw material..................
Raw material available for use.....................
Deduct: Raw-material inventory, December
31
Raw material used
Direct labor.......................................................
Manufacturing overhead:
Indirect material
Indirect labor

P 60,000
250,000
P310,000
70,000
P240,000
400,000
P 10,000
25,000

Depreciation on plant and equipment

100,000

Utilities

25,000

Other
..............................................................
..............................................................
Total manufacturing overhead

30,000

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190,000

Chapter 8 Cost Concepts and Classifications

Total manufacturing costs..................................

Add: Work-in-process inventory, January 1.......
Subtotal.............................................................
....................................................................
Deduct: Work-in-process inventory,
December 1..................................................
Cost of goods manufactured...............................

P830,000
120,000
P950,000
115,000
P835,000

Requirement 2
Amazing Aluminum Company
Schedule of Cost of Goods Sold
For the Year Ended December 31, 2005
Finished goods inventory, January 1.........................................
Add: Cost of goods manufactured............................................
Cost of goods available for sale................................................
Deduct: Finished goods inventory, December 31......................
Cost of goods sold....................................................................

P150,000
835,000
P985,000
165,000
P820,000

Requirement 3
Amazing Aluminum Company
Income Statement
For the Year Ended December 31, 2005
Sales revenue............................................................................
Less: Cost of goods sold..........................................................
Gross margin............................................................................
Selling and administrative expenses..........................................
Income before taxes..................................................................
Income tax expense...................................................................
Net income ..............................................................................

P1,105,000
820,000
P 285,000
110,000
P 175,000
70,000
P 105,000

Exercise 2
Cost Item
a. Transportation-in costs on materials
purchased
b. Assembly-line workers wages
c. Property taxes on work in process
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Fixed (F)
Variable (V)

Period (P)
Product (R)

V
V

R
R

Cost Concepts and Classifications Chapter 8

d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.

inventories
Salaries of top executives in the company
Overtime premium for assembly workers
Sales commissions
Sales personnel office rental
Production supervisory salaries
Controllers office supplies
Executive office heat and air conditioning
Executive office security personnel
Supplies used in assembly work
Factory heat and air conditioning
Power to operate factory equipment
Depreciation on furniture for sales staff
Varnish used for finishing product
Marketing personnel health insurance
Packaging materials for finished product
Salary of the quality control manager
who checks work on the assembly line
Assembly-line workers dental insurance

V
F
V
V
F
F
F
F
F
V
F
V
F
V
F
V

R
P
R
P
P
R
P
P
P
R
R
R
P
R
P
R

F
F

R
R

Exercise 3 (Cost Classifications; Manufacturer)

1.
2.
3.
4.
5.
6.
7.
8.
9.

a, d, g, i
a, d, g, j
b, f
b, d, g, k
a, d, g, k
a, d, g, j
b, c, f
b, d, g, k
b, c and d*, e and f and g*, k*
* The building is used for several purposes.

10.
11.
12.
13.
14.

b, c, f
b, c, h
b, c, f
b, c, e
b, c and d, e and f and g, k

The building that the furnace heats is used for several purposes.

15. b, d, g, k
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Chapter 8 Cost Concepts and Classifications

Exercise 4 (Economic Characteristics of Costs)

1.
2.
3.
4.
5.
6.

marginal cost
sunk cost
average cost
opportunity cost
differential cost
out-of-pocket cost

Exercise 5 (Cost Classifications; Hotel)

1.
2.
3.
4.
5.
6.
7.
8.

a, c, e, k
b, d, e, k
d, e, i
d, e, i
a, d, e, k
a, d, e, k
d, e, k
b, d, e, k

Unless the dishwasher has been used improperly.

9. h
10. a, d, e*, j
* The hotel general manager may have some control over the total space
allocated to the kitchen.

11.
12.
13.
14.

i
j
a, c, e
e, k

Exercise 6
Pickup Truck Output
Variable production costs
Fixed production costs

3,000 trucks
P 29,640,000
39,200,000
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6,000 trucks
P 59,280,000
39,200,000

9,000 trucks
P 88,920,000
39,200,000

Cost Concepts and Classifications Chapter 8

Variable selling costs
Fixed selling costs
Total costs

4,500,000
13,660,000
P 87,000,000

9,000,000
13,660,000
P121,140,000

13,500,000
13,660,000
P155,280,000

Selling price per truck

46,000

40,100

35,900

Unit cost

29,000

20,190

17,253

Profit per truck

17,000

19,910

18,647

III. Problems
Problem 1
The relevant costs for this decision are the differential costs. These are:
Opportunity cost or lost wages (take home)
[P1,500 x 70% x 12 months]........
P12,600
Tuition.....................................................
2,200
Books and supplies..................................
300
Total differential costs....................... P15,100
Room and board, clothing, car, and incidentals are not relevant because these
are presumed to be the same whether or not Francis goes to school. The
possibility of part-time work, summer jobs, 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 recognize 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 (including the
opportunity costs of lost income).

Problem 2
Requirement (a)
Only the differential outlay costs need be considered. The travel and other
variable expenses of P22 per hour would be the relevant costs. Any amount
received in excess would be a differential, positive return to Pat.
Requirement (b)
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Chapter 8 Cost Concepts and Classifications

The opportunity cost of the hours given up would be considered in this

situation. Unless Pat receives more than the P100 normal consulting rate, the
contract would not be beneficial.
Requirement (c)
In this situation Pat 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 P100 rate depending on the
outcome of Pats analysis.
Problem 3
Utilities for the bakery
Paper used in packaging product
Salaries and wages in the bakery
Cookie ingredients
Bakery labor and fringe benefits
Bakery equipment maintenance
Depreciation of bakery plant and equipment
Uniforms
Insurance for the bakery
Boxes, bags, and cups used in the bakery
Bakery overtime premiums
Bakery idle time
Total product costs in pesos

2,100
90
19,500
35,000
1,300
800
2,000
400
900
1,100
2,600
500
66,290

Problem 4
Administrative costs
Rent for administration offices
Advertising
Office managers salary
Total period costs in pesos
Problem 5
Requirement (a)
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1,000
17,200
1,900
13,000
33,100

Cost Concepts and Classifications Chapter 8

Sunk costs not shown could include lost book 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
(correctly) that use of differential analyses has several advantages --- it is
quicker, requires less data, and tends to give a better focus to the decision. The
banker might suspect the client of hiding some material data in order to make
the proposal more acceptable to the financing agency.
IV. Multiple Choice Questions
1.
2.
3.
4.
5.
6.

B
D
B
A
C
D

7.
8.
9.
10.
11.
12.

C
D
C
C
A
C

13. D
14. D
15. B
16. A
17. C
18. C

19.
20.
21.
22.
23.
24.

A
A*
B
B
C
C

25.
26.
27.
28.
29.
30.

C
B
B
A **
A
B

Controllable costs are those costs that can be influenced by a specified

manager within a given time period.
** The answer assumes absorption costing method is used.

Supporting Computations
14. P60 + P10 + P18 + P4 = P92
16. P60 + P10 + P18 + P32 = P120
15. P32 + P16 = P48
17. P4 + P16 = P20

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