MODULE 1

SUGGESTED SOLUTIONS TO EXERCISES

PROBLEM 1
Note: Many correct answers are possible.
A. The cost of each alternative (make vs. buy) would be needed along
with information about suppliers that pertains to reliability and product
quality (e.g., testimonials from a supplier's current customers that cite
any problems with on-time deliveries, product stockouts, or abnormally
high spoilage rates of purchased goods).
Given the company is
currently making the part, what would happen to the facilities if the
firm begins to purchase from outside suppliers? Could the facilities be
subleased, used for other profitable products, or downsized (with
equipment being sold)? What would happen to existing employees
would there be any layoffs and how much would the company save?
B. The manager needs information about construction or leasing costs
along with figures that focus on subsequent operating costs. Also,
projected sales, market share figures, and data about competitors
would be helpful.
PROBLEM 2
A. Cost centers and profit centers are different types of responsibility
units within an organization. With a cost center, a manager is held
accountable for the amount of cost incurred; in contrast, with a profit
center, managers are evaluated on the amount of profit generated,
namely, revenues minus expenses.
B. The number of service requests is likely to drop because users will now
be charged for services provided. In cases where services are free,
users sometimes use and abuse the privilege.
C. The profit center form of organization will probably result in a more
service-oriented maintenance group. The profit-center manager would
be willing to perform services as long as capacity is available and
revenues exceed expenses. Naturally, the added profit is viewed
favorably, and the quality of services may actually increase. On the
other hand, if organized as a cost center, providing additional service
will likely result in higher costs, which could be viewed unfavorably in
performance evaluations.
PROBLEM 3
A. Responsibility accounting refers to the various concepts and tools that
are used within an organization to evaluate the performance of people
and various sub-units (such as divisions and departments). Managers
are appointed to oversee these sub-units and held accountable for
items under their control.
B. The manager of a cost center is typically evaluated on the amount of
cost incurred. The costs should be under the manager's control, and
the service provided by the center should be high.
C. Yes. Although Philbun understands the need to run a first-class
operation and contribute to Branson's overall financial performance,
she may have taken things a bit too far. A cost-center manager should

strive to run an operation that provides high-quality service at the

lowest possible cost.
This does not necessarily mean cost
minimization, which often results in the elimination of key tasks (i.e.,
the "fine points") needed to achieve quality. It is possible that the
department's late billings and errors in invoices and customer
statements may have been caused by such eliminations.
D. No. A profit-center manager is evaluated on the basis of
generated and costs incurred.
The Billing Department
produce any revenues for Bransonit merely handles
invoices and statements. Sales of company products are
responsibility of a separate Sales Department.

revenues
does not
customer
likely the

PROBLEM 4
A. Direct costs are logically and practically related (i.e., easily traceable)
to a particular cost object. An indirect cost, on the other hand, is not.
Whether a cost is direct or indirect depends on the cost object under
consideration. A cost may be easily traceable to a company, for
example, but not easily traced to a department of that firm.
B. Direct materials form an integral part of the finished product and, at
the same time, are easily traced to that product. Indirect materials,
which are part of manufacturing overhead, generally do not meet these
guidelines. Note, though, that some indirect material may be easily
traced to the product (e.g., five squirts of wood glue in a piece of
furniture) but it may be too costly to do so.
C. Manufacturing overhead consists of indirect materials, indirect labor,
plant depreciation, factory utilities, and other factory-related costs.
This cost component reflects all manufacturing costs other than direct
materials and direct labor. Direct labor, in contrast, consists of wages
of those employees who work directly on the goods in production
(machine operators, assembly-line workers, and so forth).
PROBLEM 5
A.
B.
C.
D.
E.
F.
G.
H.
I.

PC, V
MOH, F
MOH, F
DL, V
MOH, V
DM, V
PC, F
PC, F
MOH, F

PROBLEM 6
1. Direct

6. Direct

2. Indirect

7. Direct

3. Direct

8. Indirect

4. Direct

9. Direct

5. Direct

10.Direct

PROBLEM 7
1. Manufacturing

6. Manufacturing

2. Selling

7. Administrative

3. Manufacturing

8. Selling

4. Selling

9. Administrative

5. Administrative

10.Selling

PROBLEM 8

A.

