Instant Download with all chapters and Answers
Sample Chapters
*you will get solution manuals in PDF in best viewable format after buy*
Chapter 2
Cost Concepts
Solutions to Questions
2-1 Cost behaviour refers to how a cost will
react or respond to changes in the level of
business activity.
2-2 No. A variable cost is a cost that varies,
in total, in direct proportion to changes in the
level of activity. A variable cost is constant per
unit of the activity level (e.g., number of beds
occupied). A fixed cost is fixed in total, but will
vary inversely on a per-unit basis with changes
in the level of activity.
2-3 When fixed costs are involved, the cost
per unit of activity will depend on the activity
volume (or level). For example, as production
increases, the cost per unit will fall because the
fixed cost is spread over more units. Conversely,
as production declines, the cost per unit will rise
since a constant fixed cost figure will be spread
over fewer units.
2-4 The cost of direct materials included in a
product is a variable cost; similarly, sales
commissions paid out on a per unit basis or as a
percentage of sales dollars is a variable cost.
On the other hand, costs such as building rent
and the salary of a general manager are fixed
costs.
2-5 Fixed costs in total do not vary with
volume within a relevant range. However, fixed
costs per unit of volume decrease as volume
increases and increases as volume decreases.
Therefore, an inverse relationship exists
between volume and fixed costs per unit of
volume.
2-6 Manufacturing overhead is an indirect
cost since these costs cannot be easily and
conveniently traced to individual products.
2-7 A differential cost is a cost that differs
between alternatives in a decision. An
opportunity cost is the potential benefit that is
given up when one alternative is selected over
another. A sunk cost is a cost that has already
been incurred and cannot be altered by any
decision taken now or in the future.
2-8 No; differential costs can be either
variable or fixed. For example, the alternatives
might consist of purchasing one computer
software program over another to simplify the
accounts receivable process. The difference in
the fixed costs of purchasing the two programs
would be a differential cost.
2-9 The three major elements of product
costs in a manufacturing company are direct
materials, direct labour, and manufacturing
overhead.
2-10
a. Direct materials: Direct materials are an
integral part of a finished product and can be
conveniently traced into it.
b. Indirect materials: Indirect materials are
generally small items of material such as glue
and nails. They may become an integral part of
a finished product but are traceable into the
product only at great cost or inconvenience.
Indirect materials are ordinarily classified as part
of manufacturing overhead.
c. Direct labour: Direct labour includes those
labour costs that can be easily traced to
particular products. Direct labour is also called
―touch labour.‖
d. Indirect labour: Indirect labour includes
the labour costs of workers who do not directly
work on products but provide a support
function. Examples of such labour include
janitors, supervisors, materials handlers, and
other factory workers that cannot be
conveniently traced directly to particular
products.
e. Manufacturing overhead: Manufacturing
overhead includes all manufacturing costs
except direct materials and direct labour.
2-11 PC = DM + DL
CC = DL + MOH
PC = DM + CC – MOH
2-12 A product cost is any cost incurred for
the purchase or the manufacture of goods. In
the case of manufactured goods, these costs
consist of direct materials, direct labour, and
manufacturing overhead. A period cost is a cost
that is taken directly to the income statement as
an expense in the period in which it is incurred.
Examples include selling (marketing) and
administrative expenses.
2-13 The income statement of a
manufacturing firm differs from the income
statement of a merchandising firm in the cost of
goods sold section. The merchandising firm sells
finished goods that it has purchased from a
supplier. These goods are listed as ―Purchases‖
in the cost of goods sold section. Since the
manufacturing firm produces its goods rather
than buying them from a supplier, it lists ―Cost
of Goods Manufactured‖ in place of ―Purchases.‖
Also, the manufacturing firm identifies its
inventory in this section as ―Finished Goods
Inventory,‖ rather than as ―Merchandise
Inventory.‖
2-14 The schedule of cost of goods
manufactured is used to list and organize the
manufacturing costs that have been incurred.
