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Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan

Chapter 2

An Introduction to Cost Terms and Purposes - all with Video Answers

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Chapter Questions

01:39

Problem 1

Define cost object and give three examples.

Oluwadamilola Ameobi
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02:21

Problem 2

Define direct costs and indirect costs.

Ameer Said
Ameer Said
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01:40

Problem 3

Why do managers consider direct costs to be more accurate than indirect costs?

Prashant Bana
Prashant Bana
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02:17

Problem 4

Name three factors that will affect the classification of a cost as direct or indirect.

Ameer Said
Ameer Said
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02:37

Problem 5

Define variable cost and fixed cost. Give an example of each.

Ameer Said
Ameer Said
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02:54

Problem 6

What is a cost driver? Give one example.

Ameer Said
Ameer Said
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01:37

Problem 7

What is the relevant range? What role does the relevant-range concept play in explaining how costs behave?

Ameer Said
Ameer Said
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03:01

Problem 8

Explain why unit costs must often be interpreted with caution.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
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04:53

Problem 9

Describe how manufacturing-, merchandising, and service-sector companies differ from one another.

Ameer Said
Ameer Said
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02:41

Problem 10

What are three different types of inventory that manufacturing companies hold?

Ameer Said
Ameer Said
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03:34

Problem 11

Distinguish between inventoriable costs and period costs.

Ameer Said
Ameer Said
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04:32

Problem 12

Define the following: direct material costs, direct manufacturing-labor costs, manufacturing overhead costs, prime costs, and conversion costs.

Ameer Said
Ameer Said
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01:03

Problem 13

Describe the overtime-premium and idle-time categories of indirect labor.

Prashant Bana
Prashant Bana
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03:39

Problem 14

Define product cost. Describe three different purposes for computing product costs.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
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01:28

Problem 15

What are three common features of cost accounting and cost management?

Ameer Said
Ameer Said
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02:04

Problem 16

Applewhite Corporation, a manufacturing company, is analyzing its cost structure in a project to achieve some cost savings. Which of the following statements is/are correct?
I. The cost of the direct materials in Applewhite's products is considered a variable cost.
II. The cost of the depreciation of Applewhite's plant machinery is considered a variable cost because Applewhite uses an accelerated depreciation method for both book and income tax purposes.
III. The cost of electricity for Applewhite's manufacturing facility is considered a fixed cost, even if the cost of the electricity has both variable and fixed components.
1. $I,$ II, and III are correct.
2. I only is correct.
3. II and III only are correct.
4. None of the listed choices is correct.

Muhammad Ahsan
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01:22

Problem 17

Comprehensive Care Nursing Home is required by statute and regulation to maintain a minimum 3 to 1 ratio of direct service staff to residents to maintain the licensure associated with the Nursing Home beds. The salary expense associated with direct service staff for the Comprehensive Care Nursing Home would most likely be classified as:
1. Variable cost
2. Fixed cost.
3. Overhead costs.
4. Inventoriable costs.

Muhammad Ahsan
Muhammad Ahsan
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01:02

Problem 18

Frisco Corporation is analyzing its fixed and variable costs within its current relevant range. As its cost driver activity changes within the relevant range, which of the following statements is/are correct?
I. As the cost driver level increases, total fixed cost remains unchanged.
II. As the cost driver level increases, unit fixed cost increases.
III. As the cost driver level decreases, unit variable cost decreases.
1. $I, II,$ and $III$ are correct.
2. I and II only are correct.
3. I only is correct.
4. II and III only are correct.

Muhammad Ahsan
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03:54

Problem 19

Year 1 financial data for the ABC Company is as follows:
Sales$\quad$$\$ 5,000,000$
Direct materials$\quad$850,000
Direct manufacturing labor$\quad$1,700,000
Variable manufacturing overhead$\quad$400,000
Fixed manufacturing overhead$\quad$750,000
Variable $\mathrm{SG} \& \mathrm{A}$$\quad$150,000
Fixed $\mathrm{SG} \& \mathrm{A}$$\quad$250,000
Under the absorption method, Year 1 cost of Goods sold will be:
a. $\$ 2,550,000$
b. $\$ 2,950,000$
c. $\$ 3,100,000$
d. $\$ 3,700,000$

Manasvee Singh
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02:20

Problem 20

The following information was extracted from the accounting records of Roosevelt Manufacturing Company:
$$\begin{array}{lr}
\text { Direct materials purchased } & 80,000 \\
\text { Direct materials used } & 76,000 \\
\text { Direct manufacturing labor costs } & 10,000 \\
\text { Indirect manufacturing labor costs } & 12,000 \\
\text { Sales salaries } & 14,000 \\
\text { 0ther plant expenses } & 22,000 \\
\text { Selling and administrative expenses } & 20,000
\end{array}$$
What was the cost of goods manufactured?
1. $\$ 124,000$
2. $\$ 120,000$
3. $\$ 154,000$
4. $\$ 170,000$

