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HomeSolution Manuals Fundamentals Of Cost Accounting 5th Edition Solution Manual by William N. Lanen, Shannon Anderson, Michael W Maher
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Fundamentals Of Cost Accounting 5th Edition Solution Manual by William N. Lanen, Shannon Anderson, Michael W Maher

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2
Cost Concepts and Behavior

Solutions to Review Questions
2-1.
Cost is a more general term that refers to a sacrifice of resources and may be either an
opportunity cost or an outlay cost. An expense is an outlay cost charged against sales
revenue in a particular accounting period and usually pertains only to external financial
reports.
2-2.
Product costs are those costs that are attributed to units of production, while period
costs are all other costs and are attributed to time periods.
2-3.
Outlay costs are those costs that represent a past, current, or future cash outlay.
Opportunity cost is the value of what is given up by choosing a particular alternative.
2-4.
Common examples include the value forgone because of lost sales by producing low
quality products or substandard customer service. For another example, consider a firm
operating at capacity. In this case, a sale to one customer precludes a sale to another
customer.
2-5.
Yes. The costs associated with goods sold in a period are not expected to result in
future benefits. They provided sales revenue for the period in which the goods were
sold; therefore, they are expensed for financial accounting purposes.
2-6.
The costs associated with goods sold are a product cost for a manufacturing firm. They
are the costs associated with the product and recorded in an inventory account until the
product is sold.

Fundamentals of Cost Accounting 30
2-7.
Both accounts represent the cost of the goods acquired from an outside supplier, which
include all costs necessary to ready the goods for sale (in merchandising) or production
(in manufacturing).
The merchandiser expenses these costs as the product is sold, as no additional costs
are incurred. The manufacturer transforms the purchased materials into finished goods
and charges these costs, along with conversion costs to production (work in process
inventory). These costs are expensed when the finished goods are sold.
2-8.
Direct materials: Materials in their raw or unconverted form, which become an integral
part of the finished product are considered direct materials. In some
cases, materials are so immaterial in amount that they are considered
part of overhead.

Direct labor: Costs associated with labor engaged in manufacturing activities.
Sometimes this is considered as the labor that is actually responsible for
converting the materials into finished product. Assembly workers,
cutters, finishers and similar ―hands on‖ personnel are classified as
direct labor.

Manufacturing
overhead:

All other costs directly related to product manufacture. These costs
include the indirect labor and materials, costs related to the facilities and
equipment required to carry out manufacturing operations, supervisory
costs, and all other support activities.

2-9.
Gross margin is the difference between revenue (sales) and cost of goods sold.
Contribution margin is the difference between revenue (sales) and variable cost.
2-10.
Contribution margin is likely to be more important, because it reflects better how profits
will change with decisions.
2-11.
Step costs change with volume in steps, such as when supervisors are added.
Semivariable or mixed costs have elements of both fixed and variable costs. Utilities
and maintenance are often mixed costs.
2-12.
Total variable costs change in direct proportion to a change in volume (within the
relevant range of activity). Total fixed costs do not change as volume changes (within
the relevant range of activity).

2-13.
A value income statement typically uses a contribution margin framework, because the
contribution margin framework is more useful for managerial decision-making. In
addition, it splits out value-added and non value-added costs. Therefore, it differs in two
ways from the gross margin income statement: classifying costs by behavior and
highlighting value-added and non value-added costs. It differs from the contribution
margin income statement by highlighting the value-added and non value-added costs.
2-14.
A value income statement is useful to managers, because it provides information that is
useful for them in identifying and eliminating non value-added activities.

Fundamentals of Cost Accounting 32
Solutions to Critical Analysis and Discussion Questions
2-15.
The statement is not true. Materials can be direct or indirect. Indirect materials include
items such as lubricating oil, gloves, paper supplies, and so on. Similarly, indirect labor
includes plant supervision, maintenance workers, and others not directly associated
with the production of the product.
2-16.
No. Statements such as this almost always refer to the full cost per unit, which includes
fixed and variable costs. Therefore, multiplying the cost per seat-mile by the number of
miles is unlikely to give a useful estimate of flying one passenger. We should multiply
the variable cost per mile by 1,980 miles to estimate the costs of flying a passenger
from Detroit to Los Angeles.
2-17.
Marketing and administrative costs are treated as period costs and expensed for
financial accounting purposes in both manufacturing and merchandising organizations.
However, for decision making or assessing product profitability, marketing and

administrative costs that can be reasonably associated with the product (product-
specific advertising, for example) are just as important as the manufacturing costs.