These costs are organized under the three major
headingsof direct materials, direct labour, and
manufacturing overhead. The total costs
incurred are adjusted for any change in the
Work in Process inventory to determine the cost
of goods manufactured (i.e., finished) during the
period.
The schedule of cost of goods
manufactured ties into the income statement
through the Cost of Goods Sold section. The
cost of goods manufactured is added to the
beginning Finished Goods inventory to
determine the goods available for sale. In effect,
the cost of goods manufactured takes the place
of the ―Purchases‖ account in a merchandising
firm.
2-15 A manufacturing firm has three
inventory accounts: Raw Materials, Work in
Process, and Finished Goods. The merchandising
firm generally identifies its inventory account
simply as Merchandise Inventory.
2-16 Since product costs follow units of
product into inventory, they are sometimes
called inventoriable costs. The flow is from
direct materials, direct labour, and
manufacturing overhead into Work in Process.
As goods are completed, their cost is removed
from Work in Process and transferred into
Finished Goods. As goods are sold, their cost is
removed from Finished Goods and transferred
into Cost of Goods Sold. Cost of Goods Sold is
an expense on the income statement.
2-17 Yes, costs such as salaries
anddepreciationcan end up as assets on the
balance sheet if these are manufacturing costs.
Manufacturing costs are inventoried until the
associated finished goods are sold. Thus, such
costs may be part of either Work in Process
inventory or Finished Goods inventory at the end
of a period if there are unsold units.
Solutions to Foundational 15
The Foundational 15 (LO1 – CC1; LO2 – CC2; LO3 – CC3; LO4 – CC4,
5, 6, 7)
1. Direct materials ……………………………………………………….$…. 6.00
Direct labour ………………………………………………………………3.50
Variable manufacturing overhead……………………………………. 1.50
Variable manufacturing cost per unit……………………………….. $11.00
Variable manufacturing cost per unit (a) ………………………….. $11.00
Number of units produced (b) ……………………………………….. 10,000
Total variable manufacturing cost (a) × (b) ………………………. $110,000
Fixed manufacturing overhead per unit (c)……………………….. $4.00
Number of units produced (d) ……………………………………….. 10,000
Total fixed manufacturing cost (c) × (d)…………………………… 40,000
Total product (manufacturing) cost …………………………………. $150,000
2. Sales commissions ………………………………………………………. $1.00
Variable administrative expense……………………………………… 0.50
Variable selling and administrative per unit……………………….. $1.50
Variable selling and admin. per unit (a)…………………………..$1.50 ..
Number of units sold (b)………………………………………………. 10,000
Total variable selling and admin. expense
(a) × (b)……………………………………………………………… $15,000
Fixed selling and administrative expense per unit
($3 fixed selling + $2 fixed admin.) (c) …………………………. $5.00
Number of units sold (d)………………………………………………. 10,000
Total fixed selling and administrative expense (c) ×
(d)………………………………………………………………………… 50,000
Total period (nonmanufacturing) cost………………………………. $65,000
3. Direct materials ……………………………………………………….$…. 6.00
Direct labour ………………………………………………………………3.50
Variable manufacturing overhead……………………………………. 1.50
Sales commissions ……………………………………………………….1.00
Variable administrative expense……………………………………… 0.50
Variable cost per unit sold …………………………………………….. $12.50
The Foundational 15 (continued)
4. Direct materials ……………………………………………………….$…. 6.00
Direct labour ………………………………………………………………3.50
Variable manufacturing overhead……………………………………. 1.50
Sales commissions ……………………………………………………….1.00
Variable administrative expense……………………………………… 0.50
Variable cost per unit sold …………………………………………….. $12.50
5. Variable cost per unit sold (a)………………………………………… $12.50
Number of units sold (b)………………………………………………. 8,000
Total variable costs (a) × (b)…………………………………………. $100,000
6. Variable cost per unit sold (a)………………………………………… $12.50
Number of units sold (b)………………………………………………. 12,500
Total variable costs (a) × (b)…………………………………………. $156,250
7. Total fixed manufacturing cost
