Solutions to questions due on 10 Dec 2014

1. The three major elements of product costs in a manufacturing company are direct
materials, direct labor, and manufacturing overhead.
2. A product cost is any cost involved in purchasing or manufacturing goods. In the case of
manufactured goods, these costs consist of direct materials, direct labor, and manufacturing
overhead. A period cost is a cost that is taken directly to the income statement as an expense
in the period in which it is incurred.
3. (1) Direct labour;
(2) Selling cost
(3) Direct materials
(4) Manufacturing overhead
(5) Manufacturing overhead
(6) Administrative cost
(7) Selling cost
(8) Manufacturing overhead
4. (1) Product cost: direct materials
(2) Product cost: manufacturing overhead
(3) Product cost: manufacturing overhead
(4) Period cost
(5) Product cost: direct materials
(6) Period cost
(7) Product cost: manufacturing overhead
(8) Period cost
(9) Period cost
(10) Product cost: manufacturing overhead
(11) Product cost: manufacturing overhead
(12) Period cost
(13) Product cost: direct labour
(14) Period cost
(15) Product cost: manufacturing overhead
5
(1).
High activity level (February)
Low activity level (June)
Change

X-rays Taken
7,000
3,000
4,000

X-ray Costs
$29,000
17,000
$12,000

Variable cost per X-ray:

Change in cost
$12,000
=
=$3.00 per X-ray
Change in activity 4,000 X-rays

Fixed cost per month:

X-ray cost at the high activity level
Less variable cost element:
7,000 X-rays $3.00 per X-ray
Total fixed cost

$29,000
21,000
$ 8,000

The cost formula is $8,000 per month plus $3.00 per X-ray taken or:
Y = $8,000 + $3.00X

(2). Expected X-ray costs when 4,600 X-rays are taken:

Variable cost: 4,600 X-rays $3.00 per X-ray
Fixed cost
Total cost

$13,800
8,000
$21,800

Solutions to in-class questions:

P2.32
1
Total prime costs:
Direct material
Direct labour:
Wages
Labour on-costs
Total prime costs
2
Total manufacturing overhead:
Depreciation on factory building
Indirect labour wages
Production supervisors salary
Service department costs
Indirect labour: labour on-costs
Labour on-costs for production supervisor
Total overtime premiums paid
Cost of idle time: production employees
Total manufacturing overhead
3

Total conversion costs:

Direct labour ($242 500 + $47 500)
Manufacturing overhead
Total conversion costs
Total product costs:
Direct material
Direct labour
Manufacturing overhead

$1 050 000
242 500
47 500
$1 340 000
$ 57 500
70 000
22 500
50 000
15 000
4 500
27 500
20 000
$ 267 000
$ 290 000
267 000
$557 000

$1 050 000
290 000
267 000

Total product costs

Total period costs:
Advertising expense
Administrative costs
Rental of office space for sales personnel
Sales commissions
Product promotion costs
Total period costs

$1 607 000
$ 49 500
75 000
7 500
2 500
5 000
$139 500

E.2.26
1
Regular wages (38 hours $25)
Overtime wages (10 hours $30)
Total wages

$950
300
$1250

Overtime hours
Overtime premium per hour ($30 $25)
Total overtime premium
Classification:
Direct labour (48 hours $25)
Overhead (overtime premium: 10
hours $5)
Total compensation

10 hours
$5
$50
12000$1200
50
$1250

The regular wage of $25 per hour is treated as direct labour, even when ten hours were
worked during overtime. The overtime premium of $5 per hour is classified as
manufacturing overhead, rather than direct labour cost of the particular product that is
produced during the overtime hours, because the overtime was caused by all the
production scheduled for the period, not just that particular product.
4

The normal hourly rate for this employee could only be treated as an indirect cost if he
or she did not work directly on production for some reason, perhaps because of idle
time, or the transfer of his or her labour to non-production related duties, or the worker
acts as the production supervisor.