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Fundamentals of Cost Accounting

William Lanen, Shannon Anderson, Michael Maher

Chapter 2

Cost Concepts and Behavior - all with Video Answers

Educators

Chapter Questions

Problem 1

What is the difference in meaning between the terms cost and expense?

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01:40

Problem 2

What is the difference between product costs and period costs?

Jennifer Stoner
Jennifer Stoner
Numerade Educator
02:32

Problem 3

What is the difference between outlay cost and opportunity cost?

Daniel Cisneros
Daniel Cisneros
Numerade Educator
01:47

Problem 4

Provide a business example illustrating opportunity costs.

Jennifer Stoner
Jennifer Stoner
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Problem 5

Is "cost-of-goods sold" an expense?

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Problem 6

Is "cost-of-goods" a product cost or a period cost?

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01:46

Problem 7

What are the similarities between the Direct Materials Inventory account of the manufacturer and the Merchandise Inventory account of the merchandiser? Are there any differences between the two accounts? If so, what are they?

Sanchit Jain
Sanchit Jain
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Problem 8

What are the three categories of product cost in a manufacturing operation? Describe each element briefly.

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Problem 9

What is the difference between gross margin and contribution margin.

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Problem 10

As a manager making a decision, which is likely more important: gross margin or contribution margin? Why?

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Problem 11

What do the terms step costs and semi variable costs mean?

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02:32

Problem 12

What do the terms variable costs and fixed costs mean?

Daniel Cisneros
Daniel Cisneros
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Problem 13

"Materials and labor are always direct costs, and supply costs are always indirect." What is your opinion of this statement?

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02:09

Problem 14

The cost per seat-mile for a major U.S. airline is $13.7 \mathrm{c}$. Therefore, to estimate the cost of flying a passenger from Detroit to Los Angeles, we should multiply 1,980 miles by 13.7c. Do you agree?

Linh Vu
Linh Vu
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02:09

Problem 15

In evaluating product profitability, we can ignore marketing costs because they are not considered product costs. Do you agree?

Ameer Said
Ameer Said
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01:47

Problem 16

You and two friends drive your car to Texas for spring break. A third friend asks if you can drop her off in Oklahoma. How would you allocate the cost of the trip among the four of you?

Erika Bustos
Erika Bustos
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04:03

Problem 17

The friend in question 2-16 decides that she does not want to go to Oklahoma after all. How will the costs of your trip change? Was your choice of allocation in question 2-16 incorrect? Why?

Lily An
Lily An
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Problem 18

Consider a digital music service such as those provided by Amazon or Apple. What are some of the major cost categories? Are they mostly fixed or mostly variable?

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Problem 19

Pick a unit of a hospital (for example, intensive care or maternity). Name one example of a direct materials cost, one example of a direct labor cost, and one example of an indirect cost.

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Problem 20

The dean of the Midstate University Business School is trying to understand the costs of the school's two degree programs: Bachelors (BBA) and Masters (MBA). She has asked you for recommendations on how to allocate the costs of the following services, which are used by students in both programs: cafeteria, library, and career placement. How would you respond?

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02:16

Problem 21

Currently, generally accepted accounting principles (GAAP) in the United States require firms to expense research and development (R\&D) costs as period costs. Therefore, when the resulting product is sold, R\&D costs are not part of reported product costs. Does this mean that R\&D costs are irrelevant for decision making?

Jennifer Stoner
Jennifer Stoner
Numerade Educator

Problem 22

Basic Concepts
For each of the following statements, indicate whether it is true, false, or uncertain. Explain why. Give examples in your answer.
a. A cost is something used up to produce revenues in a particular accounting period.
b. The cost of direct materials is fixed per unit but variable in total.
c. Variable costs are direct costs; only fixed costs are indirect costs.

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Problem 23

Basic Concepts
For each of the following costs incurred in a manufacturing firm, indicate whether the costs are most likely fixed (F) or variable (V) and whether they are most likely period costs (P) or product costs (M) under full absorption costing:
a. Depreciation on the building for administrative staff offices.
b. Bonuses of top executives in the company.
c. Overtime pay for assembly workers.
d. Transportation-in costs on materials purchased.
e. Assembly line workers' wages.
f. Sales commissions for sales personnel.
g. Administrative support for sales supervisors.
h. Controller's office rental.
i. Cafeteria costs for the factory.
j. Energy to run machines producing units of output in the factory.

