ACG 2071 - Managerial Accounting

Study Probes - Chapter 2 SOLUTION

1. Earle Traynham is the owner/manager of Dynacyne. Last year, in addition to paying
himself a salary of $200,000, the company earned a profit of $45,000 that remained
invested in the company. Recently, a head hunter contacted Earle and asked him to
interview for a $200,000 per year position as controller of Cynadyne. What is the nature
of the $200,000 salary if Earle chooses to stay employed at Dynacyne? Justify your
answer.
$200,000 is an opportunity cost. If Earle stays employed at Dynacyne, he will 'give up'
the $200,000 salary....hence, a cost to him.
2. Canada Foods produced and sold 100 telephones. Its total variable materials costs
were $8,700. If production and sales are expected to increase by 20% in June,
determine the following amounts for June:
A. Unit variable materials costs
$8,700/100 = $87 each
B. Total variable material costs
100*120%*$87 = $10,400
3. LeBaron Company plans to produce and sell 1,200 skateboards next year. Fixed
costs total $80,000. LeBaron sells each skateboard for $80. Total variable costs at
1,200 units are $57,600. Management is considering decreasing the selling price to $75
each, but this is likely to cause the sales volume to increase to 1,300 units. How much
is the incremental cost associated with the changes?
Variable cost per unit = $57,600/1,200 = $48 each
Incremental cost = $48*[1,300 - 1,200] = $4,800
There is no change in total fixed costs.
4. Werths Pizza produced and sold 1,000 pizzas last month with variable materials
costs of $6,000. If production and sales are expected to decrease by 25% next month,
how much are unit variable costs and total variable costs for next month?
Variable cost per unit = $6,000/1,000 = $6
Total variable costs = $6*1,000*(100% 25%) = $4,500
5. Spackle Company has 7,500 shirts that are out of fashion. Their book value is
$50,000. The shirts may be reworked into pillows that could be sold for $45,000.
Alternatively, the shirts could be sold for $12,000 as scrap. In analyzing these
alternatives, which amount is the sunk cost? Explain.

$50,000. This cost occurred in the past and cannot be changed no matter what option is
taken.
6. Baals Donuts sells donuts to policeman for $4.00 per dozen. The donuts cost $2.40
per dozen to produce. Every Friday, the company offers a special and sells the donuts
for $3.00 per dozen. Leftover donuts are given to the Homeless Center. As it relates to
left over donuts on Friday, how much is the sunk cost of the donuts?
$2.40 per dozen. This cost occurred in the past and cannot be changed no matter what
option is taken.
7. Variable cost per unit is budgeted to be $6.00 and fixed cost per unit is budgeted to
be $3.00 in a period when 8,000 units are produced. If production is actually 9,000
units, what is the expected total cost of the units produced?
Total cost = VCx + FC = [$6*9,000] + [$3*8,000] = $78,000
8. Place an X next to the cost described it is can be categorized as indicated.
Period Cost

Pickles for Burger King burgers

--Pickles are materials which can be 'traced' to products
(i.e., easily identified as part of the burger cost).
--Pickles are variable because the total cost of pickles
increases as a result of increased production of burgers.
Materials used to produce products
--These costs are part of the costs needed to get
inventory ready to sell.
--They are variable because the total cost of materials
increases as a result of increased production of burgers.
Target store supervisor salary
--This is not part of getting the inventory ready to sell so
it can't be a product cost.
--'Salary' is always fixed since it implies the same
paycheck every week regardless of how many products
are produced.
Depreciation on checkout counters
--Depreciation for a particular year is the same total cost
regardless of the level of production, i.e. a fixed cost.
--This is not part of the cost of getting inventory ready to
sell...it.e. inventory can be sold without a checkout
counter.
Retail store insurance
--Insurance for a particular year is the same total cost
regardless of the level of production, i.e. a fixed cost.

Variable Cost

--Inventory can be ready to sell without incurring a cost

on the retail store--hence it is not part of the cost of
getting the inventory ready to sell.
Salespersons commissions
--Sales related costs are not part of getting the products
ready to sell, hence, they are a period, not a product
cost.
--Commissions are percentages of sales that
salesperson's earn. A sales person's total commission
amount increases in total as production/sales increases.
Retail store rent
--Rent for a particular year is the same total cost
regardless of the level of production, i.e. a fixed cost.
--Retail store related costs are not part of getting the
products ready to sell, hence, they are a period, not a
product cost.
Executive salaries
--'Salary' is always fixed since it implies the same
paycheck every week regardless of how many products
are produced.
--"Executive' denotes a non-manufacturing cost not
related to production, making it a period cost.
Product marketing costs
--An increase in the level of production/sales does not
cause the total marketing costs for the year to increase,
i.e. a fixed cost.
--Marketing related costs are not part of getting the
products ready to sell, hence, they are a period, not a
product cost. This cost occurs after the products are
ready to sell.

