Acctg.

4 – Cost Accounting and Control

Seatwork # 2

Answers to exercises:

3-33 Classification of Costs

Parts 1 and 2:
1. Print machine setup costs: activity; product
2. Cost of complexity; the number and variety of products: structural; product
3. Training costs for new staff: executional; product
4. Ink: volume; product
5. Customer service costs: activity; period
6. Paper: volume; product
7. Redesign of the print process to improve efficiency: executional; product
8. Machine operation labor: volume; product

Answer to question no. 3:

1. The ink could have a harmful environmental impact. The company could choose
to use environmentally friendly ink, or dispose of the harmful ink in a proper
manner. All waste paper should be properly recycled. As is the case with the ink,
the company could also choose to use paper that is environmentally friendly,
e.g., recycled paper versus paper that required cutting down additional living
trees.

3-34 Classification of Costs whether period or product cost; if product cost,

direct or indirect
1. Period 8. Period
2. Product; indirect 9. Product: indirect
3. Product: indirect 10. Period
4. Product: direct 11. Period
5. Period 12. Product: indirect
6. Period 13. Period
7. Product: direct 14. Period

3-35 Classification of Costs : Direct or Indirect.; Fixed or Variable

1. Direct: variable 6. Direct: Fixed
2. Indirect: fixed 7. Indirect: Variable
3. Indirect: variable 8. Direct: Variable
4. Indirect: fixed 9. Indirect: Fixed
5. Direct: variable 10. Indirect: Fixed
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3-36 Classification of Costs: Classify: Direct or Indirect

1. Direct
2. Indirect
3. Direct
4. Indirect
5. Direct
6. Indirect
7. Indirect
8. Direct
9. Indirect
10. Indirect

3-37 Activity Levels and Cost Drivers

Cost Object Cost Driver

1 Product line or
customer
2 Product line or
customer
3 Product line
4 Product line
5 Customer order
6 Customer order
7 Customer order
8 Customer order
9 Each customer
10 Customer order
11 Customer order
12 Individual products
Directly trace to product line, or each custom order
requiring design
Directly trace to product line, or each custom order
requiring testing
Allocation base: product line
Allocation base: number of purchase orders
Directly trace to customer
Directly trace to customer
Directly trace to customer
Directly trace to customer
Directly trace to customer
Directly trace to customer
Allocation base: number of orders
Allocation base: number of units produced

3-38 Application of the Direct Cost Concept in the Fashion Industry

It is always possible, by definition, to trace direct materials and direct labor costs to
each unit produced. In some cases, as in this one, the most practical approach is to
trace the materials and labor costs directly to the batch. This is convenient both for
cost management and pricing, since the batch is for a single customer. This is a
preview of job costing, which is the topic of Chapter 4.

3-39 Manufacturing Direct Labor: Fixed or Variable?

The effect of the policy of Lincoln Electric is that labor expense, while fixed in total
expenditure, is treated as a variable expense. Labor is flexible and can be moved from
job to job or plant to plant as demand dictates; that is, labor cost at the plant level
fluctuates with demand at each plant, while total labor cost at the firm stays fixed. For
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companies like Nestle, instead of incurring a fixed cost for labor, the company’s total
labor costs are flexible and vary with demand, as part-time labor is added when needed.

3-40 Average and Total Costs: Compute Total Cost and Average Costs based
on different assumptions:

1. Total cost:
$ 1,500 (fixed cost of space rental)
+ 1,500 (variable cost of refreshments = $15 × 100)
$ 3,000

Average cost: $3,000÷100 people = $30.00 per person

2. Total cost:
$ 1,500 (fixed cost of space rental)
+ 3,000 (variable cost of refreshments = $15 × 200)
$ 4,500

Average cost: $4,500÷200 people = $22.50 per person

3. Average costs decrease as attendance increases because the fixed cost

component of total costs is now spread over 100 extra people.

Fixed cost per person: $1,500÷100 people = $15

$1,500÷200 = $ 7.50
Decrease in fixed cost per person $ 7.50

Average cost for 100 people $30.00

- Decrease per person in fixed costs 7.50
Average cost for 200 people $ 22.50

3-41 Classification of Costs

1. While a variety of possible cost objects are possible for the dance studio, the
most reasonable choice is the studio since management’s goal is to analyze the
profitability of the studios.

2. Studios as the cost object

1. Direct: variable 8. Direct: Fixed
2. Direct: variable
3. Direct: variable
4. Direct: variable
5. Direct: variable
6. Indirect: variable
7. Direct: variable
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Or,

Lessons as the cost object

1. Direct: fixed
2. Indirect: fixed
3. Indirect: fixed
4. Indirect: fixed
5. Indirect: fixed
6. Indirect: fixed
7. Indirect: fixed
8. Indirect: fixed

3-42 Relevant Range

1. The volume-based costs include:

a. administrative costs of management in Austin and Paris and the 16
marketing and customer service locations
b. the royalties paid for the images sold, the cost of computer operations
personnel,
c. the purchase of small servers as needed
d. purchase of larger computer servers as needed when demand increases,
2. The relevant range is applicable for PGI because PGI’s operations centers must
grow as demand increases. This means higher costs due to the cost of adding
small computer servers and the cost of hiring additional staff, etc. Note that the
cost of the additional support staff would increase fixed costs, but the cost of
adding capacity – additional large servers and new administrative staff–would be
a step cost, increasing unit costs. So PGI’s total costs increase in a non-linear,
upward-sloping manner over wide ranges of demand. The relevant range is
used to determine the level of unit variable cost and total fixed cost for a limited
range of activity–a range in which there is no need for additional servers or hiring
costs, etc.

3. The growth of the company globally means that the company will be more
exposed to the effects of foreign currency fluctuations. For example, a rising
dollar relative to the euro will increase the effective cost of PGI’s service to
European customers, thereby potentially decreasing demand in Europe. Also,
the translation of the European earnings in euros to PGI’s financial statement will
mean foreign currency losses, as the euro earnings are worth less with the falling
dollar. The changes in the currency exchange rates can potentially and perhaps
significantly affect the company’s earnings in two ways, decreased sales and
foreign currency exchange losses. The reverse would be true if the dollar were
to depreciate relative to the euro. The same currency issues apply should the
company’s business continue to grow in China. In this case, the currency effect
is likely to be smaller, since the Chinese currency has not changed much relative
to the dollar in recent years.
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3-43 Fixed; Variable; and Mixed Costs: Classify whether the cost per
department is variable, fixed or mixed cost
Department A Fixed
Department B Variable
Department C Mixed
Department D Mixed
Department E Variable

3-44 Fixed; Variable; and Mixed Costs : Classify whether the cost per
department is either mixed, fixed or variable

Department 1 Mixed
Department 2 Mixed
Department 3 Fixed
Department 4 Variable
Department 5 Variable