Muhammad Ahsan
Muhammad Ahsan
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07:32

Problem 21

Computing and interpreting manufacturing unit costs. Minnesota Office Products (MOP) produces three different paper products at its Vaasa lumber plant: Supreme, Deluxe, and Regular. Each product has its own dedicated production line at the plant. It currently uses the following three-part classification for its manufacturing costs: direct materials, direct manufacturing labor, and manufacturing overhead costs. Total manufacturing overhead costs of the plant in July 2017 are $\$ 150$ million (\$15 million of which are fixed). This total amount is allocated to each product line on the basis of the direct manufacturing labor costs of each line. Summary data (in millions) for July 2017 are as follows:
$$\begin{array}{lccc}
& \text { Supreme } & \text { Deluxe } & \text { Regular } \\
\hline \text { Direct material costs } & \$ 89 & \$ 57 & \$ 60 \\
\text { Direct manufacturing labor costs } & \$ 16 & \$ 26 & \$ 8 \\
\text { Manufacturing overhead costs } & \$ 48 & \$ 78 & \$ 24 \\
\text { Units produced } & 125 & 150 & 140
\end{array}$$
1. Compute the manufacturing cost per unit for each product produced in July 2017 .
2. Suppose that, in August 2017 , production was 150 million units of Supreme, 190 million units of Deluxe, and 220 million units of Regular. Why might the July 2017 information on manufacturing cost per unit be misleading when predicting total manufacturing costs in August $2017 ?$

Manasvee Singh
Manasvee Singh
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04:59

Problem 22

Direct, indirect, fixed, and variable costs. California Tires manufactures two types of tires that it sells as wholesale products to various specialty retail auto supply stores. Each tire requires a three-step process. The first step is mixing. The mixing department combines some of the necessary direct materials to create the material mix that will become part of the tire. The second step includes the forming of each tire where the materials are layered to form the tire. This is an entirely automated process. The final step is finishing, which is an entirely manual process. The finishing department includes curing and quality control.
1. Costs involved in the process are listed next. For each cost, indicate whether it is a direct variable, direct fixed, indirect variable, or indirect fixed cost, assuming "units of production of each kind of tire" is the cost object.
costs:
Rubber $\quad$ Mixing department manager
Reinforcement cables $\quad$ Material handlers in each department
Other direct materials $\quad$ Custodian in factory
Depreciation on formers $\quad$ Night guard in factory
Depreciation on mixing machines $\quad$ Machinist (running the mixing machine)
Rent on factory building $\quad$ Machine maintenance personnel in each department
Fire insurance on factory building $\quad$ Maintenance supplies for factory
Factory utilities $\quad$ Cleaning supplies for factory
Finishing department hourly laborers $\quad$ Machinist (running the forming machines)
2. If the cost object were the "mixing department" rather than units of production of each kind of tire, which preceding costs would now be direct instead of indirect costs?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
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07:02

Problem 23

Classification of costs, service sector. Market Focus is a marketing research firm that organizes fo cus groups for consumer-product companies. Each focus group has eight individuals who are paid $\$ 60$ per session to provide comments on new products. These focus groups meet in hotels and are led by a trained independent marketing specialist hired by Market Focus. Each specialistis paid a fixed retainer to conductt a minimum number of sessions and a per session fee of $\$ 2,200$. A Market Focus staff member attends each session to ensure that all the logistical aspects run smoothly. Classify each cost item (A-H) as follows:
a. Direct or indirect (D o r I) costs of each individual focus group
b. Variable or fixed (V or F) costs of how the total costs of Market Focus change as the number of focus groups conducted changes. (If in doubt, select on the basis of whether the total costs will change sub stantially if there is a large change in the number of groups conducted.
You will have two answers (D or l; V or F) for each of the following items:
Cost Item.
A. Payment to individuals in each focus group to provide comments on new products.
B. Annual subscription of Market Focus to Consumer Reports magazine.
C. Phone calls made by Market Focus staff member to confirm individuals will attend a focus group session (Records of individual calls are not kept.)
D. Retainer paid to focus group leader to conduct 18 focus groups per year on new medical products.
E. Recruiting cost to hire marketing specialists.
F. Lease payment by Market Focus for corporate office.
G. cost of tapes used to record comments made by individuals in a focus group session (These tapes are sent to the company whose products are being tested.)
H. Gasoline costs of Market Focus staff for company-owned vehicles (Staff members submit monthly bills with no mileage breakdowns.)
I. costs incurred to improve the design of focus groups to make them more effective.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
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02:48