(see requirement 1) (a)……………………………………………… $40,000
Number of units produced (b) ……………………………………….. 8,000
Average fixed manufacturing cost per unit
produced (a) ÷ (b) …………………………………………………… $5.00
8. Total fixed manufacturing cost
(see requirement 1) (a)……………………………………………… $40,000
Number of units produced (b) ……………………………………….. 12,500
Average fixed manufacturing cost per unit
produced (a) ÷ (b) …………………………………………………… $3.20
9. Total fixed manufacturing cost
(see requirement 1)………………………………………………….. $40,000
10. Total fixed manufacturing cost
(see requirement 1)………………………………………………….. $40,000
The Foundational 15 (continued)
11. Variable overhead per unit (a)……………………………………….. $1.50
Number of units produced (b) ……………………………………….. 8,000
Total variable overhead cost (a) × (b)……………………………… $12,000
Total fixed overhead (see requirement 1)…………………………. 40,000
Total manufacturing overhead cost …………………………………. $52,000
Total manufacturing overhead cost (a)……………………….. $52,000
Number of units produced (b) ………………………………….. 8,000
Manufacturing overhead per unit (a) × (b)………………….. $6.50
12. Variable overhead per unit (a)……………………………………….. $1.50
Number of units produced (b) ……………………………………….. 12,500
Total variable overhead cost (a) × (b)……………………………… $18,750
Total fixed overhead (see requirement 1)…………………………. 40,000
Total manufacturing overhead cost …………………………………. $58,750
Total manufacturing overhead cost (a)……………………….. $58,750
Number of units produced (b) ………………………………….. 12,500
Manufacturing overhead per unit (a) × (b)………………….. $4.70
13. Sales revenue (@$22.00 per unit)…………………………………… $220,000
Less: Cost of goods sold
(same as product costs in requirement 1) ……………………… 150,000
Gross margin……………………………………………………….$…….. 70,000
14. Direct materials per unit……………………………………………….. $6.00
Direct labour per unit…………………………………………………… 3.50
Direct manufacturing cost per unit (a) …………………………..$9.50 …
Number of units produced (b) ……………………………………….. 11,000
Total direct manufacturing cost (a) × (b) …………………………. $104,500
Variable overhead per unit (a) ………………………………….. $1.50
Number of units produced (b) ………………………………….. 11,000
Total variable overhead cost (a) × (b)………………………… $16,500
Total fixed overhead (see requirement 1) ……………………. 40,000
Total indirect manufacturing cost ………………………………. $56,500
The Foundational 15 (continued)
15. Direct materials per unit……………………………………………….. $6.00
Direct labour per unit…………………………………………………… 3.50
Variable manufacturing overhead per unit ………………………… 1.50
Incremental manufacturing cost per unit………………………….. $11.00
Solutions to Brief Exercises
Brief Exercise 2-1(LO3 CC3) (10 minutes)
The cost concept that best applies to Bill’s response is the concept of opportunity cost.
Bill’s response of ―no free lunch‖ suggests that the cost of the lunch is the time
foregone which he could have utilized in completing the report. For Bill, the
alternatives are time required to complete the financial performance report and time
required to attend the company lunch. If Bill attends the lunch he will have less time
available to finish the report and if he stays to finish the report he would miss the
company lunch.
Brief Exercise 2-2(LO1 CC1) (15 minutes)
Note to the instructor: A few of these costs may generate lively debate. For example,
some may argue that the cost of advertising a U2 rock concert is a variable cost since
the number of people who come to the rock concert depends on the amount of
advertising. However, one can argue that if the price is within reason, any U2 rock
concert in Vancouver will be sold out, and the function of advertising is simply to let
people know the event will be happening. Moreover, while advertising may affect the
number of people who ultimately buy tickets, the causation is in one direction. If more
people buy tickets, the advertising costs don’t go up.
Cost Behaviour
Variable Fixed
1. The costs of advertising a U2 rock concert in
Vancouver ………………………………………….. X
2. Depreciation on the Hard Rock Cafe building in Ottawa ……………… X
3. The electrical costs of running a roller coaster at the
West Edmonton Mall ………………………………………………………. X .