2-18.
There is no ―correct‖ answer to this allocation problem. Common allocation procedures
would include: (1) splitting the costs equally (25% each), (2) dividing the costs by the
miles driven and charging based on the miles each person rides, (3) charging the
incremental costs of the passengers (almost nothing), assuming you were going to drive
to Texas anyway.
2-19.
The costs will not change. Your allocation in 2-18 was not ―incorrect,‖ because the
purpose of the allocation is not to determine incremental costs.
2-20.
Answers will vary. The major cost categories include servers (mostly fixed), personnel
(mostly fixed), and licensing costs (mostly variable).

2-21.
Answers will vary. The major cost categories include servers (mostly fixed), personnel
(mostly fixed), and legal costs (mostly fixed). There are only small variable costs for
Uber or Lyft. For the drivers, the costs of the vehicle and technology are mostly fixed.
Vehicle operating expenses (fuel and maintenance) are mostly variable.
2-22.
Direct material costs include the cost of supplies and medicine. One possible direct
labor cost would be nursing staff assigned to the unit. Indirect costs include the costs of
hospital administration, depreciation on the building, security costs, and so on.
2-23.
Answers will vary. Common suggestions are number of students in each program,
usage (cafeteria: meals; library: study rooms reserved; or career placement: interviews,
for example), assuming usage is measured, or revenue (tuition dollars).
2-24.
No, R&D costs are relevant for many decisions. For example, should a program of
research be continued? Was a previous R&D project profitable? Should we change our
process of approving R&D projects? R&D costs are expensed (currently) for financial
reporting, but for managerial decision-making the accounting treatment is not relevant.
2-25.
This question can create a good discussion of the different roles of financial and
managerial accounting. An important issue is identifying the activities that are non
value-added. These are almost certainly better known to the managers of the firm than
to outsiders. These costs are also difficult to measure, meaning there are many different
―reasonable‖ numbers that might be reported. Because managers have an interest in
reporting favorable numbers (however favorable is defined), there is a potential for
managerial bias in the reports.
A second reason is that most firms would be concerned about revealing potentially
valuable competitive information.

Fundamentals of Cost Accounting 34
Solutions to Exercises
2-26. (15 min.) Basic Concepts.
a. False. The statement refers to an expense. For example, R&D costs are incurred
in expectation of future benefits.
b. False. Variable costs can be direct (direct materials) or indirect (lubricating oil for
machines that produce multiple products.)
c. True. Each unit of a product has the same amount of direct material (same cost
per unit), but producing more units requires more material (and more cost).

2-27. (15 min.) Basic Concepts.

Cost Item

Fixed (F)
Variable (V)

Period (P)
Product (M)
a. Depreciation on buildings for administrative staff offices…… F P
b. Cafeteria costs for the factory ………………………………………. F M
c. Overtime pay for assembly workers………………………………. V M
d. Transportation-in costs on materials purchased ……………… V M
e. Salariesof top executives in the company ………………………. F P
f. Sales commissions for sales personnel …………………………. V P
g. Assembly line workers’ wages ……………………………………… V M
h. Controller’s office rental ………………………………………………. F P
i. Administrative support for sales supervisors…………………… F P
j. Energy to run machines producing units of output in the
factory………………………………………………………………………. V M
2-28. (10 min.) Basic Concepts.
a. Assembly line worker’s salary……………………………………………………………. B
b. Direct materials used in production process. ……………………………………….. P
c. Property taxes on the factory…………………………………………………………….. C
d. Lubricating oil for plant machines. ……………………………………………………… C
e. Transportation-in costs on materials purchased. ………………………………….. P

2-29. (15 min.) Basic Concepts.

Concept Definition
9 Period cost ……………………Cost that can more easily be attributed to

time intervals.

2 Indirect cost…………………..Cost that cannot be directly related to a

cost object.

10 Fixed cost……………………..Cost that does not vary with the volume of

activity.

8 Opportunity cost …………….Lost benefit from the best forgone

alternative.

7 Outlay cost ……………………Past, present, or near-future cash flow.
6 Direct cost …………………….Cost that can be directly related to a cost

object.