Problem 24

Classification of costs, merchandising sector. Band Box Entertainment (BBE) operates a large store in Atlanta, Georgia. The store has both a movie (DVD) section and a music (CD) section. BBE reports revenues for the movie section separately from the music section. Classify each cost item (A-H) as follows:
a. Direct or indirect (D or I) costs of the total number of DVDs sold.
b. Variable or fixed (V or F) costs of how the total costs of the movie section change as the total number of DVDs sold changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of DVDs sold.
You will have two answers (D or I; V or F) for each of the following items:
Cost Item
A. Annual retainer paid to a video distributor
B. cost of store manager's salary
C. costs of DVDs purchased for sale to customers
D. Subscription to DVD Trends magazine
E. Leasing of computer software used for financial budgeting at the BBE store
F. cost of popcorn provided free to all customers of the BBE store
G. cost of cleaning the store every night after closing
H. Freight-in costs of DVDs purchased by BBE

Muhammad Ahsan
Muhammad Ahsan
Numerade Educator
04:59

Problem 25

Classification of costs, manufacturing sector. The Cooper Furniture Company of Potomac, Maryland, assembles two types of chairs (Recliners and Rockers). Separate assembly lines are used for each type of chair Classify each cost item (A-I) as follows:
a. Direct or indirect (D or I) cost for the total number of Recliners assembled.
b. Variable or fixed (V or F) cost depending on how total costs change as the total number of Recliners assembled changes. (If in doubt, select on the basis of whether the total costs will change substantially if there is a large change in the total number of Recliners assembled.
You will have two answers (D or I; V or F) for each of the following items:
Cost Item
A. cost of fabric used on Recliners
B. Salary of public relations manager for Cooper Furniture
C. Annual convention for furniture manufacturers; generally Cooper Furniture attends
D. cost of lubricant used on the Recliner assembly line
E. Freight costs of Recliner frames shipped from Durham to Potomac, MD
F. Electricity costs for Recliner assembly line (single bill covers entire plant)
G. Wages paid to temporary assembly-line workers hired in periods of high Recliner production (paid on hourly basis)
H. Annual fire-insurance policy cost for Potomac, MD plant
I. Wages paid to plant manager who oversees the assembly lines for both chair types

Oluwadamilola Ameobi
Oluwadamilola Ameobi
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11:16

Problem 26

Variable costs, fixed costs, total costs. Bridget Ashton is getting ready to open a small restaurantt She is on a tight budget and must choose between the following long-distance phone plans:
Plan A: Pay 10 cents per minute of long-distance calling Plan B: Pay a fixed monthly fee of \$15 for up to 240 long-distance minutes and 8 cents per minute thereafter (if she uses fewer than 240 minutes in any month, she still pays S15 for the month) Plan C: Pay a fixed monthly fee of \$22 for up to 510 long-distance minutes and 5 cents per minute thereafter (i she uses fewer than 510 minutes, she still pays $\$ 22$ for the month).
1. Draw a graph of the total monthly costs of the three plans for differentlevels of monthly long-distance calling.
2. Which plan should Ashton choose if she expects to make 100 minutes of long-distance calls? 240 minutes? 540 minutes?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
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02:36

Problem 27

Variable and Fixed costs. Consolidated Motors specializes in producing one specialty vehicle. It is called Surfer and is styled to easily fit multiple surfboards in its back area and top-mounted storage racks. Consolidated has the following manufacturing costs:
$\begin{array}{ll}0-500 \text { tires } & \$ 40,040 \\ 501-1,000 \text { tires } & \$ 65,000 \\ \text { more than } 1,000 \text { tires } & \$ 249 \%\end{array}$ more $\$ 249,870$
Consolidated currently produces 170 vehicles per month.
1. What is the variable manufacturing cost per vehicle? What is the fixed manufacturing cost per month?
2. Plot a graph for the variable manufacturing costs and a second for the fixed manufacturing costs per month. How does the concept of relevant range relate to your graphs? Explain.
3. Whatisthe total manufacturing cost of each vehicle if 80 vehicles are produced each month? 205 vehicles? How do you explain the difference in the manufacturing cost per unit?