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Problem 24

Basic Concepts
For each of the following costs incurred in a manufacturing operation, indicate whether they are included in prime costs $(\mathrm{P})$, conversion costs $(\mathrm{C})$, or both $(\mathrm{B})$ :
a. Property taxes on the factory.
b. Direct materials used in the production process.
c. Transportation-in costs on materials purchased.
d. Lubricating oil for plant machines.
e. Assembly line worker's salary.

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Problem 25

Basic Concepts
Place the number of the appropriate definition in the blank next to each concept.
$$
\begin{array}{|ll|}
\hline \text { Concept } & \text { Definition } \\
\text { Period cost } & \text { 1. Cost that varies with the volume of activity. } \\
\text { Indirect cost } & \text { 2. Lost benefit from the best forgone alternative. } \\
\text { Fixed cost } & \text { 3. Sacrifice of resources. } \\
\text { Opportunity cost } & \text { 4. Cost used to compute inventory value according to GAAP. } \\
\text { Outlay cost } & \text { 5. Cost charged against revenue in a particular accounting period. } \\
\text { Direct cost } & \text { 6. Cost that cannot be directly related to a cost object. } \\
\text { Expense } & \text { 7. Cost that is part of inventory. } \\
\text { Variable cost } & \text { 8. Cost that can be directly related to a cost object. } \\
\text { Full absorption cost } & \text { 9. Cost that can more easily be attributed to time intervals. } \\
\hline \text { Product cost } & \text { 10. Cost that does not vary with the volume of activity. } \\
\hline
\end{array}
$$

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Problem 26

Basic Concepts
For each of the following costs incurred in a manufacturing firm, indicate whether the costs are fixed (F) or variable $(\mathrm{V})$ and whether they are period costs $(\mathrm{P})$ or product costs $(\mathrm{M})$ under full absorption costing:
a. Depreciation on pollution control equipment in the plant.
b. Chief financial officer's salary.
c. Power to operate factory equipment.
d. Commissions paid to sales personnel.
e. Office supplies for the human resources manager.

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Problem 27

Basic Concepts
The following data apply to the provision of psychological testing services:
(TABLE CANT COPY)
Required
Give the amount for each of the following (one unit = one test):
a. Variable production cost per unit.
b. Variable cost per unit.
c. Full cost per unit.
d. Full absorption cost per unit.
e. Prime cost per unit.
f. Conversion cost per unit.
g. Contribution margin per unit.
h. Gross margin per unit.
i. Suppose the number of units decreases to 800 tests per month, which is within the relevant range. Which parts of $(a)$ through $(h)$ will change? For each amount that will change, give the new amount for a volume of 800 tests.

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Problem 28

Basic Concepts
Terracotta, Inc., provides you with the following data for their single product:
(TABLE CANT COPY)
Required
Give the amounts for each of the following:
a. Prime cost per unit.
b. Contribution margin per unit.
c. Gross margin per unit.
d. Conversion cost per unit.
e. Variable cost per unit.
$f$. Full absorption cost per unit.
g. Variable production cost per unit.
h. Full cost per unit.
i. Suppose the number of units increases to 400,000 units per month, which is within the relevant range, which of amounts $(a)$ through $(h)$ will change. For each that will change, give the new amount for a volume of 400,000 units.

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Problem 29

Cost Allocation-Ethical Issues
In one of its divisions, an aircraft components manufacturer produces experimental navigational equipment for spacecraft and for private transportation companies. Although the products are essentially identical, they carry different product numbers. The XNS-12 model is sold to a government agency on a cost-reimbursed basis. In other words, the price charged to the government is equal to the computed cost plus a fixed fee. The JEF-3 model is sold to the private transportation companies on a competitive basis. The product development cost, common to both models, must be allocated to the two products in order to determine the cost for setting the price of the XNS-12.

Required
a. How would you recommend the product development cost be allocated between the two products?
b. What incentives do managers have to allocate product development costs? Why?

