ACTIVITY NO.

1
PROBLEM 1:
Indicate whether each item listed below is a variable (V), fixed (F), or mixed (M) cost and whether it is a product or
service (PT) cost or a period (PD) cost. If some items have alternative answers, indicate the alternatives and the reasons
for them.
1) Wages of forklift operators who move finished goods from a central warehouse to the loading dock.
2) Paper towels used in factory restrooms.
3) Insurance premiums paid on the headquarters of a manufacturing company.
4) Columnar paper used in an accounting firm.
5) Cost of labels attached to shirts made by a company.
6) Wages of factory maintenance workers.
7) Property taxes on a manufacturing plant.
8) Salaries of secretaries in a law firm.
9) Freight costs of acquiring raw materials from suppliers.
10) Cost of wax to make candles.
11) Cost of radioactive material used to generate power in a nuclear power plant.

PROBLEM 2:
The Fremont, California, plant of New United Motor Manufacturing, Inc. (NUMMI), a joint venture of General Motors
and Toyota, assembles two types of cars (Corollas and Geo Prisms). Separate assembly lines are used for each type of
car. Classify each cost item (A–H) as follows:
a) Direct or indirect (D or I) costs with respect to the total number of cars of each type assembled (Corolla or Geo
Prism).
b) Variable or fixed (V or F) costs with respect to how the total costs of the plant change as the total number of cars
of each type assembled changes. (If in doubt, select on the basis of whether the total costs will change
substantially if there is a large change in the total number of cars of each type assembled.)
Cost Item
1) Cost of tires used on Geo Prisms
2) Salary of public relations manager for NUMMI plant
3) Annual awards dinner for Corolla suppliers
4) Salary of engineer who monitors design changes on Geo Prism
5) Freight costs of Corolla engines shipped from Toyota City, Japan, to Fremont, California
6) Electricity costs for NUMMI plant (single bill covers entire plant)
7) Wages paid to temporary assembly-line workers hired in periods of high production (paid on hourly basis)
8) Annual fire-insurance policy cost for NUMMI plant

PROBLEM 3:
The list of representative cost drivers in the right column of this table are randomized with respect to the list of
functions in the left column. That is, they do not match.
Required:
1) Match each function with its representative cost driver.
2) Give a second example of a cost driver for each function

PROBLEM 4:
Consolidated Minerals (CM) owns the rights to extract minerals from beach sands on Fraser Island. CM has costs in three
areas:

a) Payment to a mining subcontractor who charges $80 per ton of beach sand mined and returned to the beach
(after being processed on the mainland to extract three minerals: ilmenite, rutile, and zircon).
b) Payment of a government mining and environmental tax of $50 per ton of beach sand mined.
c) Payment to a barge operator. This operator charges $150,000 per month to transport each batch of beach
sand—up to 100 tons per batch per day—to the mainland and then return to Fraser Island (that is, 0 to 100 tons
per day = $150,000 per month; 101 to 200 tons per day = $300,000 per month, and so on).

Each barge operates 25 days per month. The $150,000 monthly charge must be paid even if fewer than 100 tons are
transported on any day and even if CM requires fewer than 25 days of barge transportation in that month. CM is
currently mining 180 tons of beach sands per day for 25 days per month.

Required:

1) What is the variable cost per ton of beach sand mined? What is the fixed cost to CM per month?
2) Plot a graph of the variable costs and another graph of the fixed costs of CM. Is the concept of relevant range
applicable to your graphs? Explain.
3) What is the unit cost per ton of beach sand mined (a) if 180 tons are mined each day and (b) if 220 tons are
mined each day? Explain the difference in the unit-cost figures.

PROBLEM 5:
The Evanstonian builds tabletop replicas of some of the most famous lighthouses in North America. The company is
highly automated and, thus, maintenance cost is a significant organizational expense. The company’s owner has decided
to use machine hours as a basis for predicting maintenance costs and has gathered the following data from the prior
eight months of operations:

Using the high-low method and regression method, determine the cost formula for maintenance costs.