Wendi Zhao
Wendi Zhao
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05:22

Problem 28

Variable costs, fixed costs, relevant range. Gummy Land Candies manufactures jaw-breaker candies in a fully automated process. The machine that produces candies was purchased recently and can make 5,000 per month. The machine costs \$6,500 and is depreciated using straight-line depreciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other fixed manufacturing overhead costs total $\$ 1,200$ per month

Gummy Land currently makes and sells 3,900 jaw-breakers per month. Gummy Land buys just enoughh materials each month to make the jaw-breakers it needs to sell. Materials cost $40 \mathrm{c}$ per jaw-breaker
will get a $10 \%$ discount on price. Rent and other fixed manufacturing overhead costs will remain the same.
1. What is Gummy Land's current annual relevant range of output?
2. What is Gummy Land's current annual fixed manufacturing cost within the relevant range? What is the annual variable manufacturing cost?
3. What will Gummy Land's relevant range of output be nextyear? How, if atall, will total annual fixed and variable manufacturing costs change next year? Assume that if it needs to Gummy Land could buy an identical machine a t the same cost as the one it already has.

Jennifer Stoner
Jennifer Stoner
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03:49

Problem 29

Cost drivers and value chain. Torrance Technology Company (TTC) is developing a new touchscreen smartphone to compete in the cellular phone industry. The company will sell the phones at wholesale prices to cell phone companies, which will in turn sell them in retail stores to the final customer. TTC has undertaken the following activities in its value chain to bring its product to market:
A. Perform market research on competing brands
B. Design a prototype of the TTC smartphone
C. Market the new design to cell phone companies
D. Manufacture the TTC smartphone
E. Process orders from cell phone companies
F. Deliver the TTC smartphones to the cell phone companies
G. Provide online assistance to cell phone users for use of the TTC smartphone
H. Make design changes to the smartphone based on customer feedback
During the process of product development, production, marketing, distribution, and customer service, TTC has kept track of the following cost drivers:
Number of smartphones shipped by TTC Number of design changes
Number of deliveries made to cell phone companies
Engineering hours spent on initial product design
Hours spent researching competing market brands
Customer-service hours
Number of smartphone orders processed
Machine hours required to run the production equipment
1. Identify each value-chain activity listed at the beginning of the exercise with one of the following value-chain categories:
a. Design of products and processes
b. Production
c. Marketing
d. Distribution
e. Customer service
2. Use the list of preceding cost drivers to find one or more reasonable cost drivers for each of the activities in TTC's value chain.

Derrick Hanson
Derrick Hanson
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02:36

Problem 30

Cost drivers and functions. The representative cost drivers in the right column of this table are randomized so they do not match the list of functions in the left column.
$$\begin{array}{ll}
\text { Function } & \text { Representative cost Driver } \\
\hline \text { 1. Accounts payable } & \text { A. Number of invoices sent } \\
\text { 2. Recruiting } & \text { B. Number of purchase orders } \\
\text { 3. Network Maintenance } & \text { C. Number of units manufactured } \\
\text { 4. Production } & \text { D. Number of computers on the network } \\
\text { 5. Purchasing } & \text { E. Number of employees hired } \\
\text { 6. Warehousing } & \text { F. Number of bills received from vendors } \\
\text { 7. Billing } & \text { G. Number of pallets moved }
\end{array}$$
1. Match each function with its representative cost driver
2. Give a second example of a cost driver for each function.

Muhammad Ahsan
Muhammad Ahsan
Numerade Educator
15:42

Problem 31

Total costs and unit costs, service setting. National Training recently started a business providing training events for corporations. In order to better understand the profitability of the business, the owners asked you for an analysis of costs- -what costs are fixed, what costs are variable, and so on, for each training session. You have the following cost information:
Trainer: $\$ 11,000$ per session
Materials: $\$ 2,500$ per session and $\$ 35$ per attendee
Catering costs (subcontracted):
Food: $\$ 75$ per attendee
Setup/cleanup: $\$ 25$ per attendee
Fixed fee: $\$ 5,000$ per training session
National Training is pleased with the service they use for the catering and have allowed them to place brochures on each dinner table as a form of advertising. In exchange, the caterer gives National Training a $\$ 1,000$ discount per session.
1. Draw a graph depicting fixed costs, variable costs, and total costs for each training session versus the number of guests.
2. Suppose 100 persons attend the next event. What is National Training's total net cost and the cost per attendee?
3. Suppose instead that 175 persons attend? What is National Training's total net cost and the cost per attendee?
4. How should National Training charge customers for their services? Explain briefly.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
12:05

Problem 32

Total and unit cost, decision making. Gayle's Glassworks makes glass flanges for scientific use. Materials cost $\$ 1$ per flange, and the glass blowers are paid a wage rate of $\$ 28$ per hour. A glass blower blows 10 flanges per hour. Fixed manufacturing costs for flanges are $\$ 28,000$ per period. Period (nonmanufacturing) costs associated with flanges are $\$ 10,000$ per period and are fixed.
1. Graph the fixed, variable, and total manufacturing cost for flanges, using units (number of flanges) on the $x$ -axis.
2. Assume Gayle's Glassworks manufactures and sells 5,000 flanges this period. Its competitor, Flora's Flasks, sells flanges for $\$ 10$ each. Can Gayle sell below Flora's price and still make a profit on the flanges?
3. How would your answer to requirement 2 differ if Gayle's Glassworks made and sold 10,000 flanges this period? Why? What does this indicate about the use of unit cost in decision making?