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Problem 30

Cost Allocation-Ethical Issues
Star Buck, a coffee shop manager, has two major product lines - drinks and pastries. If Star allocates common costs on any objective basis discussed in this chapter, the drinks are profitable, but the pastries are not. Star is concerned that her boss will pull the plug on pastries. Star's brother, who is struggling to make a go of his new business, supplies pastries to the coffee shop. Star decides to allocate all common costs to the drinks because, "Drinks can afford to absorb these costs until we get the pastries line on its feet." After assigning all common costs to drinks, both the drinks and pastries product lines appear to be marginally profitable. Consequently, Star's manager decides to continue the pastries line.

Required
a. How would you recommend Star allocate the common costs between drinks and pastries?
b. You are the assistant manager and have been working with Star on the allocation problem. What should you do?

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Problem 31

Prepare Statements for a Manufacturing Company The following balances are from the accounts of Hill Components:
$$
\begin{array}{lcc}
& \text { January } 1 \text { (Beginning) } & \text { December 31 (Ending) } \\
\hline \text { Direct materials inventory ................ } & \$ 48,100 & \$ 44,200 \\
\text { Work-in-process inventory ............. } & 67,730 & 71,500 \\
\text { Finished goods inventory ............. } & 15,600 & 18,200
\end{array}
$$
Direct materials used during the year amount to $$\$ 59,800$$, and the cost of goods sold for the year was $$\$ 68,900$$.

Required
Find the following by completing a cost of goods sold statement:
a. Cost of direct materials purchased during the year.
b. Cost of goods manufactured during the year.
c. Total manufacturing costs incurred during the year.

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Problem 32

Prepare Statements for a Service Company
Chuck's Brokerage Service (CBS) is a discount financial services firm offering clients investment advice, trading services, and a variety of mutual funds for investment. Chuck has collected the following information for October:
(TABLE CANT COPY)
Required
Prepare an income statement for October for CBS.

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Problem 33

Prepare Statements for a Service Company
Where 2 Services is a small service firm that advises high school students on college opportunities. Joseph Kapp, the founder and president, has collected the following information for March:
(TABLE CANT COPY)
Required
Prepare an income statement for March for Where 2 Services.

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Problem 34

Prepare Statements for a Service Company
The following data are available for Jupiter Consultants for the year just ended:
(TABLE CANT COPY)
Required
Find the following by completing a cost of goods sold statement:
a. Marketing and administrative costs.
b. Cost of services sold.

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Problem 35

Prepare Statements for a Service Company
Lead! Inc. offers executive coaching services to small business owners. Lead!'s operating profits average 20 percent of revenues and its marketing and administrative costs average 25 percent of the cost of services sold.

Required
Lead! Inc. expects revenues to be $$\$ 600,000$$ for April. Prepare an income statement for April for Lead! Inc. assuming its expectations are met.

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Problem 36

Prepare Statements for a Manufacturing Company
The following balances are from the accounts of Todd Machining Company:
$$
\begin{array}{lcc}
& \text { January 1 (Beginning) } & \text { December 31 (Ending) } \\
\hline \text { Direct materials inventory .............. } & \$ 96,000 & \$ 118,000 \\
\text { Work-in-process inventory ................ } & 116,000 & 112,000 \\
\text { Finished goods inventory ............. } & 97,600 & 90,000
\end{array}
$$
Direct materials purchased during the year amount to $$\$ 598,000$$, and the cost of goods sold for the year was $$\$ 2,172,400$$.

Required
Reconstruct a cost of goods sold statement and fill in the following missing data:
a. Cost of direct materials used during the year.
b. Cost of goods manufactured during the year.
c. Total manufacturing costs incurred during the year.

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Problem 37

Basic Concepts
The following data refer to one year. Fill in the blanks.
$$
\begin{array}{|c|c|c|}
\hline \text { it materials inventory, January } 1 & & \\
\hline \text { Direct materials inventory, December } 31 & \$ & 12,300 \\
\hline \text { Work-in-process inventory, January } 1 \ldots \ldots \ldots \ldots & & 8,100 \\
\hline \text { Work-in-process inventory, December } 31 \ldots \ldots \ldots \ldots & & 11,400 \\
\hline \text { Finished goods inventory, January } 1 \ldots \ldots \ldots \ldots \ldots & & 5,700 \\
\hline \text { Finished goods inventory, December } 31 \ldots \ldots \text {. } & & 900 \\
\hline \text { Purchases of direct materials } & & 48,300 \\
\hline \begin{array}{l}
\text { Cost of goods manufactured during the year } \ldots \ldots \ldots \ldots \\
\text { Total manufacturing costs } \ldots \ldots \ldots \ldots \ldots
\end{array} & & 163,350 \\
\hline \text { Cost of goods sold. } & & 168,150 \\
\hline \text { Gross margin. } & & 147,750 \\
\hline \text { Direct labor . } & & \\
\hline \text { Direct materials used } & & 43,800 \\
\hline \text { Manufacturing overhead........ } & & 41,400 \\
\hline
\end{array}
$$

