2-1 A cost object is anything for which a separate measurement of costs is desired.
Examples include a product, a service, a project, a customer, a brand category,
an activity, and a department.
2-2 Direct costs of a
cost object are related to the particular cost object and can be traced to that
cost object in an economically feasible (cost-effective) way.
Indirect costs of a cost object are related to the
particular cost object but cannot be traced to that cost object in an
economically feasible (cost-effective) way.
Cost assignment is a general term that encompasses the
assignment of both direct costs and indirect costs to a cost object. Direct
costs are traced to a cost object
while indirect costs are allocated to
a cost object.
2-3 Managers believe
that costs that are traced to a particular cost object are more accurately
assigned to that cost object than are allocated costs. When costs are
allocated, managers are less certain whether the cost allocation base
accurately measures the resources demanded by a cost object. Managers prefer to
use more accurate costs in their decisions.
2-4
Factors affecting the classification of a cost as
direct or indirect include
·
the materiality of the cost in question,
·
available information-gathering technology,
·
design of operations, and
·
contractual arrangements.
2-5
A variable
cost changes in total in proportion to changes in the related level of
total activity or volume. An example is a sales commission that is a percentage
of each sales revenue dollar.
A fixed cost remains unchanged in total for a given time period,
despite wide changes in the related level of total activity or volume. An
example is the leasing cost of a machine that is unchanged for a given time
period (such as a year).
2-6 A cost driver is a variable, such as the
level of activity or volume, which causally affects total costs over a given
time span. A change in the cost driver results in a change in the level of
total costs. For example, the number of vehicles assembled is a driver of the
costs of steering wheels on a motor-vehicle assembly line.
2-7 The relevant range
is the band of normal activity level or volume in which there is a specific
relationship between the level of activity or volume and the cost in question.
Costs are described as variable or fixed with respect to a particular relevant
range.
2-8 A unit cost is
computed by dividing some amount of total costs (the numerator) by the related
number of units (the denominator). In many cases, the numerator will include a
fixed cost that will not change despite changes in the denominator. It is
erroneous in those cases to multiply the unit cost by activity or volume change
to predict changes in total costs at different activity or volume levels.
2-9 Manufacturing-sector
companies purchase materials and components and convert them into various
finished goods, for example automotive and textile companies.
Merchandising-sector
companies purchase and then sell tangible products without changing their basic
form, for example retailing or distribution.
Service-sector
companies provide services or intangible products to their customers, for
example, legal advice or audits.
2-10
Manufacturing companies typically have one or more
of the following three types of inventory:
1.
Direct materials
inventory. Direct materials in stock and awaiting use in the manufacturing
process.
2.
Work-in-process
inventory. Goods partially worked on but not yet completed. Also called work in progress.
3.
Finished goods
inventory. Goods completed but not yet sold.
2-11
Inventoriable
costs are all costs of a product that are considered as assets in the
balance sheet when they are incurred and that become cost of goods sold when
the product is sold. These costs are included in work-in-process and finished
goods inventory (they are “inventoried”) to accumulate the costs of creating
these assets.
Period
costs are all costs in the income statement other than cost of goods sold.
These costs are treated as expenses of the accounting period in which they are
incurred because they are expected not to benefit future periods (because there
is not sufficient evidence to conclude that such benefit exists). Expensing
these costs immediately best matches expenses to revenues.
2-12 No. Service sector companies
have no inventories and, hence, no inventoriable costs.
2-13 Direct material costs are the acquisition costs
of all materials that eventually become part of the cost object (work in
process and then finished goods), and that can be traced to the cost object in
an economically feasible way.
Direct
manufacturing labor costs include the compensation of all manufacturing labor
that can be traced to the cost object (work in process and then finished goods)
in an economically feasible way.
Manufacturing
overhead costs are all manufacturing costs that are related to the cost
object (work in process and then finished goods), but that cannot be traced to
that cost object in an economically feasible way.
Prime
costs are all direct manufacturing costs (direct material and direct
manufacturing labor).
Conversion
costs are all manufacturing costs other than direct material costs.
2-14 Overtime premium is the wage rate paid to
workers (for both direct labor and indirect labor) in excess of their
straight-time wage rates.
Idle
time is a subclassification of indirect labor that represents wages paid
for unproductive time caused by lack of orders, machine breakdowns, material
shortages, poor scheduling, and the like.
2-15 A
product cost is the sum of the costs assigned to a product for a specific
purpose. Purposes for computing a product cost include
·
pricing and product mix decisions,
·
contracting with government agencies, and
·
preparing financial statements for external
reporting under generally accepted accounting principles.
2-16 (15 min.) Computing and interpreting manufacturing
unit costs.
1. (in
millions)
Supreme Deluxe Regular Total
Direct material cost $ 84.00 $
54.00 $
62.00 $200.00
Direct manuf. labor costs
14.00 28.00 8.00 50.00
Indirect manuf. costs 42.00 84.00 24.00 150.00
Total
manuf. costs $140.00 $166.00 $
94.00 $400.00
Fixed
costs allocated at a rate
of
$20M
$50M (direct mfg.
