ACCT3203 Week 2 Tutorial Questions Cost Terms S2 2022

Question 1
Discuss the difference between direct costs and indirect costs; variable and fixed costs; and
inventoriable and period costs. Provide examples for each type of cost.
Direct costs of a cost object are costs that are related to the cost object and can be traced to it in an
economically feasible (cost effective) way.
It is possible to trace costs to the cost object, but it is not always practical to do so from a cost-benefit
perspective. Cost tracing is the process of assigning costs to a cost object.
Indirect costs of a cost object are related to the cost object but cannot be traced in an economically
feasible way. These costs are frequently referred to as factory overhead, manufacturing overhead, or
some similar term. These costs include supervisor salaries, supplies, or other costs incurred in the
factory that are not direct materials or direct labor. Indirect costs are assigned to a cost object by
allocation.
Traceability
A variable cost changes in total in proportion to changes in the activity level. For example, if the
number of units produced doubles, direct materials (a variable cost) would double in total. However,
that the variable cost per unit remains constant.
Total fixed costs do not change with changes in the activity level. If units produced doubles, total fixed
costs remain the same. However, when expressed on a per-unit basis, fixed costs would change with an
increase in activity.
Manufacturing company
Direct variable: raw materials
Indirect variable: factory general utilities
Direct fix: wages of the worker
Indirect fix: supervisor’s salaries
Inventoriable costs are all costs of a product that are considered assets on the balance
sheet when they are incurred and include direct materials, direct labor, and factory overhead.
They become a part of the cost of the product and are assets until sold, when they become
cost of goods sold. These are also known as product costs.

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Period costs are all costs on the income statement other than cost of goods sold. Period
costs are treated as expenses of the period in which they are incurred.

Question 2
Give examples of cost objects and relevant cost drivers for the cost objects, in a manufacturing
concern and a service industry.
Manufacturing: number of hours worked by a worker; machine hour
Service: retailed store
number of hours worked by a sales staff

Question 3
What are three different types of inventory that manufacturing companies hold?
 Direct materials inventory, or simply materials inventory, consists of materials being held
by the company, ready to be used in the manufacturing process.
 Work-in-process inventory represents product partially worked on but not yet completed.
WIP is a representation of what is on the factory floor.
 Finished goods inventory is goods that have not yet been sold.

Question 4
In the context of a manufacturing business, provide examples of variable costs and fixed costs,
and classify these costs into direct costs and indirect costs (overheads). Hint: decide on the type of
business and the costs involved in running the business.
Manufacturing-sector companies purchase materials and components and convert them into
finished goods.
Variable costs: direct materials, direct manufacturing labor, variable manufacturing overhead,
Indirect: sales commissions
Fixed cost: administrative salaries--indirect

Question 5
In the context of a service business, provide examples of variable costs and fixed costs, and
classify these costs into direct costs and indirect costs (overheads). Hint: decide on the type of
business and the costs involved in running the business.
In: transportation, letter,
Bank
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Direct: salary

Question 6

Alpha Company is analyzing its fixed and variable costs within its current relevant range. As its cost
driver activity changes within the relevant range, which of the following statements is/are correct?
I. As the cost driver level increases, total fixed cost remains unchanged.
II. As the cost driver level increases, unit fixed cost increases.
III. As the cost driver level decreases, unit variable cost decreases.
1. I, II, and III are correct.
2. I and II only are correct.
3. Only I is correct.
4. II and III only are correct.

A cost driver is a variable, such as the level or activity or volume that causally affects costs over a
given span of time. Stated another way, there is a cause-and-effect relationship between the level of
activity of the cost driver and the cost incurred.

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Additional questions for students to attempt:
Question 7
Beta Company is a manufacturing concern, and has produced the following information:
Direct materials purchased 90,000
Direct materials used 85,550
Direct manufacturing labour costs 15,450
Indirect manufacturing labour costs 10,000
Sales salaries 22,000
Other plant expenses 25,000
Selling and administrative expenses 30,000

What was the cost of goods manufactured?

a. $115,450
b. $133,000
c. $136,000
d. $140,450
e. None of the above.

Question 8
Identify the best cost driver (from the list on the right) for each of the cost object (on the left side).
Provide an additional cost driver for each of the cost object.
Cost Object Cost Driver
1. Inspection of materials Number of purchase orders; Number of
inspections carried out
2. Accounts receivable Number of bills issued to customers; number of
checks received
3. Employee training Number of employees trained; number of
training hours
4. Repairs of machines Number of machines repaired; number of
machine hours operated
5. Testing of samples Number of batches produced; number of testing
conducted
6. Despatching派送 Number of sales orders; number of despatches
carried out
7. Supervisions Number of labours supervised; number of
supervision hours

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Question 9
Gamma Company produced the following balances for the year ended 30 June 2021.
Marketing and advertising costs $  54,300
Merchandise inventory at 1 July 2020 115,800
Shipping of merchandise to customers 5,700
Depreciation on fixtures 10,420
Purchases 654,000
General and administrative costs 74,800
Merchandise inventory at 30 June 2021 124,200
Merchandise freight-in商品货运 25,000
Purchase returns and allowances (32,400)
Purchase discounts (22,600)
Revenues 798,000
a. Compute (i) the cost of goods purchased and (ii) the cost of goods sold for the financial
year for Gamma.
b. Prepare Gamma’s income statement for the financial year 2021.

ai.
Gamma Company
Schedule of Cost of Goods Purchased
For the Year Ended 30 June 2021

Purchases $654,000
Add freight-in 25,000
679,000
Deduct:
Purchase returns and allowances $ 32,400
Purchase discounts 22,600 55,000

Cost of goods purchased $624,000

aii.
Gamma Company
Schedule of Cost of Goods Sold
For the Year Ended 30 June 2021

Beginning merchandise inventory at 1 July 2020 $ 115,800

Cost of goods purchased 624,000
Cost of goods available for sale 739,800
Ending merchandise inventory at 30 June 2020 124,200
Cost of goods sold $ 615,600

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b.
Gamma Company
Income Statement
For the Year Ended 30 June 2021

Revenues $798,000
Cost of goods sold 615,600
Gross margin 182,400
Operating costs
Marketing and advertising costs $54,300
Depreciation on fixtures 10,420
Shipping of merchandise to customers 5,700
General and administrative costs 74,800
Total operating costs 145,220
Operating income $ 37,180