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
02:48

Problem 33

Inventoriable costs versus period costs. Each of the following cost items pertains to one of these companies: Best Buy (a merchandising-sector company), KitchenAid (a manufacturing-sector company), and HughesNet (a service-sector company):
a. cost of phones and computers available for sale in Best Buy's electronics department
b. Electricity used to provide lighting for assembly-line workers at a KitchenAid manufacturing plant
c. Depreciation on HughesNet satellite equipment used to provide its services
d. Electricity used to provide lighting for Best Buy's store aisles
e. Wages for personnel responsible for quality testing of the KitchenAid products during the assembly process
f. Salaries of Best Buy's marketing personnel planning local-newspaper advertising campaigns
g. Perrier mineral water purchased by HughesNet for consumption by its software engineers
h. Salaries of HughesNet area sales managers
i. Depreciation on vehicles used to transport KitchenAid products to retail stores
1. Distinguish between manufacturing-, merchandising-, and service-sector companies.
2. Distinguish between inventoriable costs and period costs
3. Classify each of the cost items (a-i) as an inventoriable cost or a period cost. Explain your answers.

Muhammad Ahsan
Muhammad Ahsan
Numerade Educator
09:33

Problem 34

Computing cost of goods purchased and cost of goods sold. The following data are for Marvin Department Store. The account balances (in thousands) are for 2017 .
Marketing, distribution, and customer-service costs $\quad$ $\$ 37,000$
Merchandise inventory, January 1, 2017 $\quad$ 27,000
Utilities $\quad$ 17,000
General and administrative costs $\quad$ 43,000
Merchandise inventory, December 31,2017 $\quad$ 34,000
Purchases $\quad$ 155,000
Miscellaneous costs $\quad$ 4.000
Transportation-in $\quad$ 7,000
Purchase returns and allowances $\quad$ 4,000
Purchase discounts $\quad$ 6,000
Revenues $\quad$ 280,000
1. Compute (a) the cost of goods purchased and (b) the cost of goods sold.
2. Prepare the income statement for 2017.

Manasvee Singh
Manasvee Singh
Numerade Educator
View

Problem 35

Cost of goods purchased, cost of goods sold, and income statement. The following data are for Arizona Retail Outlet Stores. The account balances (in thousands) are for 2017 .
Marketing and advertising costs $\quad$ $\$ 55,200$
Merchandise inventory, January 1, 2017 $\quad$ 103,500
Shipping of merchandise to customers $\quad$ 4,600
Depreciation on store fixtures $\quad$ 9,660
Purchases $\quad$ 598,000
General and administrative costs $\quad$ 73,600
Merchandise inventory, December 31, 2017 $\quad$ 119,600
Merchandise freight-in $\quad$ 23,000
Purchase returns and allowances $\quad$ 25,300
Purchase discounts $\quad$ 20,700
Revenues $\quad$ 736,000
1. Compute (a) the cost of goods purchased and (b) the cost of goods sold.
2. Prepare the income statement for 2017

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:00

Problem 36

Flow of Inventoriable costs. Renka's Heaters selected data for 0 ctober 2017 are presented here (in millions):
Direct materials inventory $10 / 1 / 2017$ $\quad$ $\$ 105$
Direct materials purchased $\quad$ 365
Direct materials used $\quad$ 385
Total manufacturing overhead costs $\quad$ 450
Variable manufacturing overhead costs $\quad$ 265
Total manufacturing costs incurred during 0ctober 2017 $\quad$ 1,610
Finished-goods inventory $10 / 1 / 2017$ $\quad$ 130
cost of goods sold $\quad$ 1,770
Calculate the following costs:
1. Direct materials inventory $10 / 31 / 2017$
2. Fixed manufacturing overhead costs for October 2017
3. Direct manufacturing labor costs for October 2017
4. Work-in-process inventory $10 / 31 / 2017$
5. cost of finished goods available for sale in October 2017
6. Finished goods inventory $10 / 31 / 2017$