$50M (direct mfg.
labor)
equal to $0.40 per
dir.
manuf. labor dollar
(0.40
$14; 28; 8) 5.60
11.20 3.20 20.00
$14; 28; 8) 5.60
11.20 3.20 20.00
Variable
costs $134.40 $154.80 $ 90.80 $380.00
Units
produced (millions) 80 120 100
Cost per unit (Total manuf.
costs ÷ units produced)
$1.7500 $1.3833 $0.9400
Variable manuf. cost per unit
(Variable manuf. costs
Units produced) $1.6800 $1.2900 $0.9080
(in millions)
Supreme Deluxe Regular Total
2. Based
on total manuf. cost
per
unit ($1.75 120;
120;
$1.3833
160; $0.94 180) $210.00 $221.33 $169.20 $600.53
160; $0.94 180) $210.00 $221.33 $169.20 $600.53
Correct
total manuf. costs based
on
variable manuf. costs plus
fixed
costs equal
Variable
costs ($1.68 120; $201.60 $206.40 $163.44 $571.44
120; $201.60 $206.40 $163.44 $571.44
$1.29
160; $0.908 180)
160; $0.908 180)
Fixed
costs
20.00
Total
costs $591.44
The total manufacturing
cost per unit in requirement 1 includes $20 million of indirect manufacturing
costs that are fixed irrespective of changes in the volume of output per month,
while the remaining variable indirect manufacturing costs change with the
production volume. Given the unit volume changes for August 2007, the use of total
manufacturing cost per unit from the past month at a different unit volume
level (both in aggregate and at the individual product level) will yield
incorrect estimates of total costs of $600.53 million in August 2007 relative
to the correct total manufacturing costs of $591.44 million calculated using
variable manufacturing cost per unit times units produced plus the fixed costs
of $20 million.
2-17 (15 min.) Direct and indirect costs, effect of
changing the classification of a cost item (continuation of 2-16).
1.
MOP’s managers might prefer
that energy costs be directly traced to various products because in general,
the greater the proportion of economically traceable costs, the more accurate
will be the estimated cost of each cost object and hence the better the
managerial decisions (like product pricing) based on those cost estimates.
Since energy costs were substantial ($90 million out of $150 million of
manufacturing overhead), tracing them directly to cost objects would significantly
increase the accuracy of the cost estimates.
2.
(in
millions)
Supreme Deluxe Regular
Direct
materials costs $ 84.0 $ 54.0
$62.0
Direct
manufacturing labor costs 14.0 28.0 8.0
Direct
energy costs 39.8 40.7 9.5
Other
manufacturing overhead costs 16.8 33.6
9.6
Total
manufacturing costs $154.6 $156.3
$89.1
Units
produced (millions)
80 120 100
Cost
per unit $ 1.93 $ 1.30 $0.89
3.
Cost per unit (before
analysis) $1.75 $
1.38 $0.94
Cost per unit (after analysis) $1.93 $
1.30 $0.89
Effect of analysis on
cost per unit higher lower lower
Before Shore’s analysis, the Deluxe and Regular product lines were
being overcosted and the Supreme line was being undercosted. Shore’s analysis
resulted in $60 million of the $150 million of “overhead costs” becoming
directly traceable to products. It showed that the Supreme line consumes the
most energy relative to the volume of production. With more accurate direct
costs, and therefore a more accurate allocation of the overheads of $60
million, Supreme’s cost per unit is more than in the old cost system, while the
cost per unit of Deluxe and Regular is less than in the old cost system.
2-18 (15–20 min.) Classification
of costs, service sector.
Cost object: Each individual focus group
Cost variability: With respect to the
number of focus groups
There may be some
debate over classifications of individual items, especially with regard to cost
variability.
Cost Item
|
D or I |
V or F
|
A
|
D
|
V
|
B
|
I
|
F
|
C
|
I
|
Va
|
D
|
I
|
F
|
E
|
D
|
V
|
F
|
I
|
F
|
G
|
D
|
V
|
H
|
I
|
Vb
|
aSome students will note that phone call costs are variable when each
call has a separate charge. It may be a fixed cost if Consumer Focus has a flat
monthly charge for a line, irrespective of the amount of usage.
bGasoline costs are likely to vary with the number of focus groups.
However, vehicles likely serve multiple purposes, and detailed records may be
required to examine how costs vary with changes in one of the many purposes
served.
2-19 (15–20 min.) Classification
of costs, merchandising sector.
Cost object: Videos sold in video section of store
There
may be some debate over classifications of individual items, especially with regard
to cost variability.
Cost Item
|
D or I |
V or F
|
A
|
D
|
F
|
B
|
I
|
F
|
C
|
D
|
V
|
D
|
D
|
F
|
E
|
I
|
F
|
F
|
I
|
V
|
G
|
I
|
F
|
H
|
D
|
V
|
2-20 (15–20 min.) Classification
of costs, manufacturing sector.
Cost object: Type of car assembled (Corolla or Geo Prism)
Cost variability: With respect to changes in the number of cars
assembled
There
may be some debate over classifications of individual items, especially with regard
to cost variability.
Cost Item
|
D or I
|
V or F
|
A
|
D
|
V
|
B
|
I
|
F
|
C
|
D
|
F
|
D
|
D
|
F
|
E
|
D
|
V
|
F
|
I
|
V
|
G
|
D
|
V
|
H
|
I
|
F
|
2-21 (20 min.) Variable costs, fixed costs, total costs.
1.
