75

Chapter 2 Cost Tenr.s; Concopts, and ClasslficationS

EXERCISE 2-5 C/\ppcnd.111. ~D) Classlncallon of Quallty Coslll. 11.0111.. _ . _

Dclow arc lis1ed ~ever11l_11c11v1llcR thal arc part of II comp11n~• ~ 4uah1y conlrol syMcm:
0

a. Repairs of goodi. sull under warranly.

t,, Cus111mer rc1urni. due lo defceli..
c. S1:1ti~1ieal process control .
d. Dispoi.al or spoiled gooJs.
e. Muinrnining lesting equipment.
r. lnspccling fini~hed goods.
g. Downlimc caused by quality problems.
h. Debugging errors in software.
i. Recalls or defective products.
j. Training quality engineers.
k. Re-entering data due lo typing errori;.
1•• lni.pccting materials received from suppliers.
m. Audi1i; of the quality i.yi.lem.
SIS n. Supervision of testing personnel. · ;. ·"'
o. Rework labor. • ,- _
Required: _
I. Cla.~\iry the costs associa1ed wi1h each or these ac1ivi1-ics'in10 one o( the follow7rlg categories:
of prevention cosl, appraisal coM, internal faih1rc-cost, -or cxtcmal-foiiurc cost · ...... ·' · ·
::fi- 2. Which or the four lypcs of costs listed in (I) above arc· incurred to·kccp. poor·quaiily of con~
·es Jorri1ancc froin occurring? Which or the four types of costs arc incurred because ~ r-quality
of conformance has occurred'! · · · •· · ·

EXgRClSE 2~ Product Cost Flbws; Product versus Period Costs ·11,02, LOJf •. · .
Ryser Company was organi1.cd on May I. On that dale the company purchased 35,000 plastic cin-
blcms. each wi1h a peel-off adhesive backing. The front or 1hc emblclll5·containcd the company's
name. ac~ompanicd by an a1trnc1ive logo. Each emblem cosl Ryser Company'$2.
During May. 31,000 emblems were drawn fro~ the Raw Materials inventory account. Oflhc.\C.
1,000 were 1aken by the sales manager 10 an important sales meeting with prospective-customer.; and
handed out as an advertising gi mmick . The remaiqing cmhlcms dr.iwn from inventory were 'affixed
lo unils of the company's product thal were being 11)anufac1Liri:d dqfing May. Of_lhe' cinits of product
having emblems affixed du,ing May, 90% wcK complclcil and transferred from_Work .in Process lo
Finished Good_s. Of the units coniplcl~d during ~he month'. 75% w~rc sold a_nd shippcd.t~Fus10111crs.
Required: . ·. . · -·
I. DclcHninc-thc cost or.emblems that would be in ·eac_h of:rhe following acco11i11s.~nt f-1ay JJ:
a. Raw Malcrials. · · ' ·-· ,._,· -·
b. Work in Process. ··
c. Finished Goods.
·d. Cost of Goods SolJ.
c. Advertising Expense. · . . . . · _ _ _·. ·. • · . , · · . .
2. Specify whether each of the ,1bovc accoun1s· would appear on.the bala1icc .sh_cct.ot'<>it,:lhc· i11•
come slalcmcnl al May 31 . · · · ·