4. Property taxes on your local cinema………………………………………. X
5. The costs of synthetic materials used to make Reebok
running shoes………………………………………………………………… X
6. The costs of shipping Apple iPods to retail stores …………………….. X
7. The cost of leasing a CT-scan diagnostic machine at
the American Hospital in Paris……………………………………………. X
Brief Exercise 2-3(LO3 CC3) (15 minutes)
Item Differential
Cost
Opportunity
Cost
Sunk Cost
1. Cost of the old printing machine X
2. The salary of the head of the
Printing Department
3. The salary of the head of the
Finance Department
4. Rent on the space occupied by
the Printing department
5. The cost of maintaining the old
printer
X
6. Benefits from a new state-of-
the-art scanner
X
7. Cost of electricity to run the
printing machine
X
Note: The costs of the salaries of the heads of the Printing and the Finance
Departments and the rent on the space occupied by Printing are neither differential
costs, nor opportunity costs, nor sunk costs. These are costs that do not differ between
the alternatives and are therefore irrelevant in the decision, but they are not sunk costs
since they occur in the future. The opportunity cost of the foregone benefit from a new
state-of-the-art scanner is not a differential cost in the decision to replace the old
printer with a new printer, but if the decision were instead whether to acquire a scanner
or a printer, this opportunity cost would also be a differential cost.
Brief Exercise 2-4 (LO4 CC4, 5, 6) (15 minutes)
1. Monthly salary of the company’s accountant: Administrative cost.
2. The cost of a fan installed in a computer: Direct Materials cost.
3. Rental on equipment used to assemble computers: Manufacturing Overhead
4. The cost of advertising in the local community newspaper: Marketing and Selling
cost.
5. Monthly charge paid to an outside company for quality testing (20% of the
computers assembled are sent for testing): Manufacturing Overhead
6. The wages of employees who assemble computers from components: Direct
Labourcost.
7. The salary of the assembly shop’s supervisor: Manufacturing Overhead.
8. Sales commissions paid to the company’s salespeople: Marketing and Sellingcost.
9.Rent on the facility: Manufacturing Overhead.
Brief Exercise 2-5(LO4 CC7) (15 minutes)
Product
(Inventoriable)
Cost
Period
(Non-inventoriable)
Cost
1. Depreciation on salespersons’ cars…………………………………………. X
2. Rent on equipment used in the factory………………………….. X ………..
3. Lubricants used for maintenance of factory
equipment……………………………………………………….X……………..
4. Salaries of finished goods warehouse
personnel………………………………………………………………………. X
5. Soap and paper towels used by factory
workers at the end of a shift………………………………………………. X
6. Salessupervisors’ salaries …………………………………………………….. X
7. Property taxes on the factory building………………………….. X …………
8. Materials used in boxing units of finished
product for shipment overseas (units are
not normally boxed)…………………………………………………………. X
9. Advertising outlays……………………………………………………………… X
10. Workers’ compensation insurance on
factory employees………………………………………………………. X ……
11. Depreciation on chairs and tables in the
administrative boardroom………………………………………………….. X
12. The salary of the production quality
supervisor for the company ……………………………………………….. X
13. Depreciation on a Learjet used by the
company’s executives……………………………………………………….. X
14. Rent on rooms at a Florida resort for
manufacturing conference…………………………………………………. X
15. Attractively designed box for packaging
breakfast cereal………………………………………………………. X ………
Brief Exercise 2-6(LO5 CC9, 10; LO6 CC 11) (15 minutes)
Bims
Income Statement
Sales ………………………………………………………………………………. $3,000,000
Cost of goods sold:
Beginning merchandise inventory………………………….. $ ……………. 250,000
Add: Purchases………………………………………………………. 950,000 ……….
Goods available for sale…………………………………………………….. 1,200,000
Deduct: Ending merchandise inventory………………………….. 100,000 …….. 1,100,000
Gross margin …………………………………………………………………….. 1,900,000
Less operating expenses:
Selling expense………………………………………………………. 315,000 ……….