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Problem 38

Basic Concepts
The following data refers to one month. Fill in the blanks.
(TABLE CANT COPY)

Susan Hallstrom
Susan Hallstrom
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Problem 39

Prepare Statements for a Merchandising Company
The cost accountant for Angie's Apparel has compiled the following information for last month's operations:
$$
\begin{array}{|c|c|}
\hline \ldots \ldots \ldots \ldots \ldots \ldots \ldots & \$ 14,000 \\
\hline \text { Merchandise inventory, July } 1 \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 3,000 \\
\hline \text { Merchandise inventory, July } 31 \ldots \ldots \ldots \ldots \ldots \ldots & 2,500 \\
\hline & 120,000 \\
\hline \text { Sales commissions } . \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 9,000 \\
\hline \text { Sales revenue } \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 190,000 \\
\hline \text { Store rent } . \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 3,000 \\
\hline \text { Store utilities } \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 5,500 \\
\hline \text { Transportation-in costs. } \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 9,000 \\
\hline
\end{array}
$$
Required
Prepare an income statement with a supporting cost of goods sold statement.

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Problem 40

Prepare Statements for a Merchandising Company
Hill Street Electronics has provided the following information for last year:
$$
\begin{array}{|c|c|}
\hline \text { Sales revenue } & \$ 8,000,000 \\
\hline \text { Store rent.... } & 440,000 \\
\hline \text { Store utilities } & 270,000 \\
\hline \text { Administrative costs. . } & 580,000 \\
\hline \text { Sales commissions . } & 1,300,000 \\
\hline \text { Merchandise purchases. . } & 5,500,000 \\
\hline \text { Transportation-in costs. . . } & 210,000 \\
\hline \text { Merchandise inventory, March } 1 & 370,000 \\
\hline \text { Merchandise inventory, February } 28 \ldots \ldots \ldots \ldots \ldots \ldots & 420,000 \\
\hline
\end{array}
$$
Required
Prepare an income statement for last year with a supporting cost of goods sold statement.

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01:58

Problem 41

Cost Behavior and Forecasting
Lima Company manufactured 30,000 units of product last month and identified the following costs associated with the manufacturing activity:
(TABLE CANT COPY)
Required
Unit variable costs and total fixed costs are expected to remain unchanged next month. Calculate the unit cost and the total cost if 25,000 units are produced next month.

Adriano Chikande
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02:18

Problem 42

Components of Full Costs
Karen Corporation has compiled the following information from the accounting system for the one product it sells:
(TABLE CANT COPY)
Required
Determine each of the following unit costs:
a. Variable manufacturing cost.
b. Variable cost.
c. Full absorption cost.
d. Full cost.

Narayan Hari
Narayan Hari
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Problem 43

Components of Full Costs
Refer to Exercise 2-42.
Required
Compute:
a. Product costs per unit.
b. Period costs for the period.

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Problem 44

Components of Full Costs
Larcker Manufacturing's cost accountant has provided you with the following information for January operations:
$$
\begin{array}{|c|c|}
\hline \text { Direct materials. . } & \$ 21 \text { per unit } \\
\hline \text { Fixed manufacturing overhead costs ... } & \$ 135,000 \\
\hline \text { Sales price } & \$ 79 \text { per unit } \\
\hline \text { Variable manufacturing overhead } & \$ 12 \text { per unit } \\
\hline \text { Direct labor } & \$ 24 \text { per unit } \\
\hline \text { Fixed marketing and administrative costs . } & \$ 117,000 \\
\hline \text { Units produced and sold. } & 30,000 \\
\hline \text { Variable marketing and administrative costs. . } & \$ 5 \text { per unit } \\
\hline
\end{array}
$$
Required
Determine each of the following:
a. Variable cost.
b. Variable manufacturing cost.
c. Full absorption cost.
d. Full cost.
e. Profit margin.
f. Gross margin.
g. Contribution margin.