EXERCISE 2-7 Preparation or a Schedule of Cost of Goods Manuracturcd and Cost of

Goods Sold !LOI, L<>J. l:.O.JI . , . '· -'.-' · .
The follo~ing COSI ~100 invcnlory data for lhc just complclcd. year arc .t·akcn [r'.'?111', the ac_cou1:!ing
records of Ec~lcs Company: · ·
Costs incurred:
Advertising expense ......... . ...... . $100,000
Direct labor cost .... ... . . . , .... ... . . 90,000
PurchasQS ol ra~ materials .......... . 132,000
Rent, factory building ...... . .. .- ..... . 80,000
Indirect labor .......... . ..... . . ; ...... . 56,300
Sales commissions ..••••.. ., : .... i ••• 35,000
Utllltleo, factory . ••... ••.••.•• , , •• • .• 9,000
Maintenance, factory equlpmont ••••. , • 24,000
Suppllea, factory .•...• : .•.... , . , , .•• 700
Depreciation, office equipment .. , . .- •. : • 8,000
Depreciation, factory equipment. .•.• , •• 40,000
 Chapter 2 Cost Terms, Concepts, and c1asslflcat1ons
76
· Beginning End · JI. 1nr.:-.,v comp
of\'••; of Yffr a rcg.. ~ar basi~
Inventories: $ 8,000
12. The wi!y to e1
-$10,000 marizc sue~ r
Raw materials ••••••••• : • , , ,
5,000 20,000
Work In process ••••••• , • • • •
70,00;0 25,000
Finished goods •• '. ..... , ... • . EX.ERCISE 2-i"
_. Fred Austin i! cm
Rtquirtd: · • semblel' a compo"
1. Prepare a schedule or cost or goods manufactured. , • time, and he is pai
2. Prepare the cost or.goods sold section or Eccles Company s inci;,'l'le statement for the year.
'I
R1quind:
1. Asgumc that
F.XF.RCJSE 2-8 (Appendix 2A) ClasslncatJon .o f Overtime COit [LOI) , . thal he ill idl1
Several weeks ago you.called Jiffy Plumbing Company to have $0fflC routine repair. work done 01 week. Alloc;
che plumbing i;ysrem in your home. The plumber came about_two weoka·later. at four o'clock ln the • head cost.
:iflemoon, and spent 1wo hour~ completing your repair work. _When you received your bill from the • 2. · Assume ihat
company, _it conrained • $75 charge for labor-$30 for the first hour and $45 for the second. ·. the w,r..ek. A
·, __When qu~s•i~ned ab~ut Jhe ~ifference in hourly rates, the cq~pany's service manager ex. ~,..
- ~lamed that. th~ h,1g~_er rate r'?r the seeo~d !'°~r contai~ed a ch~e for an "ov~rtime premium,"
~m~c _the um911 rc~1red that plumbers be P.&ld time and a half for any work in excess -of.eight houn
r. 3.
overhead co
Fred's comp
. . pe~-d~Y: ~~-s~rv1ce manager funher e~plained that the company ~as wqrking ovc,time to "catch - · age includct
up a hllle on 1_1s backlog of ~ork. orders, hut still needed to maintain a "decent" profit ersareconc
the plum~ers"··11me. . · ~ in its cost n
.· - - , . mnrgan OIi t,
Required: - , ' 0 · ft
~- ADo you aghree ~vi1h the company's compu1~1io n ot.~~c labor-ch~-on yourJ'ob? : f
. mbe,-fll -s20·per hour for the fim eight hours
. day
s11ume t at the company
and $30-per h r ;pays ' its. plu · worked in a r. ,_,
· · gur ,or,any add11lonal time worked Pre • •
cost of the plumber's time for the da (nin h . pare computa_t,ons to show how the ~ PROBLEM l,-
cost and geQeral oyerhead cost on th;c0mp:n o~•~~ould be allocated between direct labor Several y.eaa a1
5

. , p : y J_u~llfied m charging an ov.crtimc premium ~

J , Under ~hat,circumsta11ces might the com any~ • . • • • in order to have
for repair work on your home?
the extra space.
year. 'The rcnt.e
- E~F.RCiSE 2-9 (Appc-~dlx iD) Using Quollt . . . .- pany has decio
L1s1eu below are lcrms rcl:uin" lo 1· . y Management Terms (LO•>I Direct mai
• , a • • • • b CJIID lly mnnngemcnt. .
·· t\ppriiisal.eosts · · supervisor to ci
• Quart1 .- . 1
Quality-cost re n _Y.?trc cs manufacturc tt
. Quality po Prevention costs _ _ eralionlwillo
Internal fail~re costs - Exter:nat failure costs . nearby in ordc
Choose the tenn or tenns lh"'t . . Quahty of conformance · • dition. the cor