Administrative expense……………………………………………………… 385,000 700,000
Net income……………………………………………………………………….. $1,200,000
Brief Exercise 2-7(LO6 CC11, 12) (15 minutes)
Lompac Products
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory ………………………….. $170,000 …………..
Add: Purchases of raw materials …………………………………………. 870,000
Raw materials available for use………………………….. $1,04 ………………. 0,000
Deduct: Ending raw materials inventory ………………………….. 150,000……
Raw materials used in production ……………………………………….. $ 890,000
Direct labour……………………………………………………………………… 245,000
Manufacturing overhead………………………………………………………. 560,000
Total manufacturing costs ……………………………………………………. $1,695,000
Add: Beginning work in process inventory ……………………………….. 210,000
$1,905,000
Deduct: Ending work in process inventory ……………………………….. 340,000
Cost of goods manufactured…………………………………………………. $ 1,565,000
Solutions to Exercises
Exercise 2-1(LO1 CC1; LO3 CC3; LO4 CC4, 5, 6, 7) (45 minutes)
Product Cost Period
(Selling
and
Admin.)
Name of the Cost Cost
Variable
Cost
Fixed
Cost
Direct
Materials
Direct
Labour
Mfg.
Overhead
Opportunity
Cost
Sunk
Cost
Rental revenue foregone,
$50,000 per year …………………………………………………………….. X
Direct materials cost, $60 per
unit………………………………………………………. X ……………………… X
Rental cost of warehouse,
$1,000 per month ………………………………………………………. X …… X
Rental cost of equipment,
$15,000 per month ………………………………………………………. X …. X
Direct labour cost, $80 per unit………………………….. X …………………. X
Depreciation of the annex
space, $5,000 per year……………………………………………………… X X X
Advertising cost, $150,000 per
year ………………………………………………………. X …………………….. X
Supervisor’s salary, $3,500 per
month ………………………………………………………. X ………………….. X
Electricity for machines, $1.80
per unit ………………………………………………………. X ………………… X
Shipping cost, $12 per unit………………………….. X ………………………. X
Return earned on investments,
$5,000 per year ………………………………………………………………. X
Exercise 2-2(LO1 CC1; LO3 CC3; LO4 CC7) (15 minutes)
1. Product; variable 6. Period; variable
2. Conversion 7. Product; period; fixed
3. Opportunity 8. Product
4. Prime 9. Period
5. Sunk 10. Fixed; product; conversion
Exercise 2-3(LO1 CC 1; LO2 CC2) (15 minutes)
Cost Behaviour
To Quantity of Baked
Goods Produced
Cost Item Variable Fixed Direct Indirect
1. Account manager’s salary…………………………………………………….. X X
2. Rent on building ………………………………………………………. X ……….. X
3. Flour used in the making of
croissants………………………………………………………. X ……………… X
4. Bakery manager’s salary ……………………………………………………… X X
5. Wages of bakers………………………….. X ……………………………………. X
6. Depreciation of commercial
ovens used in baking ………………………………………………………. X . X
7. Insurance on the building…………………………………………………….. X X
Exercise 2-4(LO1 CC1; LO4 CC7) (30 minutes)
Selling and
Admini-
strative
Cost
Product
Cost
Cost Behaviour
Cost Item Variable Fixed
1. Advertising by a dental office………………………………………………… X X
2. Shipping canned apples from a
Del Monte plant to customers ………………………….. X ………………… X
3. Apples processed and canned by
Del Monte Corporation ………………………….. X …………………………. X
4. Insurance on IBM’s corporate
headquarters ………………………………………………………. X …………. X
5. Commissions paid to Future
Shop salespersons ………………………….. X ………………………….. X …..
6. Hamburger buns in a
McDonald’s outlet ………………………….. X ……………………………….. X
7. Depreciation of factory
lunchroom facilities at a
General Electric plant ………………………………………………………. X . X
8. Insurance on a Bausch & Lomb
factory producing contact
lenses ……………………………………………………….X………………….. X
9. Salary of a supervisor
overseeing production of
circuit boards at Hewlett-
Packard………………………………………………………. X ………………… X
10. Steering wheels installed in
BMWs ………………………………………………………. X ………………….. X
Exercise 2-5(LO5 CC10; LO6 CC11, 12) (45 minutes)
1.
