Exercises

PROBLEM 1 Content of Financial Statements and Reports

Consider the following cost items:

1. Sales commissions earned by a company's sales force.

2. Raw materials purchased during the period.
3. Current year's depreciation on a firm's manufacturing facilities.
4. Year-end completed production of a carpet manufacturer.
5. The cost of products sold to customers of an apparel store.
6. Wages earned by machine operators in a manufacturing plant.
7. Income taxes incurred by an airline.
8. Marketing costs of an electronics manufacturer.
9. Indirect labor costs incurred by a manufacturer of office equipment.

Required:
1. Evaluate the costs just cited and determine whether the associated dollar amounts would be found
on the firm's balance sheet, income statement, or schedule of cost of goods manufactured.
2. What major asset will normally be insignificant for service enterprises and relatively substantial for retailers,
wholesalers, and manufacturers? Briefly discuss.
3. Briefly explain the similarity and difference between the merchandise inventory of a retailer and the
finished- goods inventory of a manufacturer.

ANSWERS:
1.) 1. Income Statement
2. Balance Sheet
3. Income Statement
4. Balance Sheet
5. Income Statement
6. Schedule of cost of goods manufactured
7. Income Statement
8. Income Statement
9. Schedule of cost of goods manufactured

2.) The major asset that will be insignificant is the inventory. It is because the service business has no
inventory but instead, the cost of their producing services will serve as an operating expense for their
business. While for retailers and wholesalers they just stock inventory that are considerable. For the
manufacturers they significant inventories that are divided into three (3) categories; the raw materials,
finished goods and the work in process.

3.) The difference is that the retailers purchase a merchandise inventory. The similarity of the two (2) is
that both of their inventories are for sale by the retailers and manufacturers.
PROLEM 2 Identification of Product Costs and Period Costs, Cost Behavior

Eastside Manufacturing produces small electric engines. Identify the following costs as direct materials
(DM), direct labor (DL), manufacturing overhead (MOH), or a period cost (PC). Also indicate whether the
cost is variable (V) or fixed (F) with respect to behavior.

A. Commissions paid to sales people

B. Straight-line depreciation on the factory building
C. Salary of the plant supervisor
D. Wages of the assembly-line workers
E. Machine lubricant used in production activities
F. Engine casings used in production activities
G. Advertising placed in trade journals
H. Lease payments for the president's automobile
I. Property taxes paid on the factory facilities

ANSWERS:
A. PC
B. MOH
C. MOH
D. DL
E. MOH
F. DM
G. PC
H. PC
I. MOH
PROBLEM 3

Identification of Product Costs and Period Costs, Cost Behavior

Consider the following items:

A. Tomatoes used in the manufacture of Heinz ketchup

B. Administrative salaries of executives employed by Southwest Airlines
C. Wages of assembly-line workers at a Ford plant
D. Marketing expenditures of the Los Angeles Dodgers baseball club
E. Commissions paid to Coca-Cola's salespeople
F. Straight-line depreciation on manufacturing equipment owned by Dell Computer
G. Shipping charges incurred by Office Depot on out-going orders
H. Speakers used in Sony home-theater systems
I. Insurance costs related to a Mary Kay Cosmetics' manufacturing plant

Required:
Complete the table that follows and classify each of the costs listed as (1) a product or
period cost and (2) a variable or fixed cost by placing an "X" in the appropriate column.

ANSWERS:

Product or Period Cost Variable or Fixed Cost

Item Product Period Variable Fixed
A X X
B C X X
DEF X X
GHI X X
X X
X X
X X
X X
X X
PROBLEM 4 Identification of Various Cost Concepts

The following selected costs were extracted from the accounting records of Los Angeles
Machining (LAM):

1. Direct materials used in production

2. Wages of machine operators
3. Factory utilities
4. Sales commissions
5. Salary of LAM's president
6. Factory depreciation
7. Wages of plant security guards
8. Uncollectible accounts expense
9. Machine lubricant used in production

Required:
By the use of numbers, identify the costs that would be used to calculate:
A. cost of goods manufactured.
B. manufacturing overhead.
C. total period costs.
D. total conversion costs.
E. total direct costs of LAM's credit and collections department.
F. LAM's inventory valuation.