Fixed manufacturing overhead per unit:

$400,000
20,000 scrapers produced = $20
Average unit manufacturing cost:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Average unit cost

B.

$ 25
35
60
20
140

Production (units)
Sales (units)
Ending finished-goods inventory (units)

20,000
17,000
3,000

3,000 units x $140 = $420,000

C.

Finished goods, Jan. 1

Add: Cost of goods manufactured (20,000 units x $140)
Cost of goods available for sale
Deduct: Finished goods, Dec. 31
Cost of goods sold

---2,800,000
$ 2,800,000
420,000
$ 2,380,000

D. 1. No change. Direct labor is a variable cost, and the cost per unit will remain
constant.
2. No change. Despite the increase in the number of units produced, this is a
fixed cost, which remains the same in total.
PROBLEM 9
No answer

PROBLEM 10
1. Prime cost

= P 185,000 + P 245,000

2. Conversion costs

= P 245,000 + P 125,000

3. Inventoriable costs

= P 430,000 + P 125,000

4. Period costs

= P 160,000 + P 145,000

=P

430,000

+ P 155,000

=P

525,000

+ P 155,000

=P

710,000

=P

305,000

PROBLEM 11
Product costs are costs that relate to the manufacturing process and
consist of direct materials, direct labor, and manufacturing overhead.
Simply stated, these are costs incurred to make a product.
Product costs are attached to the units produced (i.e., work in process)
and, thus, inventoried on the balance sheet. These costs are later charged
to finished goods when the goods are completed. Another transfer occurs
when the finished units are sold, with the costs now transferred to cost of
goods sold on the income statement.
PROBLEM 12
The doctor's observations are incorrect, as gasoline is a variable cost and
insurance is a fixed cost. Gasoline cost will increase with the number of
miles driven, whereas insurance outlays will remain the same. The doctor
seems to have confused the "total" perspective, as defined by
accountants, with the notion of per-unit cost behavior.
PROBLEM 13
1.

Direct materials used

Direct labor

20.00

Variable manufacturing overhead

2.

30.00
15.00

Variable marketing

3.00

Total variable cost per unit

68.00

X No. of units produced and sold

20,000

Total variable costs per month

Fixed manufacturing overhead

1,360,000
10.00

Fixed marketing costs

4.00

Total fixed cost per unit

14.00

X No. of units produced and sold

20,000

Total fixed costs per month

280,000

PROBLEM 14
Product or Period Cost
Product
Period
X
X
X
X
X
X
X
X
X

Item
A
B
C
D
E
F
G
H
I

Variable or Fixed Cost

Variable
Fixed
X
X
X
X
X
X
X
X
X

PROBLEM 15
1. Variable

Product

Direct

2. Variable

Product

Direct

3. Fixed

Product

Indirect

4. Variable

Product

Direct

5. Fixed

Product

Indirect

PROBLEM 16
1. Fixed

Period

2. Fixed

Inventoriable

3. Variable

Inventoriable

4. Variable

Inventoriable

5. Fixed

Inventoriable

6. Variable

Period

7. Variable

Inventoriable

8. Fixed

Inventoriable

9. Fixed

Period

10. Fixed

Inventoriable

PROBLEM 17
A.
B.
C.
D.

Marginal cost
Sunk cost
Average cost
Opportunity cost

E.

Differential cost

F. Out-of-pocket cost

PROBLEM 18
A. No. Although the variances appear on the production manager's
performance report and are often under his or her control, an
adjustment is needed in this case. The problem appears to be the fault
of the purchasing clerk who misplaced the paperwork.
Another
explanation may be that the fault lies with the marketing department
for accepting a rush order and possibly putting a strain on the entire
manufacturing system.
B. Yes. These variances should be discussed to determine who's to blame
and then cross-charged against that individual's department.
- done -