EM 501 - Exercises

Cost Terms and Cost Behavior

Classification of Costs

The Fremont assembles two types of cars (Corollas and Fiestas) on separate lines. Classify each of
the following cost items as:

• Direct or indirect (D or I) costs with respect to the type of the car assembled

• Variable or fixed (V or F) costs with respect to how the total cost of the plant change as the
number of cars assembled changes

Cost item D or I V or F
A. Cost of tires used on Fiestas
B. Salary of the public relations manager for the plant
C. Annual awards dinner for Corolla suppliers
D. Salary of engineer who monitors design changes on Fiesta
E. Freight costs of Corolla engines from Japan
F. Electricity costs for the plant (single bill)
G. Wages paid to temporary assembly line workers hired in
periods of high production (on hourly basis)
H. Annual fire insurance policy cost for the plant

Inventoriable Costs versus Period Costs

Each of the following cost items pertains to one of these companies: General Electric
(manufacturing), Safeway (merchandizing), and AOL (service). Classify each cost item as
inventoriable cost or period cost.

A. Mineral water purchased by Safeway

B. Electricity used to provide lighting for assembly line workers at GE plant
C. Depreciation on AOL’s computer equipment used to update directories
D. Electricity used to provide lighting Safeway’s store aisles
E. Depreciation on GE’s computer equipment used for quality testing
F. Salaries of Safeway’s marketing personnel planning local ad campaigns
G. Mineral water purchased by AOL for consumption by its software engineers
H. Salaries of AOL’s marketing personnel selling banner advertising

1
Cost Behavior Patterns

A B C D

E F G H

I J K L

y-axis: total cost, x-axis: units produced

1. Depreciation of equipment, where the amount charged is computed by the machine-hours

method
2. Electricity bill, a flat fixed charge plus a variable cost after a certain kilowatt-hours are used
3. City water bill; first 100,000 gallons or less $100 flat fee, next 10,000 gallons $0.003 per gallon
used, next 10,000 gallons $0.006 per gallon used, and so on
4. Cost of direct materials, where unit cost decreases with each kg. of materials used, with a
minimum unit cost of $5
5. Depreciation of an equipment, where the amount charged is computed by the straight line
method
6. Rent, where the agreement calls for a fixed payment unless 200,000 labor hours worked in
which case no rent is paid
7. Salaries of repair personnel, where one person is needed for every 1,000 machine-hours or less
8. Cost of direct materials used, no quantity discount
9. Rent, where the agreement calls for a rent of $20,000 to be reduced by $1 for each direct
manufacturing labor hour worked in excess of 200,000, but a minimum rental fee of $2,000
must be paid

2
Income Statement and Schedule of Cost of Goods Manufactured
Prepare the schedule of cost of goods manufactured and income statement for the following data.

For Specific Date For Year 2004

Direct materials, Jan. 1, 2004 $15 Purchases of direct materials $325
Work in process, Jan. 1, 2004 10 Direct manufacturing labor 100
Finished goods, Jan. 1, 2004 70 Depreciation - plant, building, equip. 80
Direct materials, Dec. 31, 2004 20 Plant supervisory salaries 5
Work in process, Dec. 31, 2004 5 Miscellaneous plant overhead 35
Finished goods, Dec. 31, 2004 55 Revenues 950
Marketing, distribution, and
customer service costs 240
Plant supplies used 10
Plant utilities 30
Indirect manufacturing labor 60