Solutions to Exercises

2-1.
(1) Beginning direct materials – 8/1 $ 18,000
Plus direct materials purchased 80,000
Direct materials available $ 98,000
Less ending direct materials – 8/31 (10,000)
Direct materials used $ 88,000
Direct labor 30,000
Factory overhead 120,000
Total manufacturing costs $238,000
Plus beginning work in process – 8/1 12,000
Minus ending work in process – 8/31 -16,000
Cost of goods manufactured $234,000

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 2, Page 2-1

(2)
Direct Materials Work in Process
$ 18,000 | $ 12,000 |
80,000 | $ 88,000 88,000 | $234,000
$ 10,000 | 30,000 |
120,000 |
$16,000 |

Direct Labor Finished Goods

$ 30,000 | $ 30,000 $ 45,000 |
234,000 | $241,000
$ 38,000 |

Manufacturing Overhead Cost of Goods Sold

$120,000 | $120,000 $241,000 |

2-2. Cost Behavior Product Direct/

Cost Item Var/Semivar/Fix /Period Indirect
(a) Sales commissions Variable Period Either2
(b) Plant manager's salary Fixed Product Indirect
(c) Lubricating oils Var or Semivar Product Indirect
(d) Brass rods Variable Product Direct
(e) Property taxes: Factory Fixed Product Indirect
Office Fixed Period
(f) Labor – repairs and maintenance Probably Semivar Product Indirect
(Could be Var or Fix)
(g) Supervisor's salary – grinding Fixed Product Indirect
(h) Crude oil Variable Product Direct1
(i) Artists' wages – grocery ads Probably Fixed Period
(j) Depreciation – office furniture Fixed Period
(k) Quality assurance personnel Fixed Product Indirect
(l) Robotics software engineers Fixed Product Indirect
(m)Union auto assembly work wages Fixed & Variable Product Possibly both 3
1
This is a joint cost and could be considered to be indirect for specific products.
2
Commissions expense could be a direct period expense if commissions are paid on
specific products; otherwise, they are an indirect period expense.
3
An interesting case. The guaranteed wage acts like a fixed salary. The hours spent
doing assembly work would be variable and be direct product costs. The hours spent
not doing assembly (or other direct labor) work would be considered overhead and be
indirect product costs.

2-3. Beginning materials inventory $8,000 (2006 ending balance)

Plus materials purchases 30,000
Minus ending materials inventory (15,000) (2008 beginning balance)
Materials used $23,000
Direct labor 20,000
Factory overhead 40,000
Total manufacturing costs $83,000
Plus beginning work in process inventory 24,000 (2006 ending balance)

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 2, Page 2-2

 Minus ending work in process inventory (18,000) (2008 beginning balance)
Cost of goods manufactured $89,000

2-4.
Department 1: Given: (a) DL + FOH = $200,000
(b) DL + DM used = $300,000
(c) Beginning DM – Ending DM = ($20,000)

DM purchases + (Beginning DM – Ending DM) = DM used = $200,000 – $20,000 = $180,000

Substitute DM used to solve for DL: DL + $180,000 = $300,000; DL = $120,000
Substitute DL in (a) to solve for FOH: $120,000 + FOH = $200,000
Factory overhead = $80,000

Department 2: Given: (a)DL + FOH = 3DM

(b) DM + DL + FOH = $600,000
(c) Indirect product costs = FOH = 0.5 x (DL + FOH)

Since FOH is IPC, DL and FOH must be equal (50 percent each)
Let A represent DL and FOH in (a): A + A = 3DM or 2A = 3DM
Substitute 3DM for (DL + FOH) in (b): DM + 3DM = $600,000
Direct materials = ($600,000  4) = $150,000

Department 3: Given: (a) TMC – CC = DM 1.00 – 0.60 = 0.40

(b) CC = DL + FOH 0.40 = (0.25 x 0.40) + 0.75 x 0.40)
(c) FOH = $600,000
(d) FOH = 0.30 (TMC)
(e) TMC = $600,000 / 0.30

Total manufacturing costs = $2,000,000

2-5.
(1) Cost Element Costs Units Cost Per Unit
Materials HK$200,000 10,000 HK$20.00
Direct labor 50,000 10,000 5.00
Factory overhead 250,000 10,000 25.00
Total manufacturing costs HK$500,000 10,000 HK$50.00

