Cost Concepts and

Classification Exercises
For each of the following costs incurred in a
manufacturing operation, indicate whether
the costs would be fixed or variable (F or V)
and whether they would be period costs or
product costs (P or R, respectively) under
full-absorption costing.
A. Transportation-in costs on materials purchased.
B. Assembly-line worker’s wages
C. Property taxed on work in process inventories.
D. Salaries of top executives in the company.
E. Overtime premium for assembly workers.
F. Sales commissions.
G. Sales personnel office rental.
H. Production supervisory salaries.
I. Controller’s office supplies.
J. Executive office heat and air conditioning.
K. Executive office security personnel.
L. Supplies used in assembly work.
M. Factory heat and air conditioning.
N. Power to operate factory equipment.
O. Depreciation on furniture for sales staff.
P. Varnish used for finishing product.
Q. Marketing personnel health insurance.
R. Packaging materials for finished product.
S. Salary of the quality control manager who checks work on the
assembly line.
T. Assembly-line workers’ dental insurance.
(Economic Characteristics of Costs)
The following terms are used to describe various economic
characteristics of costs.
Opportunity cost Differential cost
Differential cost Marginal cost
Out-of-pocket cost Average cost

Required:
Choose one of the terms listed above to characterize each of the
amounts described below.
 Opportunity cost Differential cost
Differential cost Marginal cost
Out-of-pocket cost Average cost

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

2. The cost of merchandise inventory purchased two years ago, which is now
obsolete.
3. The cost of feeding 500 children in a public school cafeteria is P800 per day, or
P1.60 per child per day. What economic term describes this P1.60 cost?
4. The management of a high-rise office building uses 2,500 square feet of space
in the building for its own management functions. This space could be rented
for P250,000. What economic term describes this P250,000 in lost rental
revenue?
5. The cost of building an automated assembly line in a factory is P800,000. The
cost of building a manually operated assembly line is P375,000. What economic
term is used to describe the difference between these two amounts.
6. Referring to the proceeding question, what economic term is used to describe
the P800,000 cost of building the automated assembly line?
JH Corporation manufactures furniture,
including tables.
Required: Classify these costs according to the various
cost terms used in the chapter.

Selected costs are given below:

1. The tables made of wood that costs P200 per table.
2. The tables are assembled by workers, at a wage cost of P80 per table.
3. Workers making the tables are supervised by a factory supervisor who is
paid P76,000 per year.
4. Electrical costs are P4 per machine-hour. Four machine-hours are
required to produce a table.
5. The depreciation of the machines used to make the tables totals P20,000
per year. The machines have no resale value and do not wear out
through use.
6. The salary of the president of the company is P200,000 per year.
7. The company spends P500,000 per year to advertise its products.
8. Salespersons are paid a commission of P60 for each table sold.
9. Instead of producing the tables, the company could rent its factory space
for P100,000 per year.
Love Ship, Inc., assembles custom sailboats from
components supplied by various manufacturers.
The company is very small and its assembly shop
and retail sales store are housed in a boathouse.
Below are listed some of the costs that are
incurred at the company.
Required:
For each cost, indicate whether it would most likely be classified as a
direct labor, direct materials, manufacturing overhead, selling, or an
administrative cost.
1. The wages of employees who build the sailboats.
2. The cost of advertising in the local newspapers.
3. The cost of an aluminum mast installed in a sailboat.
4. The wages of the assembly shop’s supervisor.
5. Rent on the boathouse.
6. The wages od the company’s bookkeeper.
7. Sales commissions paid to the company’s
salespeople.
8. Depreciation on power tools.
The Antique Hotel is a four-star hotel
located in Makati City.
Required:
For each of the following costs incurred at the Antique Hotel, indicate
whether it would most likely be a direct cost or an indirect cost of the
specified cost object by placing an X in the appropriate column.
 Cost Cost Object Direct Indirect
Cost Cost
Ex. Room service beverages A particular hotel guest

1. The salary of the head chef The hotel’s restaurant

2. The salary of the head chef A particular restaurant customer

3. Room cleaning supplies A particular hotel guest

4. Flowers for the reception desk A particular hotel guest

5. The wages of the doorman A particular hotel guest

6. Room cleaning supplies The housecleaning department

7. Fire insurance of the hotel building The hotel’s gym

8. Towels used in the gym The hotel’s gym