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Problem 45

Gross Margin and Contribution Margin Income Statements Refer to Exercise 2-44.

Required
Prepare:
a. A gross margin income statement.
b. A contribution margin income statement.

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Problem 46

Gross Margin and Contribution Margin Income Statements
The following data are from the accounting records of Fremont Products for year 2:
(TABLE CANT COPY)
Required
Prepare:
a. A gross margin income statement.
b. A contribution margin income statement.

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Problem 47

Gross Margin and Contribution Margin Income Statements Carmen Beverages reports the following information for July:
(TABLE CANT COPY)
Required
Prepare:
a. A gross margin income statement.
b. A contribution margin income statement.

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02:32

Problem 48

Value Income Statement
Greg's Diner has the following information for year 2, when several new employees were added to the waitstaff:
(TABLE CANT COPY)
4 percent of this cost was for food that was not used by the expiration date and 10 percent was for food that was incorrectly prepared because of errors in orders taken.
'15 percent of this cost was for time spent by cooks to reprepare orders that were incorrectly prepared because of errors in orders taken.
-20 percent of this cost was time taken to address customer complaints about incorrect orders.
${ }^{\triangleleft} 80$ percent of the building was used.
Required
a. Using the traditional income statement format, prepare a value income statement.
b. What value would there be to Greg from preparing the same information in year 3 ?

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Breanna Ollech
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Problem 49

Value Income Statement
Paul's Limo Service has the following information for June:
(TABLE CANT COPY)
Required
a. Using the traditional income statement format, prepare a value income statement.
b. What value would there be to Paul from preparing the same information in July?

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Problem 50

Cost Concepts
The following information comes from the accounting records for Santa Inez, Inc., for July:
$$
\begin{array}{|c|c|}
\hline \text { Direct materials inventory, July } 1 . & \$ 12,000 \\
\hline \text { Direct materials inventory, July } 31 \ldots \ldots \ldots \ldots \ldots & 10,000 \\
\hline \text { Work-in-process inventory, July } 1 \ldots \ldots \ldots \ldots \ldots \ldots & 6,000 \\
\hline \text { Work-in-process inventory, July } 31 \ldots \ldots \ldots \ldots & 4,000 \\
\hline \text { Finished goods inventory, July } 1 \text {. } & 36,000 \\
\hline \text { Finished goods inventory, July } 31 \ldots \ldots & 48,000 \\
\hline \text { Direct materials purchased during July } \ldots \ldots \ldots \ldots \ldots \ldots & 160,000 \\
\hline \text { Direct labor costs, July } \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 128,000 \\
\hline \text { Manufacturing overhead, July . } & 168,000 \\
\hline
\end{array}
$$
Required
Compute for the month of July:
a. Total prime costs.
b. Total conversion costs.
c. Total manufacturing costs.
d. Cost of goods manufactured.
e. Cost of goods sold.

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Problem 51

Cost Concepts
The controller at Emporia Precision Parts asks for your help in sorting out some cost information. She is called to a meeting, but hands you the following information for June:
$$
\begin{array}{|c|c|}
\hline \text { Prime costs, June. } & \$ 147,000 \\
\hline \text { Total manufacturing costs, June } & 267,000 \\
\hline \text { Cost of goods manufactured, June.. } & 270,000 \\
\hline \text { Cost of goods sold, June ........ } & 212,000 \\
\hline \text { Direct materials inventory, June } 30 \ldots \ldots \ldots \ldots \ldots \ldots & 15,000 \\
\hline \text { Work-in-process inventory, June } 1 \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 9,000 \\
\hline \text { Finished goods inventory, June } 30 \ldots & 72,000 \\
\hline \text { Direct materials purchased, June .............. } & 84,000 \\
\hline & 60,000 \\
\hline
\end{array}
$$
Required
Compute for the month of June:
a. Direct materials used, June.
b. Direct materials inventory, June 1 .
c. Conversion costs, June.
d. Work-in-process inventory, June 30 .
e. Manufacturing overhead, June.
f. Finished goods inventory, June 1.