Multiple Choice
1. Save, Inc. develops and manufactures games. Save distinguishes between variable
and fixed factory overhead in its cost accounting system. Which one of the following is a
benefit of this separation?
A. It allows Saves managers to identify which manager is causing waste in the
company.
B. It provides Saves production managers with better quality products.
C. It enables Saves managers to predict costs based on behavior.
D. It permits Saves managers to omit the preparation of budgets.
2. The most important costs to consider when making a decision involving future actions
are

A. sunk costs.
B. opportunity costs.
C. out-of-pocket costs.
D. incremental costs.
3. Which of the following statements regarding fixed costs is true?
A. When production increases, fixed cost per unit decreases.
B. When production decreases, total fixed costs increase.
C. When production increases, fixed cost per unit increases.
D. When production decreases, total fixed costs decrease.
4 .You own a car and are trying to decide whether or not to trade it in and buy a new
car. Which of the following costs is an opportunity cost in this situation?
A. the trip to Europe that you will not be able to take if you buy the car
B. the cost of the car you are trading in
C. the cost of your gasoline for the coming year
D. the cost of your car insurance last year
5. Which statement is true?
A. Period costs are fixed and product costs are variable.
B. Sunk costs are the same as period costs.
C. Product costs contain both fixed and variable costs.
D. Cost of goods sold contains variable costs, but no fixed costs.
6. Watts Inc. used factory equipment to produce an item with a $3 profit when it could
have used the equipment to produce a different product that sells for $15 with a $5
profit. The most likely descriptor illustrated in this situation is
A. an incremental cost
B. an opportunity cost
C. a sunk cost
D. a period cost
7. A hotel is deciding whether to rent three of its ten empty hotel rooms for $100 per
room instead of the normal rate of $150 per room. Which one of the following is an
incremental cost for this decision?
A. the depreciation cost of the furniture in the room
B. the cost of washing towels and sheets for the 3 rooms
C. the cost of shampoo and soap for all of the rooms that are occupied in the hotel
for the night
D. the labor cost of checking in the guests for the three rooms at 1 AM in the hotel
8. Lander Company rents out a small unused portion of its factory to another company
for $1,000 per month. The rental agreement will expire next month, and rather than
renew the agreement, Lander Company is thinking about using the space itself to store
materials. Which of the following is the most correct label for the $1,000 amount?
A. sunk cost
B. opportunity cost

C. period cost
D. controllable cost
9. Lee Company plans to produce and sell 400 widgets with a variable cost
per unit of $5. Total fixed costs are estimated at $6,000. Lee sells each
widget for $12. Lee is considering increasing the selling price to $13 each.
Which cost amount is not incremental?
A. $5 variable cost
B. $6,000 fixed cost
C. $12 selling price
D. $400 profit increase
10. Handy, Inc. estimates the cost of rent to be $8,000 in June when 8,000 units are
produced. If rent is a fixed cost, and if production is expected to increase to 9,000 units
in July, how much is the expected cost of Julys rent?
A. $9,000
B. $8,000
C. $1,000
D. Not enough information to determine
11. Which statement describes a fixed cost?
A. It varies in total at every level of activity.
B. The unit cost varies directly to the activity level.
C. Its unit cost varies inversely to the level of activity.
D. It remains the same per unit regardless of activity level.
Short Answer Questions
Answers can be found in chapter 2. It is immensely more beneficial if you look up
the answers in the chapter as you will get more insight by reading the concept in
context of the chapter compared to if I would provide you a one sentence answer.
Hence, I will not post answers to the following. If you want confirmation of your
interpretation of the answer, feel free to ask.
1. How do assets differ from expenses as it relates to 'costs'?
2. Identify the two cost terms based on behavior and explain why these classifications
are beneficial to management.
3. What occurs to unit variable costs when activity levels change? What occurs to total
variable costs when activity levels change?
4. What occurs to unit fixed costs when activity levels change? What occurs to total
fixed costs when activity levels change?
5. What are controllable costs? Why is it better to evaluate managers on controllable
rather than uncontrollable costs?
6. What are opportunity costs?
7. What are sunk costs?

8. Which costs are never recorded in the accounting records? Explain.

9. Which costs are ignored in decision making?
10. What is an incremental amount?
11. How are incremental amounts (revenue, costs, profit) calculated?
12. Why is the distinction of product and period costs necessary?
13. How do product and period costs differ?
14. Which costs are inventoriable?