Tuto 2 (Chapter 2)

2–10. Distinguish between fixed costs and variable costs.

Fixed costs are those costs which remain fixed and doesn't change irrespective of the
level of activity undertaken.
Variable costs are those costs which varies changes with the level of activity or output.

2–15. List three direct costs of the food and beverage department in a hotel. List three indirect
costs of the department.

Purchase, labour,

Plastic bag, plate, spoon and fork, water and electrical

2–18. Distinguish between out-of-pocket costs and opportunity costs.

Opportunity costs are not actual expenses you incur while doing business, but they could
represent a loss to business revenue that’s greater than your actual out-of-pocket
expenses. Some opportunity costs are less than your out-of-pocket costs. Even though
absorbing an opportunity cost can decrease your revenue potential, you can’t claim it as a
loss or deduction on your balance sheet or taxes.

2–19. Define the terms sunk cost and differential cost.

Sunk costs is the costs incurred in the past that cannot be changed by future
decisions. It is not differential costs because they cannot be changed by future
decisions. Differential costs is the fixed costs that can be traced directly to a product
line or customer and are fixed costs and therefore it is pertinent to making decisions.

2–20. Distinguish between marginal and average costs.

Average cost is the total cost of making a single product calculated by dividing the Total cost
by the number of product manufacture. The most important components in average cost are
fixed cost and Variable cost. It is also called as Unit cost. Marginal cost is a cost incurred due
to the change in total cost due to an increase in the unit of product. So it is an additional
cost or extra cost as a result of an increase in the production of one more unit of product.

2–23. Indicate whether each of the following costs is a direct cost or an indirect cost of the
restaurant in a hotel.

a. Cost of food served. - direct

b. Chef’s salary and fringe benefits. - direct

c. Part of the cost of maintaining the grounds around the hotel, which is allocated to the
restaurant. -indirect
d. Part of the cost of advertising the hotel, which is allocated to the restaurant. - indirect

2-25

For each case below, find the missing amount.

Case I Case II Case III

Beginning inventory of ? (21000) $ 18,000 $ 3,500
finished goods
Cost of goods $104,750 142,500 ? (159000)
manufactured during
period
Ending inventory of 24,500 12,000 10,500
finished goods
Cost of goods sold 101,250 ? (148500) 152,000
1+2-3=4

2-32

A hotel pays the phone company $200 per month plus $.15 for each call made. During January
7,000 calls were made. In February 8,000 calls were made.

Required:

1.Calculate the hotel’s phone bills for January and February.

2. Calculate the cost per phone call in January and in February.

3. Separate the January phone bill into its fixed and variable components.

4. What is the marginal cost of one additional phone call in January?

5. What was the average cost of a phone call in January?

1. Jan – 200 + (.15 x 7000) = 1250

Feb – 200 + (.15 x 8000) = 1400

2. Jan – 1250/7000 = 0.179

Feb – 1400/8000 = 0.175

3. Jan- Fixed – 200

Variable – 1050 (.15 x 7000)

4. .15

5. 1250/7000 = 0.179
2-46

Scranton Refrigeration Corporation began operations at the beginning of the current year. One of
the company’s products, a compressor, sells for $370 per unit. Information related to the current
year’s activities follows.

Variable costs per unit:

Direct material ................................................................................................................................ $ 40

Direct labor .................................................................................................................................... 74

Manufacturing overhead ................................................................................................................. 96
Annual fixed costs:

Manufacturing overhead ...................................................................................................... $1,200,000

Selling and administrative ...................................................................................................... 1,720,000

Sales and production activity:

Sales (units) .................................................................................................................................. 20,000

Production (units) ........................................................................................................................ 24,000

Scranton Refrigeration carries its finished-goods inventory at the average unit cost of production
and is subject to a 40% income tax rate. There was no work in process at year-end.

Required:

1. Determine the cost of the December 31 finished-goods inventory.

1200,000 + 1720,000 + (24,000 x 210) = 7960,000
2. Compute Scranton Refrigeration’s net income for the current year ended December 31.
Sales = 370 x 20000 = 7400,000
Cost = (7960000/24000 x 20000) + (40% x 7400,000) = 6633,333 + 2960000 = 9593,333
Income = -1633,333
mingwei
3. If next year’s production decreases to 22,500 units and general cost behavior patterns do not
change, what is the likely effect on:

a. The direct-labor cost of $74 per unit? Why?

Same as it is depends on the unit produced.

b. The fixed manufacturing overhead cost of $1,200,000? Why?

Same as it is annual fixed cost.

c. The fixed selling and administrative cost of $1,720,000? Why?

Same as it is annual fixed cost.

d. The average unit cost of production? Why?

Increase as the total unit of production drop.

2-55

Maria Chavez makes custom mooring covers for boats in Tumpa, Florida. Each mooring cover is
hand sewn to fit a particular boat. If covers are made for two or more identical boats, each
successive cover generally requires less time to make. Chavez has been approached by a local boat
dealer to make mooring covers for all of the boats sold by the dealer. Chavez has developed the
following cost schedule for mooring covers made to fit 17-foot outboard power boats.

Mooring Covers Made Total Cost of Covers

1 $ 675
2 1,275
3 1,815
4 2,310
5 2,775
Required: Compute the following:

1. Marginal cost of second mooring cover.

1275-675 /1 = 600

2. Marginal cost of fourth mooring cover.

2310-1815 /1 = 495

3. Marginal cost of fifth mooring cover.

2775-2310 /1 = 465

4. Average cost if two mooring covers are made.

1275 /2 = 637.5

5. Average cost if four mooring covers are made.

2310/4 = 577.5

6. Average cost if five mooring covers are made.

2775/5 = 555

2-56

The following terms are used to describe various economic characteristics of costs.

a. Opportunity cost

b. Out-of-pocket cost

c. Sunk cost

d. Differential cost

e. Marginal cost
f. Average cost

Required: Choose one of the terms listed above to characterize each of the amounts described
below.

1. The management of a high-rise office building uses 3,100 square feet of space in the building for
its own management functions. This space could be rented for $335,000. What economic term
describes this $335,000 in lost rental revenue? Opportunity cost

2. The cost of building an automated assembly line in a factory is $700,000. The cost of building a
manually operated assembly line is $475,000. What economic term is used to describe the
difference between these two amounts? Differential cost

3. Referring to the preceding question, what economic term is used to describe the $700,000 cost
of building the automated assembly line? Out-of-pocket cost

4. The cost incurred by Apple Computer to produce one more unit in its most popular line of
laptop computers. Marginal cost

5. The cost of feeding 400 children in a public school cafeteria is $740 per day, or $1.85 per child
per day. What economic term describes this $1.85 cost? Average cost

6. The cost of including one extra child in a day-care center. Marginal cost

7. The cost of merchandise inventory purchased two years ago, which is now obsolete. Sunk cost

2-58
1. 10,000 – 212400/10000 = 21.24
15000 – 234600/15000 = 15.64
20000 – 256800/20000 = 12.84
At 20000 units output is the unit cost minimized.
2. 10000 – (21.6 x 10000) – 212400 = 3600
15000 – (18 x 15000) – 234600 = 35400
20000 – (14.4 x 20000) – 256800 = 31200
At 15000 output is the profit maximized
3. 15000 output
4. As the average fixed cost will drop when output increase.
As the supply increase, the demand will drop. So, the company need to drop the prices.