Topic 2: Cost Classification and Behavior

Part I.
Ross Company has the following information available regarding costs at various levels of monthly
production:

Production volume 7,000 10,000

Direct materials $ 70,000 $100,000

Direct labor 56,000 80,000
Indirect materials 21,000 30,000
Supervisors' salaries 12,000 12,000
Depreciation on plant and equipment 10,000 10,000
Maintenance 32,000 44,000
Utilities 15,000 21,000
Insurance on plant and equipment 1,600 1,600
Property taxes on plant and equipment 2,000 2,000
Total $219,600 $300,600

Required:
a. Identify each cost as being variable, fixed, or mixed by writing the name of each cost under one of
the following headings:
Variable Costs Fixed Costs Mixed Costs
b. Develop an equation for total monthly production costs.
c. Predict total costs for a monthly production volume of 8,000 units

Part II.
The Valley Forge Company cost accountant wants to determine the cost behavior for overhead. Based on
observation and discussion with the plant workers, the following accounts have been identified as the
most relevant: Supervisor salaries and depreciation are believed to be generally be fixed; Indirect labor,
Utilities, and Purchasing are generally believed to be variable; Indirect labor primarily is responsible for
moving materials; Utility cost is primarily caused by the electricity to run machinery; and Purchasing costs
are driven by the number of purchase orders. These accounts and their balances are given below:
Supervisory Depreciation on Plant
Indirect Labor Utilities Purchasing
Salaries and Equipment
July $ 28,500 $ 24,000 $ 76,400 $ 40,000 $ 13,000
August 31,600 21,200 70,800 46,000 13,000
September 33,600 25,000 75,200 64,000 13,000
October 41,400 25,000 80,400 55,600 13,000
November 40,000 25,000 79,800 50,800 13,000
December 34,000 25,000 79,400 34,000 13,000
Total $209,100 $145,200 $ 462,000 $ 290,400 $ 78,000

Information on the activities is given below:

# of moves machine hours purchase orders
July 340 5,400 250
August 380 5,200 300
September 400 5,800 450
October 500 6,200 380
November 480 6,000 340
December 420 5,600 200
Total 2,520 34,200 1,920

Required:
a. Why did the cost accountant decide that salaries and depreciation were fixed?
b. Calculate the average account balance for each of the 5 accounts and calculate the average
monthly amount for each of the three drivers.
c. Calculate the fixed overhead and variable rates for each of the costs. Write an equation for the
total overhead cost.
d. In January, 490 moves; 4,375 machine hours, and 220 purchase orders were expected. What is
the amount of overhead predicted?

Part III
Classify the following costs for an auto manufacturer as either direct materials, direct labor, manufacturing
overhead, or period costs.
a. Steel used in automobiles c. Utility costs used in executive building
b. Assembly department employee wages d. Travel costs used by sales personnel
 e. Cost of shipping goods to customers k. CEO's salary
f. Property taxes on assembly plant l. Depreciation on executive building
g. Glass used in automobiles m. Salary of marketing executive
h. Maintenance supplies n. Tires installed on automobiles
i. Depreciation on assembly plant o. Advertising
j. Plant manager's salary

Required:
Complete the answer sheet above by placing an “X” under each heading that identifies the cost involved.
Direct Materials Direct Labor Manufacturing Overhead Period Cost
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.

Part IV
A number of costs and measures of activity are listed below.
Cost Description Possible Measure of Activity
1. Cost of vaccine used at a clinic Vaccines administered
2. Building rent at a taco shop Dollar sales
3. Salary of production manager at a snowboard manufacturer Snowboards produced
Cost of electricity for production equipment at a snowboard
4. Snowboards produced
manufacturer
5. Ferry captain’s salary on a regularly scheduled passenger ferry Number of passengers
6. Cost of glue used in furniture production Units produced
7. Janitorial wages at a snowboard manufacturer Snowboards produced
8. Depreciation on factory building at a snowboard manufacturer Snowboards produced
9. Cost of advertising at a snowboard company Snowboards sold
10. Cost of shipping bags of fertilizer to a customer at a chemical plant Bags shipped

Required:
For each item above, indicate whether the cost is MAINLY fixed or variable with respect to the possible
measure of activity listed next to it.

Part V.
A number of costs are listed below.
Cost Description Cost Object
1. Wages of carpenters on a home building site A particular home
A particular personal
2. Cost of wiring used in making a personal computer
computer
3. Manager’s salary at a hotel run by a chain of hotels A particular hotel guest
4. Manager’s salary at a hotel run by a chain of hotels The particular hotel
5. Cost of aluminum mast installed in a yacht at a yacht manufacturer A particular yacht
The Radiology (X-Ray)
6. Monthly lease cost of X-ray equipment at a hospital
Department
7. Cost of screws used to secure wood trim in a yacht at a yacht manufacturer A particular yacht
Cost of electronic navigation system installed in a yacht at a yacht
8. A particular yacht
manufacturer
Cost of a replacement battery installed in a car at the auto repair shop of an
9. The auto repair shop
automobile dealer
10. Cost of a measles vaccine administered at an outpatient clinic at a hospital A particular patient

Required:
For each item above, indicate whether the cost is direct or indirect with respect to the cost object listed
next to it.
 Part VI.
A direct labor worker at Chiarini Corporation is paid $14 per hour for regular time and time and a half for
all work in excess of 40 hours per week. The company's fringe benefits cost $4 for each hour of employee
time (both regular and overtime). Last week this employee worked 45 hours but was idle for 3 hours due
to material shortages. The company treats all fringe benefits as part of manufacturing overhead.

Required:
Determine how much of the worker's wages for the week would be classified as direct labor cost and how
much would be classified as manufacturing overhead cost. Show your work.

Part VII.
The following data have been provided the Monster Manufacturing Company for the most recent period:
Sales $16,800
Raw materials inventory, beginning $900
Raw materials inventory, ending $750
Purchases of raw materials $8,400
Direct labor $1,240
Manufacturing overhead $2,070
Administrative expenses $1,890
Selling expenses $1,000
Work in process inventory, beginning $700
Work in process inventory, ending $1,050
Finished goods inventory, beginning $970
Finished goods inventory, ending $1,120

Required:
Calculate the cost of goods manufactured and prepare an income statement.

Part VIII.
Innova, Inc., is beginning the production of a new product. Management believes that 500 labor hours will
be required to complete the new unit. An 80 percent incremental unit-time learning curve model for direct
labor hours is assumed to be valid. Assume the q = -0.3219. Data on costs are as follows:
Direct materials $50,000 per unit
Direct labor $20 per direct labor hour
Variable manufacturing overhead $30 per direct labor hour

Required:
a. Set up a table with columns for cumulative number of units showing the cumulative total time in
hours using the incremental unit-time learning curve. Complete the table for 1, 2, 3, and 4 units
given the individual unit time for the nth unit as 500, 400, 351, and 320 for 1 to 4 units
respectively.
b. Set up a similar table assuming a 90 percent with the incremental unit-time learning curve with
the individual unit time for the nth unit as 500, 450, 430, 405 for 1 to 4 units respectively.
c. What is the difference in variable cost of producing four units.