MODULE 1 EXERCISES

Association with cost object

ABC & Co. provides accounting services to clients. The firm has two accountants (Allan, who
performs basic accounting services and Bernard, who performs tax services) and one office
assistant. The assistant is paid on an hourly basis for the actual hours worked. One client the firm
served during April was Steve Wilson. During April 2022, the following labor time was
incurred. Classify the labor time as direct, indirect or unrelated based on whether the cost object
is (1) Wilson’s services, (2) tax services provided, or (3) the accounting firm.

Cost behavior
1. XYZ Accounting Services pays 20,000 per month for a tax preparation software license.
In addition, variable charges incurred average 90 for every tax return the firm prepares.

a. Determine the total cost and the cost per unit if the firm expects to prepare the
following number of tax returns in March 2022:
(1) 200
(2) 500
(3) 800

b. Why does the cost per unit change in (1), (2) and (3) of (a)?

c. The owner of XYZ accounting services wants to earn a margin (excluding any other
direct costs) on tax returns of 15,000 during March. If 200 returns are prepared, what
tax preparation fee should be charged? If that fee is charged and 800 returns are
prepared, what is the margin in March?

2. A company produces croquet sets. The company makes fixed monthly payments to the
local utility based on the previous year’s electrical usage. Any difference between the
actual and expected usage is paid in January of the year following the usage. In February
2022, the company made 2,000 croquet sets and incurred the following costs:

Cardboard boxes (1 per set) 10,000

Mallets (2 per set) 120,000
Croquet balls (6 per set) 90,000
Wire hoops (12 per set) 36,000
Total hourly wages for production 84,000
workers
Supervisor’s salary 26,000
 Building and equipment rental 28,000
Utilities 13,000
Total 407,000

a. What was the per-unit cost of each component of a croquet set?

b. What was the total cost of each croquet set?
c. Production for March 2022 is expected to be 2,500 croquet sets. Last November,
when 2,500 sets were made, utility cost was P14,000. There have been no rate
changes at the local utility companies since that time. What is the estimated cost per
set for March?