UNIT 2 – COST CLASSIFICATION

1. Classify the following costs as direct (D) or indirect (ID) as it relates to the
Production Department

A. Factory supervisors salary

B. Factory supplies-stationery
C. Fringe benefits-machinists
D. Glue in tube-making
E. Janitorial Supplies
F. Leather used in the manufacture of shoes
G. Lubricants for machines
H. Wood in making furniture

2. Classify the following costs as variable (V) , fixed (F) or semi-variable (S) in
terms of their behaviour with respect to production and sales activity.

A. Depreciation by straight-line
B. Direct Labour
C. Insurance
D. Maintenance and repairs
E. Property taxes
F. Rent
G. Sales agent’s salary
H. Sales Agent’s commission
I. Utilities

3. Classify the following costs as either manufacturing (M), selling (S) or administrative
(A) expenses in terms of their functions

A. Advertising
B. Auditing Expenses
C. Bad Debts
D. Cost of machine break down
E. Factory Supplies
F. Employer’s payroll taxes-factory
G. Employer’s payroll taxes-sales office
H. Entertainment and travel
I. Freight-out/Carriage outwards
J. Freight-in/Carriage inwards
K. Legal expenses
L. President’s salary
M. Rent on general office building
N. Samples

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 O. Sanding material using in furniture making
P. Small tools

4. Classify the following costs as product costs (PC) or period expenses (PE) in
relation to the production department

A. Advertising expenses
B. Direct labour
C. Insurance on office equipment
D. Legal fees
E. Overtime premium – production workers
F. Pears in a fruit cocktail
G. Production workers compensation
H. Rework on defective products
I. Travel Expenses

5. Which of the following costs are likely to be fully controllable, partially controllable
or not controllable by the manager of the production department.

A. Advertising
B. Direct materials used
C. Insurance on factory equipment
D. Idle time due to machine break down
E. Price paid for materials and supplies
F. Production manager’s salary
G. Rent on factory building
H. Stationery
I. Utilities
J. Wages paid to direct labour

6 Classify the following fixed costs as either committed or discretionary costs.

A. Advertising
B. Depreciation
C. Executive salaries
D. Insurance
E. Patent amortization
F. Property taxes
G. Public relations
H. Research and development
I. Rent
J. Training

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 7. Define the following terminologies:
A. relevant costs
B. sunk costs
C. opportunity cost
D. incremental costs
E. prime cost
F. conversion cost

8. Use the graphs below (A – E) to represent the cost behaviour described in

questions 36 through 40. A graph may be used once, twice or not at all.

[A] [B] [C]

[D] [E]

i. The cost of telephone service, which is based on the number of message units per
month. The charge is $60 per message for up to 650 message units. Additional
message units above 650 are free. ____________

ii. The cost of outsourcing diagnostic blood testing by a hospital. The hospital pays an
independent lab a fee of $80,000 per month plus $3 for each test done. __________

iii. The salaries of the security personnel at a factory. The security guards are on duty
around the clock. _______________

iv. The cost of sheet metal used to manufacture automobiles. _______________

v. The cost of electricity during peak-demand periods is based on the following

schedule.
Up to 10,000 kilowatt-hours (kWh) ……………….. $120 per kWh
Above 10,000 kilowatt-hours ……………………… $300 per kWh _____________

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9. (A) A car manufacturing company in Manchester has incurred the following

expenditures in the year 2016-17 for manufacturing various cars:

Raw material $75,000

Direct labour $42,500

Other manufacturing expenditure $24,000

Indirect expenditures $35,000

Administrative expenditures $52,500

Finance cost $13,000

Deprecation $18,000

Required: Calculate prime cost.

(B) A furniture manufacturing company in Portland incurred the following

manufacturing expenses for the completion of one of its assignment;
 5 Labour worked for 30 days

 Labor charges are $1000 per labor per day

 Wood – 100 sheets @ a cost of $1,500 per sheet

 Glue – 50 Kg @ a cost of $250 per Kg

Required: Calculate prime cost

(C) ABC Company manufactures 10 bed frames and incurs the following

expenses:

 $5,000 for lumber

 $1,500 for hardware
 50 hours of labor for product assembly at a rate of $15 per hour

Calculate

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 i. cost of direct labour

ii. prime cost

iii. prime cost per unit

10. XYZ Company incurred the following costs during the month of December:

Completed Units 50,000

Direct Wages $38,000
Indirect Wages $5,000
Direct Material $29,000
Indirect Material $1,000
Equipment Depreciation $6,500
Office Expenses $10,000
Factory Insurance $2,000

Required: Use the following information to calculate conversion cost per unit.

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