(2) Cost Per Unit Units Total Costs

Cost of goods sold HK$50.00 8,000 HK$400,000
Ending inventory 50.00 2,000 100,000
Total manufacturing costs HK$500,000

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 2, Page 2-3

2-6.
(a) Kramer:
High Activity – Low Activity Cost of 2,000 Turkeys Variable Cost

($25,000 – $22,000) = $3,000 = $1.50 per turkey

(8,000 – 6,000) 2,000

Fixed cost: $25,000 – (8,000 x $1.50) = $13,000 or $22,000 – (6,000 x $1.50) =

$13,000

Cost function: a + b (x) = $13,000 + $1.50 (x)

(b) Bradburn:

Total costs – Fixed costs = Variable costs or $600,000 – $240,000 = $360,000

Variable cost per unit: $360,000  120,000 units = $3 per unit
Cost function: Total costs = a + b (x) = FC + VC per unit (x)
TC = $240,000 + $3 (x)
Next year’s cost estimate = $240,000 + $3 (140,000) = $660,000

(c) Slowik:
Cost Function Costs of 50 Contracts Costs of 30 Contracts
Variable costs $3,000 per contract $150,000 $90,000
Fixed costs $30,000 per month 30,000 30,000
Total costs $180,000 $120,000
Average cost $3,600 $4,000

2-7. Joyce's costs: $20,000 + $0.10 (x) Diana’s costs: $2,000 + $0.40 (x)

Indifferent point: $20,000 + $0.10 (x) = $2,000 + $0.40 (x); x = 60,000 boxes

Below 60,000 boxes, Diana is the low cost producer. Above 60,000 boxes, Joyce is the low-
cost producer. At high volumes, Joyce has the advantage because of her low per unit cost
and because her higher fixed costs have less impact. At low volumes, Diana's low fixed costs
are important even though her unit cost is three times Joyce's unit cost.

2-8.
(a) Variable, although some semivariability probably exists.
(b) Variable, based on sales or number of pizzas.
(c) Fixed, assumes that a supervisor's salary is a fixed cost. However, if the supervisor is paid
only on an as-needed basis, then it would be a semifixed (step-fixed) cost.
(d) Variable, probably with the number of pizzas delivered. If some waiting time is assumed, the
wages could be semivariable.
(e) Fixed.
(f) Semifixed, if ovens are operating when the business is open and if power use fluctuates only
due to 24-hour openings and severe peak and slow periods.
(g) Semivariable or mixed. A lease partially based on sales implies that each month a base
amount (fixed portion) plus a sum calculated as a percentage of sales are paid.
(h) Variable, assumes that the fixed cost of the drink machine is excluded.
(i) Fixed.

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(j) Semifixed, assumes maintenance costs are always incurred, maybe as an extended warranty
contract (fixed). Actual repairs are probably cost lumps that occur irregularly (maybe step-
fixed). Some may be related to use.

2-9.
(1) The sunk cost is the $50,000 cost of producing the jeans. It is a past cost, cannot be
changed,
and does not affect the decision to be made.

(2) Choices: Rework & Sell Sell to Mexico Sell as Waste

Revenue $15,000 $6,000 $2,200
Additional expenses:
Rework (8,000)
Freight (750)
$ 7,000 $5,250 $2,200

Select "rework and sell" choice. It gives the highest net cash inflow.

(3) Quantitatively, the "wait" alternative is weak. The annual storage cost is $2,400. These are
out-of-pocket dollars. The waiting period is eight to ten years. Subtracting $19,200 to
$24,000 of storage costs would leave only $6,000 to $10,800 profit, even if her prediction is
accurate. She can get $7,000 today. She would have to wait eight to ten years for a chance
of getting a larger return. The longer into the future we must wait for an event, the more
uncertain the outcome of the event is. Given that this is style merchandise, the predicted
salability is uncertain; the $30,000 is clearly uncertain; and the timing is uncertain.

Students should suggest the time value of money issue. Dollars received today have more
value than dollars eight to ten years into the future. The $7,000 she would get from the
"rework and sell" alternative can be earning returns for the next eight to ten years. Instead, if
she waits, she is paying storage costs every month, with no firm promise of $30,000. And the
other alternatives may also disappear.