Mason Company
Schedule of Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning……………………………………… $18,000
Add: Purchases of raw materials …………………………………………. 120,000
Raw materials available for use…………………………………………… 138,000
Deduct: Raw materials inventory, ending………………………….. 1….. 2,500
Raw materials used in production ……………………………………….. $125,500
Direct labour……………………………………………………………………… 70,000
Manufacturing overhead:
Indirect labour………………………………………………………………… 45,000
Maintenance, factory equipment …………………………………………. 6,000
Insurance, factory equipment …………………………………………….. 1,900
Rent, factory facilities………………………………………………………. 24,000 .
Supplies ………………………………………………………………………… 3,600
Depreciation, factory equipment …………………………………………. 17,000
Total overhead costs …………………………………………………………… 97,500
Total manufacturing costs ……………………………………………………. 293,000
Add: Work in process, beginning……………………………………………. 10,300
303,300
Deduct: Work in process, ending …………………………………………… 15,150
Cost of goods manufactured…………………………………………………. $288,150
2. The cost of goods sold section of Mason Company’s income statement:
Finished goods inventory, beginning ………………………………………. $ 23,000
Add: Cost of goods manufactured ………………………………………….. 288,150
Goods available for sale……………………………………………………….. 311,150
Deduct: Finished goods inventory, ending ……………………………….. 18,100
Cost of goods sold ……………………………………………………………… $293,050
Exercise 2-6(LO4 CC8) (30 minutes)
1.a)Bolts of polyester purchased ………………………………………………… 10,000
Bolts drawn from inventory………………………………………………….. 9,200
Bolts remaining in inventory…………………………………………………. 800
Cost per bolt…………………………………………………………………….. × $80
Cost in Raw Materials Inventory at June 30 …………………………….. $ 64,000
b)Bolts of polyester used in production (9,200 – 200) 9,000
Linens completed and transferred to Finished Goods (90% ×
9,000)………………………………………………………………………….. 8,100
Linens still in Work in Process at June 30………………………………… 900
Cost per bolts …………………………………………………………………… × $80
Cost in Work in Process Inventory at June 30 ………………………….. $ 72,000
c)Linens completed and transferred to Finished Goods (above)………. 8,100
Linens sold during the month (70% × 8,100) ………………………….. 5,670
Linens still in Finished Goods at June 30…………………………………. 2,430
Cost per bolts …………………………………………………………………… × $80
Cost in Finished Goods Inventory at June 30……………………………. $194,400
d)Linens sold during the month (above) ……………………………………. 5,670
Cost per bolts …………………………………………………………………… × $80
Cost in Cost of Goods Sold at April 30…………………………………….. $453,600
e)Bolts used for customer samples …………………………………………… 200
Cost per bolts …………………………………………………………………… × $80
Cost in Selling Expense at June 30 ………………………………………… $ 16,000
2. a) Raw Materials Inventory—balance sheet
b) Work in Process Inventory—balance sheet
c) Finished Goods Inventory—balance sheet
d) Cost of Goods Sold—income statement
e) Selling Expense—income statement
EXERCISE 2-7 (LO6 CC12) (15 minutes)
Direct material used = $ 62,000
Direct labour costs = $ 15,000
Manufacturing overhead = $ 6,500
Total Manufacturing costs= $ 83,500
Opening inventory of work in process = $ 3,000
Less:Ending inventory of work in process = $ 12,000
Cost of goods manufactured = $ 74,500
EXERCISE 2-8 (LO5 CC10; LO6 CC11, 12) (7 minutes)
Cost of goods sold = Sales – Gross margin
= $1,700,000 – (40% × $1,700,000)
= $1,700,000 – $680,000
= $1,020,000
Cost of goods manufactured = Cost of goods sold + Ending inventory of finished
goods – Opening inventory of finished goods
= $1,020,000 + $85,000 – $130,000 = $975,000