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:00

Problem 37

Cost of goods manufactured, income statement, manufacturing company. Consider the following account balances (in thousands) for the Peterson Company:$$\begin{array}{lcc}
& \text { Beginning of } & \text { End of } \\
\text { Peterson Company } & \mathbf{2 0 1 7} & \mathbf{2 0 1 7} \\
\hline \text { Direct materials inventory } & 21,000 & 23,000 \\
\text { Work-in-process inventory } & 26,000 & 25,000 \\
\text { Finished-goods inventory } & 13,000 & 20,000 \\
\text { Purchases of direct materials } & & 74,000 \\
\text { Direct manufacturing labor } & & 22,000 \\
\text { Indirect manufacturing labor } & & 17,000 \\
\text { Plant insurance } & & 7,000 \\
\text { Depreciation - plant, building, and equipment } & & 11,000 \\
\text { Repairs and maintenance-plant } & & 3,000 \\
\text { Marketing, distribution, and customer-service costs } & & 91,000 \\
\text { General and administrative costs } & & 24,000
\end{array}$$
1. Prepare a schedule for the cost of goods manufactured for 2017 .
2. Revenues for 2017 were $\$ 310$ million. Prepare the income statement for 2017 .

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
12:05

Problem 38

Cost of goods manufactured, income statement, manufacturing company. Consider the following account balances (in thousands) for the Carolina Corporation:
1. Prepare a schedule for the cost of goods manufactured for 2017.
2. Revenues (in thousands) for 2017 were $\$ 1,300,000$. Prepare the income statement for 2017.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
09:16

Problem 39

Income statement and schedule of cost of goods manufactured. The Howell Corporation has the following account balances (in millions):
Prepare an income statement and a supporting schedule of cost of goods manufactured for the year ended December 31,2017 . (For additional questions regarding these facts, see the next problem.)

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
12:47

Problem 40

Interpretation of statements (continuation of 2-39).
1. How would the answer to Problem 2-39 be modified if you were asked for a schedule of cost of goods manufactured and sold instead of a schedule of cost of goods manufactured? Be specific.
2. Would the sales manager's salary (included in marketing, distribution, and customer-service costs) be accounted for any differently if the Howell Corporation were a merchandising-sector company instead of a manufacturing-sector company?
3. Using the flow of manufacturing costs outlined in Exhibit 2 - (page 44 ) describe how the wages of an assemblerrin the plant would be accounted for in this manufacturing company
4. Plant supervisory salaries are usually regarded as manufacturing overhead costs. When might some of these costs be regarded as direct manufacturing costs? Give an example
5. Suppose that both the direct materials used and the plant and equipment depreciation are related to the manufacture of 1 million units of product. What is the unit cost for the direct materials assigned to those units? What is the unit cost for plant and equipment depreciation? Assume that yearly plant and equipment depreciation is computed on a straight-line basiss
6. Assume that the implied cost-behavior patterns in requirement 5 persist. That is, direct material costs behave as a variable cost and plant and equipment depreciation behaves as a fixed cost. Repeat the computations in requirement 5, assuming that the costs are being predicted for the manufacture of 1.2 million units of product. How would the total costs be affected?
7. As a management accountant, explain concisely to the president why the unit costs differed in requirements 5 and 6.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
00:00

Problem 41

Income statement and schedule of cost of goods manufactured. The following items (in millions) pertain to Schaeffer Corporation:
Schaeffer's manufacturing costing system uses a three-part classification of direct materials, direct manufacturing labor, and manufacturing overhead costs.
$$\begin{array}{lclr}
{}{} {\text { For Specific Date }} & {}{} {\text { For Year 2017 }} \\
\hline \text { Work-in-process inventory, Jan. 1, 2017 } & \$ 10 & \text { Plant utilities } & \$ 8 \\
\text { Direct materials inventory, Dec. 31, 2017 } & 4 & \text { Indirect manufacturing labor } & 21 \\
\text { Finished-goods inventory, Dec. 31, 2017 } & 16 & \text { Depreciation- plant and equipment } & 6 \\
\text { Accounts payable, Dec. 31, 2017 } & 24 & \text { Revenues } & 359 \\
\text { Accounts receivable, Jan. 1, 2017 } & 53 & \text { Miscellaneous manufacturing } & 15 \\
& & \text { overhead } & \\
\text { Work-in-process inventory, Dec. 31, 2017 } & 5 & \text { Marketing, distribution, and } & 90 \\
& & \text { customer-service costs } & \\
\text { Finished-goods inventory, Jan 1, 2017 } & 46 & \text { Direct materials purchased } & 88 \\
\text { Accounts receivable, Dec. 31, 2017 } & 32 & \text { Direct manufacturing labor } & 40 \\
\text { Accounts payable, Jan. 1, 2017 } & 45 & \text { Plant supplies used } & 9 \\
\text { Direct materials inventory, Jan. 1, 2017 } & 34 & \text { Property taxes on plant } & 2
\end{array}$$
Prepare an income statement and a supporting schedule of cost of goods manufactured. (For additional questions regarding these facts, see the next problem.)