5 Expense ……………………….Cost charged against revenue in a
particular accounting period.
1 Cost……………………………..Sacrifice of resources.
3 Variable cost …………………Cost that varies with the volume of activity.
4 Full absorption cost ………..Cost used to compute inventory value

according to GAAP.
11 Product cost ………………….Cost that is part of inventory.
2-30. (15 min.) Basic Concepts.
Cost Item

Fixed (F)
Variable (V)

Period (P)
Product (M)
a. Power to operate factory equipment ………………………….. V M
b. Chief financial officer’s salary……………………………………. F P
c. Commissions paid to sales personnel………………………… V P
d. Office supplies for the human resources manager……….. F P
e. Depreciation on pollution control equipment in the plant.. F M

Fundamentals of Cost Accounting 36
2-31. (15 min.) Basic Concepts.
a. Variable production cost per unit: ($360 + $60 + $15 + $30) …………………..$465
b. Variable cost per unit: ($465 + $45)…………………………………………………….$510
c. Full cost per unit: [$510 + ($225,000 ÷ 1,500 units)]………………………………$660
d. Full absorption cost per unit: [$465 + ($135,000 ÷ 1,500)]………………………$555
e. Prime cost per unit. (materials + labor + outsource) ………………………………$435
f. Conversion cost per unit: (labor + overhead + outsource) ………………………$540
g. Contribution margin per unit: ($900 – $510)………………………………………..$390
h. Gross margin per unit: ($900 – full absorption cost of $555)…………………..$345
i. Suppose the number of units decreases to 1,250 units per month,
which is within the relevant range. Which parts of (a) through (h) will
change? For each amount that will change, give the new amount for
a volume of 1,250 units.
c. Full cost = $510 + ($225,000 ÷ 1,250) = $690
d. Full absorption cost = $465 + ($135,000 ÷ 1,250) = $573
f. Conversion costs = $360 + $30 + ($135,000 ÷ 1,250) + $60 = $558
h. Gross margin = $900 – $573 = $327

c, d, f
and h
will
change
, as
follows

2-32. (15 min.) Basic Concepts: Intercontinental, Inc.
a. Prime cost per unit: (materials + labor) ………………………………………………..$40
b. Contribution margin per unit: ($100 – $72) …………………………………………$28
c. Gross margin per unit: ($100 – full absorption cost of $74)…………………….$26
d. Conversion cost per unit: (labor + overhead)………………………………………..$50
e. Variable cost per unit: ($60 + $12)………………………………………………………$72
f. Full absorption cost per unit: [$60 + ($4,200,000 ÷ 300,000)]………………….$74
g. Variable production cost per unit: ($16 + $24+ $20) ………………………………$60
h. Full cost per unit. [$72+ ($5,400,000 ÷ 300,000 units)]…………………………..$90
i. Suppose the number of units increase to 400,000 units per month,
which is within the relevant range. Which parts of (a) through (h) will
change? For each amount that will change, give the new amount
for a volume of 400,000 units.
c. Gross margin = $100.00 – $70.50 = $29.50
d. Conversion costs = $16 + $20+ ($4,200,000 ÷ 400,000) = $46.50
f. Full absorption cost = $60 + ($4,200,000 ÷ 400,000) = $70.50
h. Full cost = $72 + ($5,400,000 ÷ 400,000) = $85.50

c, d, f
and h
will
change,
as
follows

2-33. (15 min.) Cost Allocation—Ethical Issues
This problem is based on the experience of the authors’ research at several companies.
a. Answers will vary as there are several defensible bases on which to allocate the
product development costs. As an example, many government-purchasing contracts
are based on the cost of the product or service. In this case, using expected sales
(units or revenue) leads to a potential circularity. Price depends on cost, which
depends on sales, which depends on price.
b. The company has an incentive to allocate as much cost as possible to government

sales. This cost will be reimbursed (and the government may be less price-
sensitive). Of course, the government recognizes this and has detailed allocation

guidelines in place and an agency (the Defense Contract Audit Agency) that
monitors contracts and the allocation of costs.
2-34. (15 min.) Cost Allocation—Ethical Issues
This problem is based on the experience of the authors’ research at several companies.
a. Answers will vary as there are several defensible bases on which to allocate the
common costs. One possibility is relative sales revenue. (We ignore here whether
we should allocate these costs, something we discuss in chapter 4.)
b. You should explain to Star that you cannot agree with the allocation basis, especially
given the reason for selecting the basis. If this fails to persuade Star, you should
disclose to Star’s boss your disagreement with the analysis and the relation between
Star and the vendor.

Fundamentals of Cost Accounting 38
2-35. (30 min.) Prepare Statements for a Manufacturing Company: Tappan
Parts.

Tappan Parts
Cost of Goods Sold Statement
For the Year Ended December 31

Beginning work in process inventory………….. $1,354,000
Manufacturing costs:
Direct materials:
Beginning inventory ………………………….. $962,000
Purchases……………………………………….. 1,118,000 (a)*
Materials available…………………………. $2,080,000
Less ending inventory ……………………….. 884,000
Direct materials used……………………… $1,196,000
Other manufacturing costs…………………. 310,000 **
Total manufacturing costs ………………. 1,506,000 (c)
Total costs of work in process…………….. $2,860,000
Less ending work in process …………… 1,430,000
Cost of goods
manufactured ………………………………………….

