Management Accounting: Cost Concepts

Wilson Company

The following information has been taken from the cost records of Wilson Company for the past year:

Raw material used in production $326

Total manufacturing costs charged to production during the year (includes direct 686
material, direct labor, and overhead equal to 60% of direct labor cost)
Cost of goods available for sale 826
Selling and Administrative expenses 25

Inventories Beginning Ending

Raw Material $75 $ 85
Work in Process 80 30
Finished Goods 90 110

1. Refer to Wilson Company. The cost of raw material purchased during the year was
a. $316.
b. $336.
c. $360.
d. $411.
ANS: B
Beginning Inventory 75
+Purchases 336
=Goods Available for Sale 411
-Ending Inventory (326)
Materials Used in Production 85

2. Refer to Wilson Company. Direct labor cost charged to production during the year was
a. $135.
b. $216.
c. $225.
d. $360.
ANS: C

Total production costs $686

- Raw materials $326
Conversion Costs $360
Let x = Direct Labor
Let .60x = Factory Overhead
x + .60x $360
x $225

3. Refer to Wilson Company. Cost of Goods Manufactured was

a. $636.
b. $716.
c. $736.
d. $766.
ANS: C
Beginning WIP Inventory $ 80
Costs of Production 686
less: Ending WIP Inventory (30)
Cost of Goods Manufactured $736
====

4. Refer to Wilson Company. Cost of Goods Sold was

a. $691.
b. $716.
c. $736.
d. $801.
ANS: B
Beginning Finished Goods Inventory $ 90
Cost of Goods Manufactured 736
less: Ending Finished Goods (110)
Inventory
Cost of Goods Manufactured $716
====

Brandt Company.

Brandt Company manufactures wood file cabinets. The following information is available for June 2001:

Beginning Ending
Raw Material Inventory $ 6,000 $ 7,500
Work in Process Inventory 17,300 11,700
Finished Goods Inventory 21,000 16,300

5. Refer to Brandt Company. Direct labor is $9.60 per hour and overhead for the month was $9,600.
Compute total manufacturing costs for June, if there were 1,500 direct labor hours and $21,000 of raw
material was purchased.
a. $58,500
b. $46,500
c. $43,500
d. $43,100
ANS: C

Begin Inv Purch Ending Inv

Raw Materials $6,000.00 $21,000.00 $(7,500.00) $19,500.00
Rate Hours
Direct Labor $ 9.60 1,500 14,400.00
Overhead 9,600.00
$43,500.00

6. Refer to Brandt Company. Direct labor is paid $9.60 per hour and overhead for the month was $9,600.
What are prime costs and conversion costs, respectively if there were 1,500 direct labor hours and
$21,000 of raw material was purchased?
a. $29,100 and $33,900
b. $33,900 and $24,000
c. $33,900 and $29,100
d. $24,000 and $33,900
ANS: B
Begin Inv Purch Ending Inv
Raw Materials $6,000.00 $21,000.00 $(7,500.00) $19,500.00
Rate Hours
Direct Labor $ 9.60 1,500 14,400.00
Overhead 9,600.00

Prime Costs = Raw Materials + Direct Labor-- $19,500 + 14,400 = $33,900

Conversion Costs = Direct Labor + Factory Overhead--$14,400 + 9,600 - $24,000

7. Refer to Brandt Company. Direct labor is paid $9.60 per hour and overhead for the month was $9,600.
If there were 1,500 direct labor hours and $21,000 of raw material purchased, Cost of Goods
Manufactured is:
a. $49,100.
b. $45,000.
c. $51,000.
d. $49,500.
ANS: A
Beginning WIP Inventory $ 17,300
Raw Materials $ 19,500
Direct Labor 14,400
Factory Overhead 9,600 43,500
Ending WIP Inventory (11,700)
Cost of Goods Manufactured $ 49,100

8. Refer to Brandt Company. Direct labor is paid $9.60 per hour and overhead for the month was $9,600.
If there were 1,500 direct labor hours and $21,000 of raw material purchased, how much is Cost of Goods
Sold?
a. $64,500.
b. $59,800.
c. $38,800.
d. $53,800.
ANS: D
Beginning WIP Inventory $ 17,300
Raw Materials $ 19,500
Direct Labor 14,400
Factory Overhead 9,600 43,500
Ending WIP Inventory (11,700)
Cost of Goods Manufactured $ 49,100
Beginning Finished Goods Inventory 21,000
Ending Finished Goods Inventory (16,300)
$ 53,800