t
be · " most approp · 1
, ~s~~ ,JJIQre th~fl once._(No1e.1hqt ;i blan;;:: ~ c~dmpletc the followjng statements. The-r
• . COil will lac $~
I ·, line basis. u i
I When a product or se . d o mo!c than one word.) enns can • I
..r:
pc, ,onna'nce, it is viewed rv,ce oes not c i Mverti5i
. on onn to customer ex . •
-· 2·. A' product :or service w'll has being poor in pectattons in terms of features or ~ locus
irs-d · 1
es,gners imended or ifave ·1 hn low . . ·r.
To have I
l Acompany incu~ ,
poor qualify of c:onfo
• ~ ma~y defects as a result of sl ' it does not function the way
· and oppy manufacture.
. I uidatc some 1
peryear. ·
4. -A. ,·om pany incurs
. . rmance from occ urnng. . - - - - - - - - - .tn an .effon 10 keep t, .11.,,.,im:
5. dr~:ec;nformance has occurred
our groups of
:ire generalt th
. - ·.
costs associated wirh . .
and ____..;.,___ __ .
bec:iu5e · · ... ,.
I Pre,.:ean a,
. poor qu.u
6. hispccticin ly .e mo!it damaging to a co quality of conformance

8 Th
manufactunn ---
, estmg :1 d -h

8 Practices d
are incurred -
mpany
7. customers ar~ ~no{:nnasot er costs incurred to keep defective rod

in nn effort to 1· •
.• - - - - - - - -
P ucts from be' h'
mg s ,pped to
I
· e costs rci • • an the provid• · List the
known ai a1mg to d~fects, rejected mg of substandard c 1rrunatc poo
serv· r product design, defective (Wider Nam
9, Whc , ~ ~ - - - - : _ : Products, and d . ICC.
." a product•·.. . . . ownttme caused b . . COit involve
10. ~:e,ntc,urfcd. . . ,s clcfc-ctive in some way i' d 1· y qualtty problems are cost may be
. r •men co . .- s c tvered to
placing h5 gre;pany•~ lotal quality , .a CU!itomcr, then column hel
est emphns· costs should J -----
- . ,son ecreue Ir It redl tri PROBLE~
. ind • butcs_lts qualhy cmt1 by
11,0S, U >f
Various cu1
 • Chaptar 2 cost.Tarn,s, co
nc•P1S. arid ctasslfiCBtloll'
82

R1q1dr1d:
• R1qulr1d:
I. Prc c :i !lctteduleJ of •co! ,. Asotte
· 2. Prepnr
purc '" ;,;cum,:<iattme lt of g(?O<l~ monu f!ICtured• of gooc'.
:t nt, , 1 nt of to 000 units or
Ai1~ume thUI 1hc comp11nY
pro th pn>i!uct ring the
Whut wa• the ,,.r ag e co " perduc,cd ed~u,,v• ~enali7 What was the average du • l. A•• !IC

rne
unit ror ,rec .,, .
··
cosl per re.r. 3, Based 1
pany-c,
,. A"1or
omy edep
'""rcd otion?pi
,.pee,. un11 i,,
'"' ,om nY
Wh•• ,,. ,. ,.. .,, per uni!
· .
pro
10 duce I
,nd y,!14' ,..,, cost WOii
·
of ' •
1 5,oo:i~
• :•"'._,.I":;,no"d::°'
10
dunng the coming.
n:ct "" "" "''
8 DI thi• tev<I or ,cllYIIY? Pot ractorY e co m~ •Y incur foryo,, 4 PROBLE~
,ume tlUI• direct material,;, deprec cost Beha·
a v,riable cost and tl\11 :••11~•: (In_preparing your answer, .. tieprec••••• Thefol\oW
thal clepn:ciation ;,compute ts• fi•ed cost: also iu ,
5, A• the manager ""' d on a straigbt•lht!' basis.) company:
?" 'Ib le ror prodilction ct)S · ·
averdge c~I ~ per unit bet
II, ,.p lai n to th• presid
ent ariy difference In "tho
ween (3) and (4) above. - -
PROBLEM i-2 0 SchedUle or'Cost ol coo
11.0I, 1.02, LOJ, 1.041
cis l>fan ulactured; Income ~tatemen
t
Skyler compafly w,,
or_g•~•zed on NoYe._
mb er I - . .
or the p_re.!01,s year. After
·OP '"" "'· moougemc•t had ,.v en mo--
nthl ~r ,tut-
?""' "' ' di.,PJIOin1<d. howe,p
oncomo Slatemcot follow,:
.
cctcd to eon\ • profit do nn
ever, when the
. · . ·.
'"'°""' ,.,,,_,
g.J u., , the most rocenrmonih M
(or June also showed , ..;
ai" '~ •
·
. - unc I
SKYLER COMPANY
.. Income Sta tem t
- ·· For the Month Endeden June 3-0 ,
~ales . ., ... .. , •.• ... •.• saoo'.ooo .
[ess operating ·expenses . ; .-.. ... .
: .
. • • _· ••
Selling and·~~minlstratlv
e salines ••• • • · $ 35
· R,ent ,;m faclht1es .-• · OOO
}•Urch>;es ot niw
Insurance
mi,i~;.;,~· ·' ' ·· · · · ·
- · · •
c • . 40,~'JO
.
·;;!~; ~~~i~~~i :' ' ' ' ·' · .
· _ · • • • • • • • ·: • _19
09p~aclatl~, 0,0 00
Utiht1es costs 8,0 90 .·
' . Indirect labor 0
• • '. • • • • _· -10 ,00 0