2-10.
(a) Mydlowski Co. cost function:

Cost at highest activity – Cost at lowest activity = ($36,000 – $28,000) = $20 per unit
Highest activity – Lowest activity (1,100 – 700)

Total fixed cost = Total cost at highest activity – (Variable cost per hour x Highest activity)
or
Total fixed cost = Total cost at lowest activity – (Variable cost per hour x Lowest activity)

Total fixed cost = $36,000 – ($20 X 1,100) = $14,000

Cost function: a + b (x) = $14,000 + $20 (x)

(b) Coppo Credit Checking Agency cost function: $2,000 + $5 (x)

Budgeted costs (2,100 credit checks): $2,000 + $5 (2,100) $12,500

Actual costs (given) 13,200

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 2, Page 2-5

 Actual spending over budget $700

Coppo Credit Checking Agency’s actual total costs were higher than the adjusted budget
costs by $700, implying that it was unable to perform at its expected level of spending.

(c) Puidokas Lub Services cost function:

Cost at highest activity – Cost at lowest activity = ($21,000 – $18,000) = $15 per unit
Highest activity – Lowest activity (1,200 – 1000)

Total fixed cost = Total cost at highest activity – (Variable cost per hour x Highest activity)
or
Total fixed cost = Total cost at lowest activity – (Variable cost per hour x Lowest activity)

Total fixed cost = $18,000 – ($15 x 1,000) = $3,000

Cost function: a + b (x) = $3,000 + $15 (x)

2-11.
(1) Using the high-low method:

Cost at highest activity – Cost at lowest activity = ($20,000 – $15,000) = $2.50 variable cost per MH
Highest activity – Lowest activity (6,000 – 4,000)

Total fixed cost = Total cost at highest activity – (Variable cost per hour x Highest activity)
or
Total fixed cost = Total cost at lowest activity – (Variable cost per hour x Lowest activity)

Total fixed cost = $20,000 – ($2.50 X 6,000) = $5,000

Cost function: a + b (x) = $5,000 + $2.50 (x)

(2) October cost estimate using the cost function in part (1):

$5,000 + $2.50 (4,300 hours) = $15,750

2-12.
(1) Total costs = a + b (x)
$500,000 = $300,000 + b (200,000)
b = $1 variable cost per gallon

Marginal cost would equal $1 per gallon, which is the cost of producing one additional gallon
of
“Good Stuff.”

(2) Average cost per gallon for 180,000 gallons: Total cost  Gallons produced
$300,000 + ($1 * 180,000) = $480,000
$480,000  180,000 = $2.67 per gallon (rounded)

(3) Total costs for 220,000 gallons using the cost function:

Managerial Accounting Solutions, Schneider/Sollenberger, 4th Edition, Chapter 2, Page 2-6

$300,000 + $1 (220,000) = $520,000
$520,000  220,000 = $2.36 per gallon (rounded)

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2-13.
(1) Variable costs: Change in cost  Change in hours
October and November: £5,000  1,000 = £5 per hour
November and December: £10,000  2,000 = £5 per hour

Next, subtract the variable costs at each level from total costs to see if the fixed portion is
constant:
October November December
Total costs £17,000 £22,000 £12,000
Variable cost:
£5 per hour x 3,000 hours 15,000
x 4,000 hours 20,000
x 2,000 hours 10,000
Fixed cost per month £ 2,000 £ 2,000 £ 2,000

The cost function is: £2,000 + £5 per unit. As can be shown, this cost function explains
exactly the total costs for the three months.

(2) Yes, one cost function works for all three month. See the calculations for Part (1).

(3) New fixed costs: £2,000 + £1,500 = £3,500 per month

New variable costs: £5 + (£5 * 0.05) = £5.25 per hour

Total budgeted cost for 3,500 hours: (£3,500 * 12) + (£5.25 * (3,500 * 12)) = £262,500

2-14.
To: Cynthia Golden
From: Fellow student

Certain costs are very important to your decision of whether or not to return to school. One of the
most important is your opportunity cost. This is the salary from your current job that you will
forego, $25,000.

Unless you change your living patterns, your living costs of $16,000 per year are irrelevant to the
decision since they are the same under either alternative. However, since the $16,000 is a future
cost, you may be able to change your living costs. No other costs in the data you have provided
are irrelevant or sunk. The tuition and books costs of $9,000 and the salary foregone are relevant
costs.

It is important to note that the most important missing piece of information is your expected
earnings after you complete your degree. As a personal decision, the financial facts may not be
the most critical. However, as a financial decision, you will need to measure the increased
earnings resulting from the degree to decide whether going back to school is a wise economic
decision.

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