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Problem 52

Cost Concepts
Princeton Fabrication, Inc., produced and sold 1,200 units of the company's only product in March. You have collected the following information from the accounting records:
(TABLE CANT COPY)
Required
a. Compute:
1. Variable manufacturing cost per unit.
2. Full cost per unit.
3. Variable cost per unit.
4. Full absorption cost per unit.
5. Prime cost per unit.
6. Conversion cost per unit.
7. Profit margin per unit.
8. Contribution margin per unit.
9. Gross margin per unit.
b. If the number of units decreases from 1,200 to 800 , which is within the relevant range, will the fixed manufacturing cost per unit increase, decrease, or remain the same? Explain.

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Problem 53

Prepare Statements for a Manufacturing Company
Pioneer Parts, a manufacturer of windows for commercial buildings, reports the following account information for last year (all costs are in thousands of dollars):
(TABLES CANT COPY)
Required
Prepare an income statement with a supporting cost of goods sold statement.

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Problem 54

Prepare Statements for a Manufacturing Company
Butte Components produces a variety of hardware products, primarily for the do-it-yourself (DIY) market. As part of your job interview as a summer intern at Butte, the cost accountant provides you with the following (fictitious) data for the year:
(TABLE CANT COPY)
Required
Prepare the income statement with a supporting cost of goods sold statement.

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Problem 55

Prepare Statements for a Manufacturing Company
The administrative offices and manufacturing plant of Oakdale Tool \& Die share the same building. The following information (in $$\$ 000$$ s) appears in the accounting records for last year:
(TABLE CANT COPY)
Required
Prepare an income statement with a supporting cost of goods sold statement.

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Problem 56

Cost Allocation with Cost Flow Diagram
Coastal Computer operates two retail outlets in Oakview, one on Main Street and the other in Lakeland Mall. The stores share the use of a central accounting department. The cost of the accounting department for last year was $$\$ 180,000$$. Following are the operating results for the two stores for the year:
$$
\begin{array}{|c|c|c|}
\hline & \text { Main Street } & \text { Lakeland Mall } \\
\hline \begin{array}{l}
\text { Sales revenue } . . . \ldots \ldots \ldots \ldots \ldots \\
\text { Number of computers sold }
\end{array} & \$ 1,000,000 & \$ 2,000,000 \\
\hline & 2,000 & 1,600 \\
\hline
\end{array}
$$
Required
a. Allocate the cost of the central accounting department to the two stores based on:
(1) Number of computers sold.
(2) Store revenue.
b. Draw a cost flow diagram to illustrate your answer to requirement (a), part (2).

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Problem 57

Cost Allocation with Cost Flow Diagram
Wayne Casting, Inc., produces a product made from a metal alloy. Wayne buys the alloy from two different suppliers, Chillicothe Metals and Ames Supply, in approximately equal amounts because of supply constraints at both vendors. The material from Chillicothe is less expensive to buy, but more difficult to use, resulting in greater waste. The metal alloy is highly toxic and any waste requires costly handling to avoid environmental accidents. Last year the cost of handling the waste totaled $$\$ 300,000$$. Additional data from last year's operations are shown below.
$$
\begin{array}{lcc}
\text { Amount of material purchased (tons) } \ldots \ldots & \begin{array}{c}
\text { Chillicothe } \\
\text { Metals }
\end{array} & \begin{array}{c}
\text { Ames } \\
\text { Supply }
\end{array} \\
\text { Amount of waste (tons) } \ldots \ldots \ldots \ldots \ldots & 130 & 120 \\
\text { Cost of purchases. . . . . } 12.8 \ldots \ldots \ldots \ldots & \$ 624,000 & \$ 876,000
\end{array}
$$
Required
a. Allocate the cost of the waste handling to the two suppliers based on:
1. Amount of material purchased.
2. Amount of waste.
3. Cost of material purchased.
b. Draw a cost flow diagram to illustrate your answer to item (a), part (1).

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Problem 58

Cost Allocation with Cost Flow Diagram
The library at Pacific Business School (PBS) serves both undergraduate and graduate programs. The dean of PBS is interested in evaluating the profitability of the degree programs and has asked the head of the library, Rex Gilmore, to allocate the annual library cost of $$\$ 4,035,000$$ to the two programs.

Rex believes that two cost drivers explain most of the costs: number of students and credit hours. Using information from a previous analysis, he split the annual library budget as follows:
(TABLE CANT COPY)
Required
a. Allocate the cost of the library to the two programs (undergraduate and graduate).
b. Draw a cost flow diagram to illustrate your answer to requirement (a).