~
' .....
....

- · blrect labor .' . : -·, .. .. ' ..

'' · .: ' • •
50 ,00 0
• • '. • - . •

1
.. -. ... : ; • • 10 8,0
. . .i)epreclauo~:·,;6;~ry ·.q~ p;.~ni ··.... 00 -T oe tol
· - AMdaln 1·
te_n~nce, fa'ctory .' , ••• • :
• • • • • • •_
90 ,09 0 sno.o
vert1smg ... •• -. • _ . •••••••••
12 ,00 0 R1qui1
Net ope ratlrygJ osp ;,. .. : ·, • • • · • • 7,0 00 \. Pl
- - - '. - • '. • • 80,000 •••• ·
. •.• . . . . •. . ••. 630,000 . Cl
. After.,..eing the $301l0 $ (30 00 0 2. A
0 .
<lab le withiosix months, .bu 10 . . - • ). .. d
to lh~ow in.1he towel t c " for l~ne:,Skyler's
and aft~t etght mpnths presidents a
worse, I just heard thOt
· Linda i, lhC com· a !~ '
/t " ' we 're still sp'll' tated, ,.1 ·wa·
one of those offen we've s sure we
h td ~ng red ink. Maybe it's 'd be prof•
. · . 3. J
won't be bac:Hrom hersu time rot us .
a.-ist,nt who has h,J 'ui J s r • or tho compw1y.
the company follows· contr_o ller, _in her absence, m: •ry l'o ma ke matl<fl
. · e experience m manufacturing opestatfor at least six more weeks."
n. Only -RO% r h ratei_n
ionent
s abo
Add.ve· wa
- s pre
. pared by a new 4.
•
· tllO nal information about
- h. mg andO ad 0 · I · c rcnl O n rac1•l11t
lnvont .. •es appl"
~•n o'1
ry balances rati,e aethcg
ivitics
· ·-
a11he · .'. . to factory· operations·' the
,cs
. der app. lie.s to
· mmng••~ end of the mo remain sell· P&<
nth we Toe
re as foit.:,w- s: - · · Wi t
Raw materials CCU
~o~k In proces·s· -·. . . ... ' June 1
Finished goods . . . .
... . - $17,0 00 Ju ne 30 The
S ........ 70 000
C
· •. " $4 2,0 00 av a
""
" 1'% of t • '
· : " " " " 20,00 85 the
"" "'" '"• am 0 ·, ,000
o he ms urn
m Thc prcsidoo1 un1s applynce t . and 90% of the utT 60 ,00 0
"" '"' •• ., to whh'S asked o sel . gic
you toling and adm,.msh. , u,c
trativcs ac:
cost a I
tivitf.1:.Y to factory oper. <li I
-ether the co c eek over-the ttioqs: the gi,
. . mpany should . abo .
contmuc op veera
mctio
omn/ statement
and make a rcc. oin·
or,