Minutes/month
|
0
|
50
|
100
|
150
|
200
|
250
|
300
|
350
|
400
|
450
|
480
|
500
|
550
|
600
|
650
|
Plan A ($/month)
|
0
|
5
|
10
|
15
|
20
|
25
|
30
|
35
|
40
|
45
|
48.00
|
50
|
55
|
60
|
65
|
Plan B ($/month)
|
18
|
18
|
18
|
18
|
18
|
18
|
18
|
21
|
24
|
27
|
28.80
|
30
|
33
|
36
|
39
|
Plan C ($/month)
|
24
|
24
|
24
|
24
|
24
|
24
|
24
|
24
|
24
|
24
|
24.00
|
25
|
27.5
|
30
|
32.5
|
2. In
each region, Compo chooses the plan that has the lowest cost. From the graph
(or from calculations), we can see that if Compo expects to use 0–180 minutes
of long-distance each month, she should buy Plan A; for 180–400 minutes, Plan B;
and for over 400 minutes, Plan C. If Compo plans to make 100 minutes of
long-distance calls each month, she should choose Plan A; for 200 minutes,
choose Plan B; for 500 minutes, choose Plan C.
2-22 (15–20 min.) Variable
costs and fixed costs.
1. Variable cost per ton
of beach sand mined
Subcontractor $ 80 per ton
Government tax 50 per ton
Total $130 per ton
Fixed costs per month
0 to 100 tons of capacity per day = $150,000
101 to 200 tons of capacity per
day = $300,000
201 to 300 tons of capacity per
day = $450,000
2.
The concept of relevant
range is potentially relevant for both graphs. However, the question does not
place restrictions on the unit variable costs. The relevant range for the total
fixed costs is from 0 to 100 tons; 101 to 200 tons; 201 to 300 tons, and so on.
Within these ranges, the total fixed costs do not change in total.
3.
Tons Mined
per Day
|
Tons Mined
per Month
|
Fixed Unit
Cost per Ton
|
Variable Unit
Cost per Ton
|
Total Unit
Cost per Ton
|
(1)
|
(2) = (1) × 25
|
(3) = FC ÷ (2)
|
(4)
|
(5) = (3) + (4)
|
(a)
180
|
4,500
|
$300,000
÷ 4,500 = $66.67
|
$130
|
$196.67
|
(b)
220
|
5,500
|
$450,000
÷ 5,500 = $81.82
|
$130
|
$211.82
|
The unit cost for 220 tons mined per day is $211.82, while for 180
tons it is only $196.67. This difference is caused by the fixed cost increment
from 101 to 200 tons being spread over an increment of 80 tons, while the fixed
cost increment from 201 to 300 tons is spread over an increment of only 20
tons.
2-23 (15
min) Cost drivers and the value chain.
1.
Business Function
|
Representative Cost Driver
|
Production
|
·
Hours the Tylenol packaging line is in operation
|
Research and development
|
·
Number of patents filed with U.S. Patent office
|
Marketing
|
·
Minutes of TV advertising time on “60 Minutes”
|
Distribution
|
·
Number of packages shipped
|
Design of
products/processes
|
·
Hours spent designing tamper-proof bottles
|
Customer service
|
·
Number of calls to toll-free customer phone line
|
2.
Business Function
|
Representative Cost Driver
|
Research and development |
• Hours of laboratory work
• Number of new drugs in
development
|
Design of products/processes
|
• Number of focus groups on alternative
package designs
• Hours of process engineering work
|
Production
|
• Number of units packaged
• Number of tablets
manufactured
|
Marketing
|
• Number of promotion packages
mailed
• Number of sales personnel
|
Distribution
|
• Weight of packages shipped
• Number of supermarkets on
delivery route
|
Customer
service
|
• Number of units of a product
recalled
• Number of personnel on toll-free customer
phone lines
|
2-24 (10–15 min.) Cost
drivers and functions.
1.
Function |
Representative Cost Driver |
1. Accounting Number of
transactions processed
2. Personnel Number of
new hires
3. Data Processing Hours of computer processing unit (CPU)
4. Research and
Development Number of research
scientists
5. Purchasing Number of
purchase orders
6. Billing Number
of invoices sent
2.
Function |
Representative Cost Driver |
1. Accounting Hours of
technical work
2. Personnel Number of
employees
3. Data Processing Number of computer
transactions
4. Research and Development Number of new products being developed
5. Purchasing Number
of different types of materials purchased
6. Billing Number
of credit sales transactions
2-25 (20 min.) Total
costs and unit costs
1.
Number
of attendees 0 100 200 300 400 500 600
Variable
cost per person
($10 caterer charge –
$5 student door fee) $5
$5 $5 $5 $5 $5 $5
Fixed
Costs $1,500 $1,500 $1,500 $1,500 $1,500 $1,500 $1,500
Variable
costs (number of
attendees x variable cost per
person) 0 500
1,000 1,500 2,000 2,500 3,000
Total
costs (fixed + variable) $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500
|
2.
Number of
attendees
|
0
|
100
|
200
|
300
|
400
|
500
|
600
|
Total costs
(fixed +
variable)
|
$1,500
|
$2,000
|
$2,500
|
$3,000
|
$3,500
|
$4,000
|
$4,500
|
Costs per
attendee (total costs
number attendees) |
$20.00
|
$12.50
|
$10.00
|
$ 8.75
|
$ 8.00
|
$ 7.50
|
As shown in the
table above, for 100 attendees the total cost will be $2,000 and the cost per
attendee will be $20.
3. As shown in the table in requirement 2, for 500 attendees the
total cost will be $4,000 and the cost per attendee will be $8.
4. Using
the calculations shown in the table in requirement 2, we can construct the
cost-per-attendee graph shown below:
As president of
the student association requesting a grant for the party, you should not use
the per unit calculations to make your case. The person making the grant may
assume an attendance of 500 students and use a low number like $8 per attendee
to calculate the size of your grant. Instead, you should emphasize the
fixed cost of $1,500 that you will incur even if no students or very few
students attend the party, and try to get a grant to cover as much of the fixed
costs as possible as well as a variable portion to cover as much of the $5
variable cost to the student association for each person attending the party.