ANSWERS:
A.) 1, 2, 3, 6, 7, 9
B.) 3, 6, 7, 9
C.) 4, 5, 8
D.) 2, 3, 6, 7, 9
E.) 8
F.) 1, 2, 3, 6, 7, 9
 PROBLEM 5 Cost of Goods Manufactured and Cost of Goods Sold

Panama Manufacturing had the following data for the period just

ended:

Work in process,
Jan. 1 P 21,000
Work in process,
Dec. 31
40,000
Finished goods, Jan. 1 70,000
Finished goods,
Dec. 31 61,000
Direct materials
used 126,000
Direct labor 260,000
Factory depreciation 80,000
Sales 945,000
Advertising expense 52,000
Factory utilities 27,000
Indirect materials 19,000
Indirect labor 35,000

Required:
1. Calculate Panama's cost of goods manufactured.
2. Calculate Panama's cost of goods sold.

ANSWERS:
1.) Direct Material Used 126, 000
Direct labor 260, 000
MOH: 161, 000
Factory depreciation 80, 000
Factory utilities 27,000
Indirect Materials 19, 000
Indirect Labor 35, 000
Total manufacturing costs 547, 000
 Add: WIP, Jan. 1 21, 000
568, 000
Deduct: WIP, Dec. 31 (40,000)
Cost of goods manufactured 528, 000

2.) Finished Goods, Jan. 1 70, 000

Add: COGM 528, 000
Goods available for sale 598, 000
Deduct; FG, Dec 31 (61, 000)
Cost of goods sold 537, 000
 PROBLEM 6 Fixed and Variable Cost Behavior

Mighty Muffler, Inc., operates an automobile service facility. The table below shows the
cost incurred during a month when 600 mufflers were replaced.

Number of Muffler Replacements

500 600 700
Total costs:
Fixed costs A P 8,400 C
Variable costs B 6,000 D
Total costs E P14,400 F

Cost per muffler replacement:

Fixed cost G H I
Variable cost J K
L
Total cost per muffler replacement M N
O

Required:
Fill in the missing amounts, labeled A through O, in the table

ANSWERS:

Number of Muffler Replacements

500 600 700
Total costs:
Fixed costs (a)8,400 8,400 (c)8,400
Add: Variable costs (b)5,000 6,000 (d)7,000
Total costs 13,400 14,400 15,400

Cost per muffler

Fixed costs (g)16.8 (h)14 (j)12
Add: Variable costs (i) 10 (k) 10 (l) 10
Total cos per muffler replacement 26.8 24 22

Solutions:

(b) 500x10 = 5,000 (g) 8,400/10 = 16.8 (i) 8,400/700 = 12

(d) 700x10 = 7,000 (h) 8,400/600 = 14 (j)(k)(l) 6,000/600 = 10
 PROBLEM 7 HLM and Least Squares

Regression Method

The administrator of Florence Hospital would like a cost formula linking the
administrative costs involved in admitting patients to the number of patients admitted
during a month. The admitting department’s costs and the number of patients admitted
during the immediately preceding eight months are given in the following table:

Month Number of patients admitted Admitting department costs

May 1,800 P14,700
June 1,900 15,200
July 1,700 13,700
August 1,600 14,000
September 1,500 14,300
October 1,300 13,100
November 1,100 12,800
December 1,500 14,600

Required:
1. Used the high low method and least squares regression method to establish
the fixed and variable components of admitting costs.
2. Express the formula and variable components of admitting costs as a cost formula
in the form Y = a + bX (HLM and LQRM).

ANSWERS:
1.) Variable costs = cost at highest activity-cost at lowest activity/highest activity-lowest activity
No. of patients Admitting cost
Highest 1,900 15,200
Lowest (1,100) (12,800)
800 2,400
2,400/800 = 3 per patient admitted
 Fixed costs = total cost at highest activity – variable cost/unit x highest activity in units

= 15,200 - (3 x 1, 900)
= 15, 200 – 5, 700
= 9,500

2.) y = a + bx

y = 9,500 + 3x