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09:33

Problem 59

Find the Unknown Information
After a computer failure, you are trying to reconstruct some financial results for the year just ended. While you know that backups are available, it will take too long to get the information you want. You have been able to collect the following information:
$$
\begin{array}{|c|c|}
\hline \text { ect materials inventory, January } 1 \text { (Beginning). } & \$ 16,000 \\
\hline \text { Direct materials inventory, December } 31 \text { (Ending) ........ } & 12,000 \\
\hline \text { Work-in-process inventory, January } 1 \text { (Beginning) ....... } & 21,200 \\
\hline \text { Work-in-process inventory, December } 31 \text { (Ending).... } & 10,000 \\
\hline \text { Finished goods inventory, December } 31 \text { (Ending) } & 14,08 \\
\hline \text { Purchases of direct materials } & 38,40 \\
\hline & 88,80 \\
\hline \text { Total manufacturing costs } . \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 77,60 \\
\hline \text { Cost of goods sold } & 87,04 \\
\hline \text { Gross margin. } & 52,48 \\
\hline \text { Direct labor... } & 12,16 \\
\hline \text { Manufacturing overhead. } & 23,040 \\
\hline \text { Average sales price per un } & \\
\hline
\end{array}
$$
Required
Find the following:
a. Finished goods inventory, January 1.
b. Direct materials used for the year.
c. Gross margin percentage (as a percentage of sales).

Manasvee Singh
Manasvee Singh
Numerade Educator

Problem 60

Find the Unknown Information
Just before class starts, you realize that you have mistakenly recycled the second page of your cost accounting homework assignment. Fortunately, you still have the first page of the printout from your spreadsheet (shown below) and you remember that you were able to determine the items on the recycled page from this information.
(TABLE CANT COPY)
Required
Find the following:
a. Cost of goods sold.
b. Direct materials used.
c. Purchases of direct materials.
d. Sales revenue.

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Problem 61

Cost Allocation and Regulated Prices
The City of Imperial Falls contracts with Evergreen Waste Collection to provide solid waste collection to households and businesses. Until recently, Evergreen had an exclusive franchise to provide this service in Imperial Falls, which meant that other waste collection firms could not operate legally in the city. The price per pound of waste collected was regulated at 20 percent above the average total cost of collection.
Cost data for the most recent year of operations for Evergreen are as follows:
$$
\begin{array}{lr}
\text { Administrative cost } \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & \$ 40,0,000 \\
\text { Operating costs-trucks } \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 1,280,000 \\
\text { Other collection costs } \ldots \ldots \ldots \ldots \ldots \ldots \ldots \ldots & 320,000
\end{array}
$$
Data on customers for the most recent year are:
$$
\begin{array}{lrrr}
& & \text { Households } & \text { Businesses } \\
\text { Number of customers } \ldots \ldots \ldots \ldots \ldots \ldots & 12,000 & 3,000 \\
\text { Waste collected (tons) } \ldots \ldots \ldots \ldots \ldots \ldots & 4,000 & 12,000
\end{array}
$$
The City Council of Imperial Falls is considering allowing other private waste haulers to collect waste from businesses, but not from households. Service to businesses from other waste collection firms would not be subject to price regulation. Based on information from neighboring cities, the price that other private waste collection firms will charge is estimated to be $$\$ 0.04$$ per pound $$(=\$ 80$$ per ton).

Evergreen's CEO has approached the city council with a proposal to change the way costs are allocated to households and businesses, which will result in different rates for households and businesses. She proposes that administrative costs and truck operating costs be allocated based on the number of customers and the other collection costs be allocated based on pounds collected. The total costs allocated to households would then be divided by the estimated number of pounds collected from households to determine the cost of collection. The rate would then be 20 percent above the cost. The rate for businesses would be determined using the same calculation.

Required
a. Based on cost data from the most recent year, what is the price per pound charged by Evergreen for waste collection under the current system (the same rate for both types of customers)?
b. Based on cost and waste data from the most recent year, what would be the price per pound charged to households and to businesses by Evergreen for waste collection if the CEO's proposal were accepted?
c. As a staff member to one of the council members, would you support the proposal to change the way costs are allocated? Explain.