2-26 (15 min.) Total
costs and unit costs.
1.
(a) $100,000 ¸ 2,000 =
$50.00 per package
(b) $100,000 ¸ 6,000 =
$16.67 per package
(c) $100,000 ¸ 10,000 = $10.00 per package
(d)[$100,000 + (10,000 × $8)] ÷ 20,000 =
$180,000 ¸ 20,000 = $9.00 per package
The unit cost to ECG decreases on a per-unit base due to the first $100,000 payment being a fixed cost. The $8 amount per package beyond 10,000 units is a variable cost.
The cost function
is
|
|
2-27 (20–30 min.) Inventoriable
costs versus period costs.
1. Manufacturing-sector companies purchase materials and
components and convert them into different finished goods.
Merchandising-sector
companies
purchase and then sell tangible products without changing their basic form.
Service-sector companies provide services or
intangible products to their customers—for example, legal advice or
audits.
Only
manufacturing and merchandising companies have inventories of goods for sale.
2. Inventoriable
costs
are all costs of a product that are regarded as an asset when they are incurred
and then become cost of goods sold when the product is sold. These costs for a
manufacturing company are included in work-in-process and finished goods
inventory (they are “inventoried”) to build up the costs of creating these
assets.
Period
costs
are all costs in the income statement other than cost of goods sold. These
costs are treated as expenses of the period in which they are incurred because
they are presumed not to benefit future periods (or because there is not
sufficient evidence to conclude that such benefit exists). Expensing these
costs immediately best matches expenses to revenues.
3. (a) Mineral water purchased for resale by
Safeway—inventoriable cost of a merchandising company. It becomes part of cost
of goods sold when the mineral water is sold.
(b)
Electricity
used at GE assembly plant—inventoriable cost of a manufacturing company. It is
part of the manufacturing overhead that is included in the manufacturing cost
of a refrigerator finished good.
(c)
Depreciation
on Google’s computer equipment—period cost of a service company. Google has no
inventory of goods for sale and, hence, no inventoriable cost.
(d)
Electricity
for Safeway’s store aisles—period cost of a merchandising company. It is a cost that benefits the current period
and it is not traceable to goods purchased for resale.
(e)
Depreciation
on GE’s assembly testing equipment—inventoriable cost of a manufacturing
company. It is part of the manufacturing overhead that is included in the
manufacturing cost of a refrigerator finished good.
(f)
Salaries
of Safeway’s marketing personnel—period cost of a merchandising company. It is
a cost that is not traceable to goods purchased for resale. It is presumed not
to benefit future periods (or at least not to have sufficiently reliable
evidence to estimate such future benefits).
(g)
Bottled
water consumed by Google’s engineers—period cost of a service company. Google has
no inventory of goods for sale and, hence, no inventoriable cost.
(h)
Salaries
of Google’s marketing personnel—period cost of a service company. Google has no
inventory of goods for sale and, hence, no inventoriable cost.
2-28 (20 min.) Flow of Inventoriable Costs.
(All numbers below are in millions).
1.
Direct materials inventory 8/1/2007
$
90
Direct materials purchased 360
Direct materials available for production 450
Direct materials used 375
Direct materials inventory 8/31/2007 $ 75
2.
Total manufacturing overhead costs
$ 480
Subtract: Variable manufacturing overhead costs (250)
Fixed manufacturing overhead costs
$ 230
3.
Total manufacturing costs $ 1,600
Subtract: Direct materials used (from requirement 1) (375)
Total manufacturing overhead costs
(480)
Direct manufacturing labor costs
$
745
4.
Work-in-process inventory 8/1/2007
$ 200
Total manufacturing costs 1,600
Work-in-process available for production 1,800
Subtract: Cost of goods manufactured (moved into FG) (1,650)
Work-in-process inventory 8/31/2007 $ 150
5.
Finished goods inventory 8/1/2007
$ 125
Cost of goods manufactured (moved from WIP) 1,650
Finished goods available for sale in August
$ 1,775
6.
Finished goods available for sale in August (from
requirement 5) $ 1,775
Subtract: Cost of goods sold (1,700)
Finished goods inventory 8/31/2007
$
75
2-29 (20
min.) Computing
cost of goods purchased and cost of goods sold.
(a) Marvin Department
Store
Schedule of Cost of Goods Purchased
For the Year Ended December 31, 2007
(in thousands)
Purchases $155,000
Add
transportation-in 7,000
162,000
Deduct:
Purchase return
and allowances $4,000
Purchase
discounts 6,000 10,000
Cost of goods
purchased $152,000
(b) Marvin Department
Store
Schedule
of Cost of Goods Sold
For
the Year Ended December 31,
2007
(in
thousands)
Beginning
merchandise inventory 1/1/2007 $ 27,000
Cost of goods purchased
(above) 152,000
Cost of goods available for
sale 179,000
Ending merchandise inventory
12/31/2007 34,000
Cost of goods sold $145,000
2-30 (30–40 min.) Cost
of goods manufactured.