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
12:47

Problem 42

Terminology, interpretation of statements (continuation of $2-41$ ).
1. Calculate total prime costs and total conversion costs.
2. Calculate total inventoriable costs and period costs.
3. Design costs and $\mathrm{R} \& \mathrm{D}$ costs are not considered product costs for financial statement purposes. When might some of these costs be regarded as product costs? Give an example.
4. Suppose that both the direct materials used and the depreciation on plant and equipment are related to the manufacture of 2 million units of product. Determine the unit cost for the direct materials assigned to those units and the unit cost for depreciation on plant and equipment. Assume that yearly depreciation is computed on a straight-line basis.
5. Assume that the implied cost-behavior patterns in requirement 4 persist. That is, direct material costs behave as a variable cost and depreciation on plant and equipment behaves as a fixed cost. Repeat the computations in requirement $4,$ assuming that the costs are being predicted for the manufacture of 3 million units of product. Determine the effect on total costs.
6. Assume that depreciation on the equipment (but not the plant) is computed based on the number of units produced because the equipment deteriorates with units produced. The depreciation rate on equipment is $\$ 1.50$ per unit. Calculate the depreciation on equipment assuming (a) 2 million units of product are produced and (b) 3 million units of product are produced.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
07:31

Problem 43

Labor cost, overtime, and idle time. David Letterman works in the production department of Northeast Plastics (NEP) as a machine operator. David, a long-time employee of NEP, is paid on an hourly basis at a rate of $\$ 24$ per hour. David works five 8 -hour shifts per week Monday-Friday (40 hours). Any time David works over and above these 40 hours is considered overtime for which he is paid at a rate of time and a half $(\$ 36$ per hour). If the overtime falls on weekends, David is paid at a rate of double time (\$48 per hour). David is also paid an additional $\$ 24$ per hour for any holidays worked, even if it is part of his regular 40 hours. David is paid his regular wages even if the machines are down (not operating) due to regular machine maintenance, slow order periods, or unexpected mechanical problems. These hours are considered "idle time."
During December David worked the following hours:
Included in the total hours worked are two company holidays (Christmas Eve and Christmas Day) during Week $4 .$ All overtime worked by David was Monday-Friday, except for the hours worked in Week 3 ; all of the Week 3 overtime hours were worked on a Saturday.
1. Calculate (a) direct manufacturing labor, (b) idle time, (c) overtime and holiday premium, and (d) total earnings for David in December.
2. Is idle time and overtime premium a direct or indirect cost of the products that David worked on in December? Explain.

Manasvee Singh
Manasvee Singh
Numerade Educator
09:33

Problem 44

Missing records, computing inventory costs. Ron Howard recently took over as the controller of Johnson Brothers Manufacturing. Last month, the previous controller left the company with little notice and left the accounting records in disarray. Ron needs the ending inventory balances to report first-quarter numbers. For the previous month (March 2017) Ron was able to piece together the following information:
Calculate the cost of
1. Finished-goods inventory, 3/31/2017
2. Work-in-process inventory, 3/31/2017
3. Direct materials inventory, 3/31/2017

Manasvee Singh
Manasvee Singh
Numerade Educator
07:32

Problem 45

Comprehensive problem on unit costs, product costs. Atlanta Office Equipment manufactures and sells metal shelving. It began operations on January $1,2017 .$ Costs incurred for 2017 are as follows (V stands for variable; $F$ stands for fixed ):
$$\begin{array}{lr}
\text { Direct materials used } & \$ 140,000 \mathrm{V} \\
\text { Direct manufacturing labor costs } & 22,000 \mathrm{V} \\
\text { Plant energy costs } & 5,000 \mathrm{V} \\
\text { Indirect manufacturing labor costs } & 18,000 \mathrm{V} \\
\text { Indirect manufacturing labor costs } & 14,000 \mathrm{F} \\
\text { 0ther indirect manufacturing costs } & 8,000 \mathrm{V} \\
\text { Other indirect manufacturing costs } & 26,000 \mathrm{F} \\
\text { Marketing, distribution, and customer-service costs } & 120,000 \mathrm{V} \\
\text { Marketing, distribution, and customer-service costs } & 43,000 \mathrm{F} \\
\text { Administrative costs } & 54,000 \mathrm{F}
\end{array}$$
Variable manufacturing costs are variable with respect to units produced. Variable marketing, distribution, and customer-service costs are variable with respect to units sold. Inventory data are as follows:
$$\begin{array}{lcc}
& \text { Beginning: January 1, 2017 } & \text { Ending: December 31, 2017 } \\
\hline \text { Direct materials } & 0 \mathrm{Ib} & 2,300 \mathrm{lbs} \\
\text { Work in process } & 0 \text { units } & 0 \text { units } \\
\text { Finished goods } & 0 \text { units } & ? \text { units }
\end{array}$$
Production in 2017 was 100,000 units. Two pounds of direct materials are used to make one unit of finished product.
Revenues in 2017 were $\$ 473,200$. The selling price per unit and the purchase price per pound of direct materials were stable throughout the year. The company's ending inventory of finished goods is carried at the average unit manufacturing cost for $2017 .$ Finished-goods inventory at December $31,2017,$ was $\$ 20,970.$
1. Calculate direct materials inventory, total cost, December 31, 2017.
2. Calculate finished-goods inventory, total units, December 31, 2017.
3. Calculate selling price in 2017 .
4. Calculate operating income for 2017 .