$ 1,430,000 (b)
Beginning finished goods inventory……………. 312,000
Finished goods available for sale………………. $ 1,742,000
Ending finished goods inventory ……………….. 364,000
Cost of goods sold ………………………………….. $1,378,000
* Letters (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and c.
** Difference between total manufacturing costs of $1,506,000 and direct materials used
of $1,196,000.

2-36. (10 min.) Prepare Statements for a Service Company: Chuck’s Brokerage
Service.

Fundamentals of Cost Accounting 40
2-37. Prepare Statements for a Service Company: Where2 Services.

Formatted: Font: 12 pt

2-38. (10 min.) Prepare Statements for a Service Company: Remington
Advisors
Sales revenue …………………………….. $1,700,000 (Given)
Cost of services sold (b)……………….. 890,000 (Sales revenue – gross margin)
Gross margin………………………………. $810,000 (Given)
Marketing and administrative
costs (a) …………………………………….. 505,000 (Gross margin – operating profit)
Operating profit …………………………… $305,000 (Given)

Fundamentals of Cost Accounting 42
2-39. (20 min.) Prepare Statements for a Service Company: Lead! Inc.
You can solve this in the order shown below.

Lead!, Inc.
Income Statement
For the Month Ended April 30

Sales revenue ………………………………………………………. $600,000 …………………….

a

Cost of services sold………………………………………………………. 384,000 ……………

c

Gross margin ………………………………………………………. $216,000 ……………………..

d

Marketing and administrative costs………………………….. 96,000 …………………….

e

Operating profit ($600,000 x 20%) ………………………….. $120,000 ……………………..

b

a. Given
b. $120,000 = 20% x $600,000.
c. To find the cost of services sold plus marketing and administrative costs, start with
the operating profit (b). Then cost of services plus marketing and administrative costs is
$480,000 (= $600,000 – $120,000). But, marketing and administrative costs equal 25%
of cost of services sold, so,
Cost of services sold + marketing and administrative costs = $480,000 and
Marketing and adminstrative costs = .25 x Cost of services sold.
Combining these equations yields,
1.25 x Cost of services sold = $480,000
or cost of services sold = $384,000 (= $480,000 ÷ 1.25).
d. $216,000 = $600,000 – $384,000.
e. $96,000 = 25% x $384,000.

2-40. (30 min.) Prepare Statements for a Manufacturing Company: Crabtree
Machining Company.

CrabtreeMachining Company
Cost of Goods Sold Statement
For the Year Ended December 31

Beginning work-in-process inventory …. $ 139,200
Manufacturing costs:
Direct materials:
Beginning inventory ………………….. $115,200
Purchases……………………………….. 717,600
Materials available…………………. $832,800
Less ending inventory ……………….. 141,600
Direct materials used……………… $ 691,200 (a)*
Other manufacturing costs…………. 1,901,760 **
Total manufacturing costs ………. 2,592,960 (c)
Total costs of work in process…….. $ 2,732,160
Less ending work in process …… 134,400
Cost of goods manufactured… $ 2,597,760 (b)
Beginning finished goods inventory……. 117,120
Finished goods available for sale………. $ 2,714,880
Ending finished goods inventory ……….. 108,000
Cost of goods sold ………………………….. $2,606,880
* The best approach to solving this problem is to lay out the format of the Cost of Goods
Sold Statement first, then fill in the amounts known. Next find the subtotals that are
possible (e.g., Finished goods available for sale). Finally, solve for letters (a), (b), and
(c) where (a), (b), and (c) refer to amounts found in solutions to requirements a, b, and
c.
** Difference between total manufacturing costs and direct materials used.

Fundamentals of Cost Accounting 44
2-41. (15 min.) Basic Concepts: Monroe Fabricators
a. From the basic inventory equation,
Beginning Inventory + Transferred in
= Transferred out + Ending Inventory, so
Ending Materials Inventory, December 31,
= Beginning balance + Transferred in – Transferred out
= $7,800 +$48,300-$43,800…………………………………………. = $12,300
b. Total manufacturing costs = Cost of goods manufactured
– Beginning work-in-process + Ending work-in-process
= $163,350– $8,100+ $11,400………………………………………
(also can be found solving for Transferred in to Finished
Goods)

= $166,650

c. Total manufacturing costs = Direct materials + Direct labor
+ Manufacturing overhead, so,
Direct labor = Total manufacturing costs
– Direct materialsused – Manufacturing overhead,
= $166,650 – $43,800 – $41,400 ………………………………….. = $81,450
d. Sales revenue = Gross margin+ Cost of Goods Sold
= $147,750+ $168,150………………………………………………… = $315,900

 

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