Canseco
Company
Schedule
of Cost of Goods Manufactured
Year
Ended December 31, 2007
(in
thousands)
Direct materials:
Beginning inventory,
January 1, 2007 $ 22,000
Purchases of
direct materials 75,000
Cost of
direct materials available for use 97,000
Ending inventory,
December 31, 2007 26,000
Direct materials used $ 71,000
Direct manufacturing labor 25,000
Indirect manufacturing costs:
Indirect
manufacturing labor 15,000
Plant insurance 9,000
Depreciation—plant
building & equipment 11,000
Repairs and
maintenance—plant 4,000
Total indirect
manufacturing costs 39,000
Manufacturing costs incurred during 2007 135,000
Add beginning work-in-process inventory, January 1, 2007 21,000
Total manufacturing costs to account for 156,000
Deduct ending work-in-process inventory, December 31, 2007
20,000
Cost of goods manufactured (to Income
Statement) $136,000
Canseco
Company
Income
Statement
Year
Ended December 31, 2007
(in
thousands)
Revenues $300,000
Cost of goods sold:
Beginning
finished goods, January 1,
2007 $
18,000
Cost of
goods manufactured
136,000
Cost of
goods available for sale 154,000
Ending
finished goods, December
31, 2007 23,000
Cost of
goods sold 131,000
Gross margin 169,000
Operating costs:
Marketing,
distribution, and customer-service costs 93,000
General and
administrative costs 29,000
Total
operating costs 122,000
Operating income
$ 47,000
2-31 (25–30 min.) Income
statement and schedule of cost of goods manufactured.
Howell
Corporation
Income
Statement for the Year Ended December
31, 2007
(in
millions)
Revenues $950
Cost of goods sold:
Beginning
finished goods, Jan. 1, 2007 $ 70
Cost
of goods manufactured (below) 645
Cost
of goods available for sale 715
Ending
finished goods, Dec. 31,
2007 55 660
Gross margin
290
Marketing,
distribution, and customer-service costs 240
Operating income $ 50
Howell
Corporation
Schedule
of Cost of Goods Manufactured
for
the Year Ended December 31,
2007
(in
millions)
Direct materials
costs:
Beginning
inventory, Jan. 1, 2007 $ 15
Purchases
of direct materials 325
Cost
of direct materials available for use 340
Ending
inventory, Dec. 31, 2007 20
Direct materials used $320
Direct manufacturing
labor costs 100
Indirect manufacturing
costs:
Indirect
manufacturing labor 60
Plant
supplies used 10
Plant
utilities 30
Depreciation––plant,
building, and equipment 80
Plant
supervisory salaries 5
Miscellaneous plant overhead 35 220
Manufacturing costs
incurred during 2007 640
Add beginning
work-in-process inventory, Jan.
1, 2007 10
Total manufacturing
costs to account for 650
Deduct ending
work-in-process, Dec. 31,
2007 5
Cost of goods manufactured $645
2-32 (15–20 min.) Interpretation of
statements (continuation of 2-31).
1. The schedule in 2-31 can become a
Schedule of Cost of Goods Manufactured and Sold simply by including the
beginning and ending finished goods inventory figures in the supporting
schedule, rather than directly in the body of the income statement. Note that
the term cost of goods manufactured
refers to the cost of goods brought to completion (finished) during the
accounting period, whether they were started before or during the current
accounting period. Some of the
manufacturing costs incurred are held back as costs of the ending work in
process; similarly, the costs of the beginning work in process inventory become
a part of the cost of goods manufactured for 2007.
2. The sales manager’s
salary would be charged as a marketing cost as incurred by both manufacturing
and merchandising companies. It is basically an operating cost that appears
below the gross margin line on an income statement. In contrast, an assembler’s
wages would be assigned to the products worked on. Thus, the wages cost would
be charged to Work in process and would not be expensed until the product is
transferred through Finished Goods Inventory to Cost of Goods Sold as the
product is sold.
3. The direct-indirect
distinction can be resolved only with respect to a particular cost object. For example, in defense contracting, the cost
object may be defined as a contract. Then, a plant supervisor working only on
that contract will have his or her salary charged directly and wholly to that
single contract.
4. Direct materials used =
$320,000,000 ÷ 1,000,000 units = $320 per unit
Depreciation = $ 80,000,000 ÷ 1,000,000 units = $ 80 per unit
5. Direct materials
unit cost would be unchanged at $320 per unit. Depreciation cost per unit would
be $80,000,000 ÷ 1,200,000 = $66.67 per unit. Total direct materials costs
would rise by 20% to $384,000,000 ($320 per unit × 1,200,000 units), whereas
total depreciation would be unaffected at $80,000,000.
6. Unit costs are averages, and they must be
interpreted with caution. The $320 direct materials unit cost is valid for
predicting total costs because direct materials is a variable cost; total
direct materials costs indeed change as output levels change. However, fixed
costs like depreciation must be interpreted quite differently from variable
costs. A common error in cost analysis is to regard all unit costs as one—as if all the total costs to which they are related are variable
costs. Changes in output levels (the
denominator) will affect total variable
costs, but not total fixed costs.
Graphs of the two costs may clarify this point; it is safer to think in terms
of total costs rather than in terms of unit costs.
2-33 (25–30 min.) Income
statement and schedule of cost of goods manufactured.
Chan
Corporation
Income
Statement
for
the Year Ended December 31,
2007
(in
millions)
Revenues $350
Cost of goods sold:
Beginning
finished goods, Jan. 1, 2007 $ 40
Cost
of goods manufactured (below) 204
Cost
of goods available for sale 244
Ending
finished goods, Dec. 31,
2007 12 232
Gross margin 118
Marketing,
distribution, and customer-service costs 90
Operating income $ 28
Chan
Corporation
Schedule
of Cost of Goods Manufactured
for
the Year Ended December 31,
2007
(in
millions)
Direct material costs:
Beginning
inventory, Jan. 1, 2007 $ 30
Direct
materials purchased 80
Cost
of direct materials available for use 110
Ending
inventory, Dec. 31, 2007 5
Direct
materials used $105
Direct manufacturing labor costs 40
Indirect manufacturing costs:
Plant
supplies used 6
Property
taxes on plant 1
Plant
utilities 5
Indirect
manufacturing labor costs 20
Depreciation––plant,
building, and equipment 9
Miscellaneous
manufacturing overhead costs 10 51
Manufacturing costs
incurred during 2007 196
Add beginning
work-in-process inventory, Jan.
1, 2007 10
Total manufacturing
costs to account for 206
Deduct ending
work-in-process inventory, Dec.
31, 2007 2
Cost of goods
manufactured (to income statement) $204
2-34 (15–20 min.) Terminology,
interpretation of statements (continuation of 2-33).
1. Direct materials used $105
million
Direct manufacturing labor costs 40 million
Prime costs $145 million
Direct manufacturing labor costs $ 40 million
Indirect manufacturing costs 51 million
Conversion costs $ 91
million
2. Inventoriable costs (in millions) for Year
2007
Plant
utilities $ 5
Indirect manufacturing labor 20
Depreciation—plant, building,
and equipment 9
Miscellaneous manufacturing
overhead 10
Direct materials used 105
Direct manufacturing labor 40
Plant supplies used 6
Property tax on plant 1
Total inventoriable
costs $196
Period costs (in millions) for Year 2007
Marketing, distribution, and
customer-service costs $ 90
3. Design costs and
R&D costs may be regarded as product costs in case of contracting with a
governmental agency. For example, if the Air Force negotiated to contract with
Lockheed to build a new type of supersonic fighter plane, design costs and
R&D costs may be included in the contract as product costs.
4. Direct materials used = $105,000,000
÷ 1,000,000 units = $105 per unit
Depreciation = $ 9,000,000 ÷ 1,000,000 units = $ 9 per unit
5.
Direct materials unit cost would be unchanged at
$105. Depreciation unit cost would be $9,000,000 ÷ 1,500,000 = $6 per unit.
Total direct materials costs would rise by 50% to $157,500,000 ($105 per unit ×
1,500,000 units). Total depreciation cost of $9,000,000 would remain unchanged.
6.
In this case, equipment depreciation is a variable
cost in relation to the unit output. The amount of equipment depreciation will
change in direct proportion to the number of units produced.
(a)
Depreciation will be $4 million (1 million × $4)
when 1 million units are produced.
(b)
Depreciation will be $6 million (1.5 million × $4)
when 1.5 million units are produced.
2-35 (20
min.) Overtime premium.
The Westec and Pinnacle orders
consumed a total of $100,000 in labor costs: $80,000 (4,000 labor hours × $20 per labor hour) in
straight direct labor costs and $20,000 (2,000 overtime labor hours × $20 per labor hour × 50% overtime premium rate). The straight
direct labor costs are to be split equally between the two orders since each
consumed 2,000 direct labor hours. The costs of overtime premiums are allocated
differently under different scenarios.
1.
PANEL 1
|
||||
(in $000s)
|
Westec caused rush order
|
|||
Customer
|
Westec
|
Pinnacle
|
||
Sales Representative
|
I. Blacklaw
|
G. Benson
|
||
Revenues
|
$420,000
|
$460,000
|
||
Cost of goods
sold:
|
||||
Direct
materials
|
$230,000
|
$260,000
|
||
Direct
manufacturing labor
|
40,000
|
40,000
|
||
Indirect manufacturing labor
|
80,000
|
80,000
|
||
Overtime
premium
|
20,000
|
-
|
||
Total cost of
goods sold
|
370,000
|
380,000
|
||
Gross margin
|
$ 50,000
|
$ 80,000
|
||
Bonus earned by
salesperson
(10% of gross
margin)
|
$ 5,000
|
$ 8,000
|
||
2.
PANEL 2
|
||||
(in $000s)
|
Pinnacle caused rush order
|
|||
Customer
|
Westec
|
Pinnacle
|
||
Sales Representative
|
I. Blacklaw
|
G. Benson
|
||
Revenues
|
$420,000
|
$460,000
|
||
Cost of goods
sold:
|
||||
Direct materials
|
$230,000
|
$260,000
|
||
Direct manufacturing labor
|
40,000
|
40,000
|
||
Indirect manufacturing labor
|
80,000
|
80,000
|
||
Overtime premium
|
-
|
20,000
|
||
Total cost of
goods sold
|
350,000
|
400,000
|
||
Gross margin
|
$ 70,000
|
$ 60,000
|
||
Bonus earned by
salesperson (10% of gross margin)
|
$ 7,000
|
$ 6,000
|
||
3.
PANEL 3
|
||||
(in $000s)
|
Neither caused rush order
|
|||
Customer
|
Westec
|
Pinnacle
|
||
Sales
Representative
|
I. Blacklaw
|
G. Benson
|
||
Revenues
|
$420,000
|
$460,000
|
||
Cost of goods
sold:
|
||||
Direct materials
|
$230,000
|
$260,000
|
||
Direct manufacturing labor
|
40,000
|
40,000
|
||
Indirect manufacturing labor
|
80,000
|
80,000
|
||
Overtime
premium
|
10,000
|
10,000
|
||
Total cost of
goods sold
|
360,000
|
390,000
|
||
Gross margin
|
$ 60,000
|
$ 70,000
|
||
Bonus earned by
salesperson (10% of gross margin)
|
$ 6,000
|
$ 7,000
|
||
4. Gary Shaw, the operations
manager realizes that when there is overtime, which order or orders it is
assigned to will make a significant difference to the sales bonuses earned by
Blacklaw and Benson (see bonuses earned by salespeople in the calculations
above). He needs to track the flow of orders and overtime very carefully in
order to avoid problems in the future. He must always be very precise and fair
in assigning overtime to various orders.
2-36 (30–40 min.) Fire
loss, computing inventory costs.
1. Finished goods inventory, 2/26/2007 = $50,000
2. Work-in-process inventory, 2/26/2007 = $28,000
3. Direct materials inventory, 2/26/2007 = $62,000
This problem is not as easy as it first appears. These answers are
obtained by working from the known figures to the unknowns in the schedule
below. The basic relationships between categories of costs are:
Prime costs (given) = $294,000
Direct materials used = $294,000
– Direct manufacturing labor costs
= $294,000 – $180,000 = $114,000
Conversion costs = Direct
manufacturing labor costs ÷ 0.6
$180,000
÷ 0.6 = $300,000
Indirect manuf.
costs = $300,000
– $180,000 = $120,000 (or 0.40 ´ $300,000)
Schedule of Computations
Direct materials,
1/1/2007 $ 16,000
Direct materials
purchased 160,000
Direct materials available for use 176,000
Direct materials,
2/26/2007 3 = 62,000
Direct materials
used ($294,000 – $180,000) 114,000
Direct
manufacturing labor costs 180,000
Prime costs 294,000
Indirect
manufacturing costs 120,000
Manufacturing
costs incurred during the current period 414,000
Add work in
process, 1/1/2007 34,000
Manufacturing
costs to account for 448,000
Deduct work in
process, 2/26/2007
2 = 28,000
Cost of goods
manufactured 420,000
Add finished
goods, 1/1/2007 30,000
Cost of goods available for sale (given) 450,000
Deduct finished
goods, 2/26/2007 1 = 50,000
Cost of goods
sold (80% of $500,000) $400,000
Some instructors may wish to place the key amounts in a Work in
Process T-account. This problem can be used to introduce students to the flow
of costs through the general ledger (amounts in thousands):
Work in
Process
|
Finished Goods
|
Cost of Goods Sold
|
|||||||
BI
|
34
|
BI
|
30
|
||||||
DM
used
|
114
|
COGM
420
|
------->
|
420
|
COGS 400
|
---->400
|
|||
DL
|
180
|
||||||||
OH
|
120
|
Available
|
|||||||
To
account for
|
448
|
for
sale
|
450
|
||||||
EI
|
28
|
EI
|
50
|
||||||
2-37 (30 min.) Comprehensive
problem on unit costs, product costs.
1. If 2 pounds of direct materials are used to make each unit
of finished product, 100,000 units × 2 lbs., or 200,000
lbs. were used at $0.70 per pound of direct materials ($140,000 ÷ 200,000
lbs.). (The direct material costs of $140,000 are direct materials used, not
purchased.) Therefore, the ending inventory of direct materials is 2,000 lbs. ´ $0.70 = $1,400.
2. Manufacturing Costs for 100,000 units
Variable Fixed Total
Direct
materials costs $140,000 $ – $140,000
Direct
manufacturing labor costs 30,000 – 30,000
Plant
energy costs 5,000 – 5,000
Indirect manufacturing labor costs 10,000 16,000 26,000
Other
indirect manufacturing costs 8,000 24,000 32,000
Cost of goods manufactured $193,000 $40,000 $233,000
Average
unit manufacturing cost: $233,000
÷ 100,000 units
= $2.33 per unit
Finished goods inventory in units:
3. Units sold in 2007 = Beginning
inventory + Production – Ending inventory
= 0 + 100,000 – 9,000 = 91,000 units
Selling price in 2007 = $436,800
÷ 91,000
= $4.80 per unit
4.
Revenues
(91,000 units sold × $4.80) $436,800
Cost
of units sold:
Beginning finished goods, Jan. 1, 2007 $ 0
Cost of goods manufactured 233,000
Cost of goods available for sale 233,000
Ending finished goods, Dec. 31, 2007 20,970 212,030
Gross margin 224,770
Operating costs:
Marketing, distribution, and
customer-service costs 162,850
Administrative costs 50,000 212,850
Operating income $ 11,920
Note:
Although not required, the full set of unit variable costs is:
Direct
materials cost
|
$1.40
|
|||
Direct
manufacturing labor cost
|
0.30
|
|||
Plant
energy cost
|
0.05
|
=
$1.93 per unit manufactured
|
||
Indirect
manufacturing labor cost
|
0.10
|
|||
Other
indirect manufacturing cost
|
0.08
|
|||
Marketing,
distribution, and customer-service costs
|
$1.35
|
per
unit sold
|
||
2-38 (30 min.) Cost
analysis, litigation risk, ethics.
1.
Reasons for Keely not wanting Nash to include the
potential litigation costs include the following:
(a)
Genuine belief that the product has no risk of
future litigation. Note that she asserts “she has total confidence in her
medical research team.”
(b)
Concern that the uncertainties about litigation are
sufficiently high to make any numerical estimate “meaningless.”