9. Davis Company manufacturers desks. The beginning balance of Raw Material Inventory was $4,500;
raw material purchases of $29,600 were made during the month. At month end, $7,700 of raw material
was on hand. Raw material used during the month was
a. $26,400.
b. $34,100.
c. $37,300.
d. $29,600.
ANS: A
Beginning RM Inventory + Purchases - Ending RM Inventory = RMaterials Used
$4,500 + 29,600 - 7,700 = X
X = $26,400

10. Urban Company manufacturers tables. If raw material used was $80,000 and Raw Material Inventory
at the beginning and end of the period, respectively, was $17,000 and $21,000, what was amount of raw
material was purchased?
a. $76,000
b. $118,000
c. $84,000
d. $101,000
ANS: C
Beginning RM Inventory + Purchases - Ending RM Inventory = RMaterials Used
$17,000 + X - 21,000 = $80,000
X = $84,000

Problem 1
Action Trainers provides a personalized training program that is popular with many companies. The
number of programs offered over the last five months, and the costs of offering these programs are as
follows:

Programs Offered Costs Incurred

Jan 55 $15,400
Feb 45 14,050
Mar 60 18,000
April 50 14,700
May 75 19,000

a. Using the high-low method, compute the variable cost per program and the total fixed cost
per month.
b. Using the least squares regression method, compute the variable cost per program and the
total fixed cost per month.

ANS:

a. Variable cost per program:

Change in costs $19,000 - $14,050 = $165 per program

Change in activity 75 - 45

Fixed cost:
At high activity = $19,000 - (75 x $165) = $6,625 per month
At low activity = $14,050 - (45 x $165) = $6,625 per month

b. x y Xy x2
55 $15,400 $ 847,000 3,025
45 14,050 632,250 2,025
60 18,000 1,080,000 3,600
50 14,700 735,000 2,500
75 19,000 1,425,000 5,625
285 $81,150 $4,719,250 16,775

= 57

= 16,230

b = 4,719,250 - (5 57 16,230) (16,775 - (5 57 )

b = 176.79
a = 16,230 - (176.79 57)
a = 6,152.97

Problem 2

The facility manager of Bello Corporation asked the systems analyst for information to help in forecasting
handling costs. The following printout was generated using the least squares regression method.

Fixed cost $2550

Variable cost per unit 1.85
Activity variable units of production volume

a. Using the information from the printout, develop a cost function that can be used to estimate
handling costs at different volume levels.
b. Estimate handling costs if expected production for next month is 20,000 units.

ANS:
a. Total handling costs = $2,550 + $1.85 (unit production)
Total handling costs = $2,550 + ($1.85 x 20,000) = $39,550
b.

Problem 3

The McAlister Co. has the following information available regarding costs and revenues for two recent
months. Selling price is $20.

March April
Sales revenue $60,000 $100,000
Cost of goods sold -36,000 - 60,000
Gross profit $24,000 $ 40,000
Less other expenses:
Advertising $ 600 $ 600
Utilities 4,200 5,600
Salaries and commissions 3,200 4,000
Supplies (bags, cleaning supplies etc.) 320 400
Depreciation 2,300 2,300
Administrative costs 1,900 1,900
Total -12,520 -14,800
Net income $11,480 $25,200

Required:

a. Identify each of the company's expenses (including cost of goods sold) as being either
variable, fixed, or mixed.
b. By use of the high-low method, separate each mixed expense into variable and fixed
elements. State the cost formula for each mixed expense.
c. What is the total cost equation?
d. Estimate total cost if sales = $75,000.

ANS:

a. Cost April May Behavior

COGS 36,000/60,000=60% 60,000/100,000=60% V
Advertising 600 600 F
Utilities 4,200/60,000= 7% 5,600/100,000=5.6% M
Salaries, Etc. 4,000/100,000=4% M
3,200/60,000=5.3%
Supplies 320/60,000 .53% 400/100,000=.4% M
Depreciation 2,300 2,300 F
Administration 1,900 1,900 F

b. Utilities $1,400 = 3.5% Sales

$40,000

FC = $4,200 - (3.5% x 60,000) = $2,100

Salaries $800/$40,000 = 2% Sales

FC = $3,200 - (2% x 60,000) = $2,000

Supplies $80/$40,000 = .2% sales

FC = $320 - (.2% x $60,000) = $200

c. Total FC = $600 + $2,300 + $1,900 + $2,100 + $2,000 + $200 = $9,100

Total VC = 60% + 3.5% + 2% + .2% = 65.7% sales
TC = $9,100 + 65.7% sales
d. TC = $9100 + (65.7% x $75,000) = $58,375