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Problem 62

Reconstruct Financial Statements
San Ysidro Company manufactures hiking equipment. The company's administrative and manufacturing operations share the company's one building. Eighty percent of the building is used for manufacturing and the remainder is used for administrative activities. Indirect labor is 8 percent of direct labor.

The cost accountant at San Ysidro has compiled the following information for the year ended December 31:
(TABLE CANT COPY)
Required
Prepare a cost of goods manufactured and sold statement and an income statement.

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Problem 63

Finding Unknowns
Mary's Mugs produces and sells various types of ceramic mugs. The business began operations on January 1, year 1, and its costs incurred during the year include these:
$$
\begin{aligned}
&\text { Variable costs (based on mugs produced): }\\
&\begin{array}{|c|c|}
\hline & \$ 6,000 \\
\hline \text { ig labor costs. } & 27,000 \\
\hline \text { Indirect manufacturing costs .... } & 5,400 \\
\hline \begin{array}{l}
\text { Administration and marketing . } \\
\text { Eixed costs: }
\end{array} & 3,375 \\
\hline \text { ats } & 18, \\
\hline \text { firect manufacturing costs. } & 6,000 \\
\hline
\end{array}
\end{aligned}
$$
On December 31, year 1, direct materials inventory consisted of 3,750 pounds of material. Production in that year was 20,000 mugs. All prices and unit variable costs remained constant during the year. Sales revenue for year 1 was $$\$ 73,312$$. Finished goods inventory was $$\$ 6,105$$ on December 31 , year 1 . Each finished mug requires 0.4 pounds of material.

Required
Compute the following:
a. Direct materials inventory cost, December 31, year 1 .
b. Finished goods ending inventory in units on December 31 , year 1 .
c. Selling price per unit.
d. Operating profit for year 1 .

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09:33

Problem 64

Finding Unknowns
BS\&T Partners has developed a new hubcap with the model name Spinnin' Wheel. Production and sales started August 3. As of August 2, there were no direct materials in inventory. Data for the month of August include the following:
(TABLE CANT COPY)
Required Complete the table.

Manasvee Singh
Manasvee Singh
Numerade Educator

Problem 65

Analyze the Impact of a Decision on Income Statements
You were appointed the manager of Drive Systems Division (DSD) at Tunes2Go, a manufacturer of portable music devices using the latest developments in hard drive technology, on December 15 last year. DSD manufactures the drive assembly, M-24, for the company's most popular product. Your bonus is determined as a percentage of your division's operating profits before taxes.

One of your first major investment decisions was to invest $$\$3$$ million in automated testing equipment for the M-24. The equipment was installed and in operation on January 1 of this year.

This morning, J. Bradley Finch III, the assistant manager of the division (and, not coincidentally, the grandson of the company founder and son of the current CEO) told you about an offer by Pan-Pacific Electronics. Pan-Pacific wants to rent to DSD a new testing machine that could be installed on December 31 (only two weeks from now) for an annual rental charge of $$\$ 690,000$$. The new equipment would enable you to increase your division's annual revenue by 7 percent. This new, more efficient machine would also decrease fixed cash expenditures by 6 percent.

Without the new machine, operating revenues and costs for the year are estimated to be as shown below. Sales revenue and fixed and variable operating costs are all cash.
$$
\begin{array}{|c|c|}
\hline \text { ales revenue } & \$ 4,800,000 \\
\hline \text { Variable operating costs } & 600,000 \\
\hline \text { verating costs } & 2,250 \\
\hline \text { ent depreciation. } & 450 \\
\hline \text { preciation. } & 375,0 \\
\hline
\end{array}
$$
If you rent the new testing equipment, DSD will have to write off the cost of the automated testing equipment this year because it has no salvage value. Equipment depreciation shown in the income statement is for this automated testing equipment. Equipment losses are included in the bonus and operating profit computation.

Because the new machine will be installed on a company holiday, there will be no effect on operations from the changeover. Ignore any possible tax effects. Assume that the data given in your expected income statement are the actual amounts for this year and next year if the current equipment is kept.

Required
a. Assume the new testing equipment is rented and installed on December 31. What will be the impact on this year's divisional operating profit?
b. Assume the new testing equipment is rented and installed on December 31. What will be the impact on next year's divisional operating profit?
c. Would you rent the new equipment? Why or why not?

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