(c)
Concern that inclusion of future litigation costs
would cause the board of directors to vote against the project. Keely may be
“overly committed” to the project and wants to avoid showing information that
prompts questions she prefers not to be raised.
(d)
Avoid “smoking gun” memos being included in the
project evaluation file. Keely may believe that if subsequent litigation
occurs, the plaintiffs will “inappropriately” use a litigation cost line item
as “proof” that FY knew the product had health problems that were known to
management at the outset.
2. Unit costs excluding litigation costs $100
Add unit litigation costs 110
Total unit costs 210
Add 20% markup 42
Selling price per unit $252
Since each
treatment is planned to cost patients $300, the new selling price of $252 will
drop the doctors’ margin to only $48 (16%) from the planned margin of $180
(60%) based on FY’s originally intended selling price of $120. This would probably
result in the doctors not having much incentive to promote the product. In
fact, it may be quite possible that the doctors may not attempt to prescribe
the treatment at such low margin because of their own exposure to liability.
Doctor’s minimum gross margin per treatment
(40% X 300) (120)
Doctor’s maximum cost per treatment 180
FY’s maximum selling price per unit = 180
FY’s maximum total cost = 180/1.2 = 150
FY’s per unit purchase cost =
(100)
FY’s maximum per treatment insurance cost =
$ 50
(a)
He may be implicated in future litigation, and in
particular, he may be accused of withholding damaging evidence.
(b)
Keely may find ways to portray him as not a “team
player” and this may damage his career trajectory and future in the company.
(c)
He may have serious on-going issues with Keely’s
ethical standards. He should talk to her, to her manager/supervisor, and in the
worst case, be prepared to resign if his concerns are not heard and documented.
This type of problem is likely to occur again and again in the “cosmeceuticals”
business.
2-39 (20–25 min.) Finding
unknown amounts.
Let G = given, I =
inferred
Step 1: Use gross margin formula Case 1 Case 2
Revenues $
32,000 G $31,800
G
Cost of goods sold A
20,700 I
20,000 G
Gross margin $ 11,300
G C $11,800 I
Step 2: Use schedule
of cost of goods manufactured formula
Direct materials used $ 8,000
G $
12,000 G
Direct manufacturing labor costs 3,000 G 5,000 G
Indirect manufacturing costs 7,000
G D 6,500 I
Manufacturing costs incurred 18,000 I 23,500 I
Add beginning work in process, 1/1 0
G 800
G
Total manufacturing costs to account
for 18,000 I 24,300 I
Deduct ending work in process, 12/31 0
G 3,000
G
Cost of goods manufactured $ 18,000 I $ 21,300 I
Step 3: Use cost of
goods sold formula
Beginning finished goods inventory, 1/1 $ 4,000
G $ 4,000 G
Cost of goods manufactured 18,000
I 21,300
I
Cost of goods available for sale 22,000 I 25,300 I
Ending finished goods inventory, 12/31 B1,300 I 5,300
G
Cost of goods sold $ 20,700
I $ 20,000 G
For
case 1, do steps 1, 2, and 3 in order.
For
case 2, do steps 1, 3, and then 2.
Chapter 2 Video Case
The video
case can be discussed using only the case writeup in the chapter. Alternatively,
instructors can have students view the videotape of the company that is the
subject of the case. The videotape can be obtained by contacting your Prentice
Hall representative.The case questions challenge students to apply the concepts
learned in the chapter to a specific business situation.
THREE DOG BAKERY: Understanding Cost Terms
1. Various cost objects for Three Dog Bakery are:
Product: Dog
biscuits and treats (125 different kinds)
Service: Telephone
orders for dogalog sales
Project: Investigation
of new store locations
Customer: PetsMart,
the national pet store chain
Activity: Development
and updating of the e-commerce Web site
Department: Finance,
Marketing, Sales, Production, Shipping, Receiving, and so on.
2. Cost
Item D
or I F or V
a.
Salary of the production department manager who
oversees
manufacturing D F
b. Salaries of founders Dan Dye and Mark
Beckloff I F
c. Cardboard trays used to package sets of
twelve specialty biscuits D V
d. Salary of the graphic designer who
prepares the Dogalog Neither*
illustrations and
layout
e.
Annual maintenance service agreement for the
shrink-wrap machine D F
f. Wages paid to assembly line workers
who mix Snickerpoodle
ingredients in batches D V
g. Air conditioning costs for the entire
baking commissary D F
h. Cost of flour, eggs, and carob icing
for Rollover biscuits D V
*Design costs
are not related to production and hence are neither direct nor indirect costs
of production.
3. Three Dog Bakery is a manufacturing company
but it is engaged in the manufacturing and merchandising sectors. With respect
to manufacturing, it produces baked dog biscuits and treats at the central
baking warehouse. Raw ingredients are purchased and converted into finished
goods on the assembly line.
With respect to merchandising, the
company operates retail stores. In addition to baked dog treats, these stores
also sell merchandise from other manufacturers (dog bowls, hats, leashes,
collars, etc.).
Three Dog Bakery does not provide
services per se so it is not engaged in the service sector.
4. When Wal-Mart purchases Lick ‘n Crunch
cookies for sale in its stores, the purchase is an inventoriable cost. The cost
of purchasing the cookies is considered an asset (inventory) on the balance
sheet and it only becomes cost of goods sold as a matching expense against
revenues when the cookies are sold. Inventoriable costs of Lick ‘n Crunch
Cookies include the cost of the cookies plus any incoming freight, insurance,
and handling costs for the cookies.
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