Manasvee Singh
Manasvee Singh
Numerade Educator
03:39

Problem 46

Different meanings of product costs. There are at least 3 different purposes for which we measure product costs. They are (1) pricing and product mix decisions, (2) determining the appropriate charge for a government contract, and (3) for preparing financial statements for external reporting following Generally Accepted Accounting Principles. $0 n$ the following table, indicate whether the indicated cost would be included or excluded for the particular purpose. If your answer is not definitive (include or exclude), provide a short explanation of why.

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:54

Problem 47

Cost classification; ethics. Paul Howard, the new plant manager of Garden Scapes Manufacturing Plant Number 7, has just reviewed a draft of his year-end financial statements. Howard receives a year-end bonus of $11.5 \%$ of the plant's operating income before tax. The year-end income statement provided by the plant's controller was disappointing to say the least. After reviewing the numbers, Howard demanded that his controller go back and "work the numbers" again. Howard insisted that if he didn't see a better operat ing income number the next time around he would be forced to look for a new controller.
Garden Scapes Manufacturing classifies all costs directly related to the manufacturing of its product as product costs. These costs are inventoried and later expensed as costs of goods sold when the productis sold. All other expenses, including finished-goods warehousing costs of $\$ 3,64,000,$ are classified as period expenses. Howard had suggested that warehousing costs be included as product costs because they are "definitely related to our product." The company produced 260,000 units during the period and sold 240,000 units.
As the controller reworked the numbers, he discovered that if he included warehousing costs as product costs, he could improve operating income by $\$ 280,000$. He was also sure these new numbers would make Howard happy.
1. Show numerically how operating income would improve by $\$ 280,000$ just by classifying the preceding costs as product costs instead of period expenses.
2. Is Howard correct in his justification that these costs are "definitely related to our product"?
3. By how much will Howard profit personally if the controller makes the adjustments in requirement 1?
4. What should the plant controller do?

Muhammad Ahsan
Muhammad Ahsan
Numerade Educator
00:00

Problem 48

Finding unknown amounts. An auditor for the Internal Revenue Service is trying to reconstruct some partially destroyed records of two taxpayers. For each of the cases in the accompanying list, find the unknowns designated by the letters $A$ and $B$ for Case 1 and $C$ and $D$ for Case 2.
$$\begin{array}{lrr}
& \text { Case 1 } & \text { Case 2 } \\
& \multicolumn{2}{c} {\text { (in thousands) }} \\
\hline \text { Accounts receivable, 12/31 } & \$ 8,000 & \$ 3,150 \\
\text { cost of goods sold } & \mathrm{A} & 31,800 \\
\text { Accounts payable, 1/1 } & 4,500 & 2,550 \\
\text { Accounts payable, 12/31 } & 2,700 & 2,250 \\
\text { Finished-goods inventory, 12/31 } & \mathrm{B} & 7,000 \\
\text { Gross margin } & 18,000 & \mathrm{C} \\
\text { Work-in-process inventory, 1/1 } & 3,000 & 1,500 \\
\text { Work-in-process inventory, 12/31 } & 0 & 4,700 \\
\text { Finished-goods inventory, 1/1 } & 5,000 & 7,000 \\
\text { Direct materials used } & 13,000 & 19,000 \\
\text { Direct manufacturing labor } & 4,500 & 8,500 \\
\text { Manufacturing overhead costs } & 9,500 & \mathrm{D} \\
\text { Purchases of direct materials } & 13,500 & 10,500 \\
\text { Revenues } & 52,000 & 52,300 \\
\text { Accounts receivable, 1/1 } & 3,000 & 2,100
\end{array}$$

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator