Xerci 2 (15 minutes)

xercise 2-1 (15 minutes)

1. Product; variable Product

2. Opportunity (Inventoriable) Period
Cost
3. Prime
1. The cost of the memory chips uscd in a
COS
. Peiod
radarsCl.......... *°*°°**°°*°*°****

5. Produut; period; fixed 2.

Pioduct
Factory heating costs. ***

. 3. Factory equipment maintenance costs.. .

7 Conversioon 4. Training costs for new administrative
8. Period; variable employees..... . **********
Sunk
X
9. 5. The cost of the solder that is used in
10. Fixed; product; conversion assembling the radar sets.. . X
6. The travel costs of the company's
salespersons... * X
7. Wages and salaries of factory security
X
personnel....... **°*****.

8. The cost of air-conditioning

executive offices.. . . X
9. Wages and salaries in the department that
handles billing customers.... ****
X
10. Depreciation on the equipment in the
workers... X
filness room used by factory
11. Tclephone cxpenscs incurred by factory
management..... * * * * * * '

X
12. The costs of shipping ccmpleted radar sets
X
to customers.....
* * * * * * * * * ° * * * * ° * * *

assemble
13. The wages of the workers who
X
the radar sets..
*********°'*°°°°**

X
14. The president's salary...
for factory
15. Health insurance premiums X
* * * *

personnel......

18 19
Exercise 2-3 (15 minutes)
Exercise 2-4 (15 minutes)
Cost Behavior Selling and
Cost
Variable Fixed Cost Behavior Administrative Product
1. Smal glass plates used for lab tests ina
Cost
ho'ilal X
Cost Item Variable Fixed Cost
1. The costs of turn signal
2. Strayht-line deprecialion of a building.. X Swilchies UScd at ulhe
3 Top management salaries.... General Motors Sag1naw,
4. Electncal costs of running machines.... Michigan, plant......
5. Adverus1ng of products and serviccs*. 2. lnterest expernse on CBS's
long-term d e b t*
. .* . . * .
6 Batteries used in manufacturing trucks... X
3. Salesperson's commissions at
7. Commissions to salespersons...
Avon Products.
8 1nsurance on a dentist's office.... X 4. Insurance on one of
9. Leather used in manufacturing footballs. Cincinnati Milacron's factory
K
10. Rent on a medical center. X
bujldings. X

5. The costs of shipping brass

This parucular item may cause some debate. Hopefully, advertising fittings to customers in
rCsults in more demand for products and services by customers. So California...**********************" X
adveriising costS are correlated with the amount of products and 6. Depreciation on the
SCivices provide However, nole the direction of causaity. Advertising bookshelves at Reslon
Causes an increase in the amount of goods and
serienc Diovided, but an X
y Customers
Bookstore. ****** ***********

increasC in the amount of goods and services denc 7. The costs of X-ray film at the
incred>u i i advertising cosls. X X
Joes nol necesSariy resull in à proportional lab..
in the classical scnse that the total
Mayo Clinic's radiology
Hence, advertising costs are fixed 8. 7he cost of lcasing an 800
to what the unit salcs
anmount spent on advertising is not proportional telephone number at L.L.
turn out to be. Bean. *** *

9. The deprecialion on the

playgrouind cquipnient al a
X
McDonald's outlet... **********

10. The cost of the mozzarclla

cheese used at a Pizza Hut
outlet .

20
 Exercise2-7 (30 minutes)
Exercise 2-8 (15 minutes)
1.
No. It appears that the overtime spent completing the job was simply
1. a

ECCLES COMPANY maller of how the job happened to be scheduled. Under tnese
Schedule of Cost of Goods Circumstances, an overtime premium probably should not be chargcd
to
Manufactured a cuslomcr wliose job happerns to fall at the tail end of the day's
Direct malerials:
sclicdulc.
Raw materials inventory,
beginning...
Add: Purchases of raw materials.. . $ 8,000
2. Direct labor cost: 9 hours x $20 per
hour.. $180
Raw malerials availabie for
.132.000
use... .. 140,000 General overhead cost: 1 hour x $10 per hour. 10
Deduct: Raw materials Tolal labor cost..
***********************. $190
inventory,
ending.. 10.000
Raw materials used in production....
$130,000 3. A charge for an overtime premium might be justified if the customer
Direct labor.... ****** ***
90,000
Manufacturing overhead: requested that the work be done on a "rush" basis.
Rent, factory building.. 80,000
Indirect labor... 56,300
ULilities, factory.. 9,000
Maintenance, factory equipment... 24,000
Supplies, factory.. 700
Depreciation, factory equipment.. 40,000
Total ovcrhead costs.. 210,000
Tolal manufacturing costs.. 430,000
Add: Work in process, beginning.. 5,000
435,000
Deduct: Work in process, ending 20.000

Cost of goods manufactured..

$A15,000

2. The cost of goods sold section wouid be:

$ 70,000
inventory, beginning.
* * * * *
. . .

inished goods 415,000

manufactured...
Add: Cost of goods 485,000
Goods available for sale....... 25,000
Deduct: FinIshed goods inventory, ending.. 4460,000
Cosl of goods sold.

24 25
 Exercise 2-9 (15 minutes)
Exercise 2-10 (15 minutes)
1. Quality
1. Direct labor cost: 34 hours
2. Quality cf ronformance x $12
per hour.......... 408
Manufacturing overhead cost: 6 hours'x $12 per hour.... 1 2
3. Prevention costs, appraisal costs Total cost...... ****. *****
$480
4. Intcrnal failure cosls, cxlernal failure
costs
2. Direct labor cost: 50 hours x $12
5. External failure costs per hour... $600
Manufacturing overhead cost: 10 hours x $6 per hour... 60
6. Appraisal costs
Total cost... .. $660
7. Prevention costs
3. The company could treat the cost of fringe benefits relating to direct
8. Internai failure costs labor workers as part of manufacturing overhead. This
the cost of such fringe enefits Over all units of
approach spreads
) F x l l d ldiule COSts output. Alternatively, the
company could treat the cost of fringe benefits relating to direct labor
i0. i'iuvCii cOS, :norarsal costs workers as additional direct labor cost. This latter
-Iac cosls of fringe benefits to specific
approach charges the
. Jualily jobs rather than to all units of output.
12. Q1iyUSt ° U

26
28

Problem 2-11 (30 minutes)

Product Cost Period

Variable Fixed Direct Direct Mfg. (Selling and Cpportunity Sunk
Cost Materials Labor Overhead Admin.) Cost Cost Cost
Name cf the Cost Cost
Rental revenue forgone, $40,000
per year.* *******°*****

Direct materials cOst, $40 per

unit. ******'***"*** ***" **
X
Supervisor's salary, $2,500 per
**°'* ***°*"***"
X
month...
Direct labor cost, s18 per unit.
Rentai cost of wårehouse, $1,000
X
per niOnh.. *
Rental cost of equipment, $3,000
X
per month... °* ***"
Depreciation of the building,
X X
***** *** '**"
$10,000 per year
Advertising cost, $50,000 per
************************************

A
X
Shipping cost, $i0 per unit..
Electrical cOsts, S2 per unit. X
Return earned on investments,
X
S6,000 per year..

Problem 2-12 (20 minutes)

To Units of
Cost Behavior Product
Cost Ite Variable Fixed Direct Indirect
1. Plastic washers used in auto
production*...
2. Production
superintendent's salary.. X
Laborers assembling a
product.....
4. Electricity for operation of machines.
5. Janitorial salaries....
6. Clay used in brick production... **** ***°

7. Rent on a factory
building.... X
8. Wood used in ski
production. . X
9. ScrewS Used in
*******
furniture production*...
10. A supervisors salary.....
11. Cloth used in suit
12. Depreciation of
production...
cafeteria equipment.
13. Glue used in textbook production*...
14. Lubricants for machines..
15. Paper used in textbook production.. X_
their
*These materials would usually be considered indirect materials because
are relatively
insignificant. It would not be worth the effort to trace their costs to iFdividual costs
units of product and
therefore they would usually be classified as indirect materials.
Problem 2-13 (30 minutes) Problem 2-13 (continued)
1. Total
wages for the week: 4. Allocationof wages and
fringe benefits:
Regular Liine: 40 hours x Direct labor:
$24 per hour.
Overtinc: 5 hours x $36 per hour 960 Wage cost: 45 hours x $24 pcr
Total wages..
....

180 hour..
Fringe benciils: 45 houi x 48 pCr
$1,080
******

Allocation of total wages: $1,140 Manufacturing overhcad: hour..... 360 $1,440

Direct labor: 45 hours x $24 Idle timc: 3 hours-x $24 per
per hour, hour...... 72
Manufacturing overhead: 5 hours
$1,080 Overtime premium: 8 hours x $12 per hour
x
$12 per hour.... 60 ... 96
Total wages.. . Fringe benefits: 3 hours x $8 per hour.
$1,140 24192
Tolal wages and fringe benefits....
2. Total wages for the week:
$1,632
Regular time: 40 hours x $24 per hour. 960
Overtime: 10 hours x $36 per hour......
360
Total wages..
$1320
Allocation of tolal wages
Direct labor: 46 hours $24 per
x
hour $1,104
Manufacturing overhead:
Idle time: 4 hours x $24 per hour. ****
$ 96
Ovcrliye premium: 10 hours x $12 per hour.. 120216
Tolal wages..... $1,320

3. Total wages and fringe benerils for the week:

Regular ime: 40 hours x $24 per hour. $ 960
Overlime: 8 hoursx $36 per hour... 288
Fringe benefits: 48 hours x $8 per hour 384
Total wages and fringe benefits. ....
$1,632
Allocation of wages and fringe benefits:
Direct lalbor: 45 hours x $24 per hour $1,080
Manulacluring ovcrhead
Idle limc: 3 hours x $24 per hour... 72

Overtime 8 hours x $12 per hour 96

premium: . . . .

Fringc benefils: 48 hours x $8 per hour . . .

384552
Total wages and fringe benefits... $1,632

30
31
 Problem 2-14 (60 minutes)
Problem 2-14 (continued)
1.
Yedder Enterprises
Quality Cost Report (in thousands of dollars) 18,000
16,000
This Year Last Yoar 14,000
Amount Percent
Amount Perccnt 12,000
Prevention costs:
0,000
External Failure
Systems development. ... $ 680 0.68 % $120 D Internal Failure
Statistical process control
0.13 % 8,000
270 0.27 % 0.00 % Appraisal
Qualily engineering.. 1650 1.65 % 1,080 114 %
6,000
Prevention
Tolal..... 2,600 2.60 % 4,000
1,200 1.27 %
Appraisal costs: 2,000
Inspection. 2,770 2.77 % .1,700 1.79 %
Supplies used in testing... 40 0.04 % 30 0.03 % Last Year This Year
Cost of Lesting equipment 390 0.39 % 270 0.28 %
Tolal.. ********.
3,200 3.20 % 2,000 2.10 %
Inlernal failure costs:
Net cost of scrap... 1,300 1.30 % 800 0.84 %
18%
Rework labor. ..1,600 1.60 % 1,400 1.47 %
16%
Downtime due lo quality
problemS... ..1,100 1.10 % 600 0.63 % 14%
4.00 % 2,800 2.94 % 12%
Total. 4,000
****
External failure costs 10%
External Failure
3,500 3.68 % Internal Failure
Product recalls.. ***********. 600 0.60 % 8%
2,800 2.80 % 3,300 3.47 % Appraisal
Warranty repairs.. G% Prevention
Customer returns of defective 3.37 % 4%
200 0.20 % 3,200
goods ****°°°**

3.60 % 10,000 10.52 % 2%

Total.. *****°*
3,600
$16,000 16.84 % 0%
Total quality cost...... .. $13,400 13.40 %
* AS a percentage of total sales in each year. Last Year This Year
the right are subject to rounding
Nole: The figures in the last column on

error.

2. See the graph on the following page.

32 33
 Problem 2-14 (continued)

3 Dúring the past year the

on
company nas more than doubled
prevention andit has increasea lts Spending on appraisal
60%. This increased emphasis on prevention
in a
its snendine
activities hu
and appraisal has resulted
declinc of total quality cOsts from 16.84% of sales last vear to
13.4% of salcs lhis ycar. Whilc uie sILualion has
H
improved, internal and
external failure costs still constitute the majority of the quality costs-
and this does not include the lost sales due to Customer
perceptions of
DOor quality. However, if the company Continues to emphasize
prevention and appraisal, the intetial and external failure costs should
further decline until they are no longer dominant.

Probably due to the increased emphasis on appraisal activities, internal

failure costs have actually increased. This is because the increased
appraisal activilies calch more defects before they are shipped to
customers. Thus, the company is incurring more costs for scrap and
rcwork, but it is saving large amounts on external failure costs as a
Consequence of not releasing defective goods to customers. As better
quality is built into products and better defect prevention systems are
devetoped, defects should decrease and appraisal and internal failure
Costs should also fal

U)

OE
O 8
N D

31
 Problem 2-16 (15 minutes)
The controller is correctin his viewpointthat the salary cost should be
elassified as a selling (marketing) cost. The duties described in the
problem have nothing to do with the manufacture of a product, but
ralher deal wilh order-laking and shipping inished goods to customers.
As stated in the text, selling costs include all costs necessary to secure D

customer orders and get the finished product into the hands of
Customers.

from the point of view of the reported

2. No, the president is not correct;
net operating income for the year, it does make a difference how the
salary cost is classified. If the salary cost is classified as a selling expense
all of it will appear on the income statement as a period cost. However,
if the salary cost is classified as a manufacturing (product) cost, then it
will be added into Work in Process Inventory along with other
manufacturing costs for the period. To the extent that goods are still in
the salary cost will remain with
process at the end of the period, part of
these goods in the Work in Process Inventory account. Only that portion
leave the
of the salary cost that has bcen assigned lo finished units will
Work in Process Inventory account and be transferred into the Finished
that goods are
Goods Inventory account. In like manner, to the extent
of the salary cost will remain with
unsold at the end of the period, part
"hat portion
thesc goods in the Finished Goods Inventory account. Only
that are sold during
of the salary that has been assigned to finished units
the period will appear on the income statement as an expense
(part of
Cost of Goods Sold) for the period.

36
HITT
Problem 2-17 (continued)
2. The $600 legal and filing fees are not a differential cost. These legal and
filing fecs have already been paid and are a sunk cost. Thus, the cost
will not differ depending on whether Frieda decides to produce fly
Swallers or to slay with the computer firm. All other costs listed above
are differenlial costs since they will be incurred only if Frieda leaves the
computer firm and produces the fly swatters.

38
Problem 2-18 (continued) Problem 2-19 (60 minutes)
2. Only the product costs wil be includea in the cost of a
bookcase Thhe 1.
cOst per bookcase will be: MEDCO, INC.
Schedule of Cost of Goods Manufactured
DIrect product costs..... ... $520,000
Indirect product cosls...
******
264.000 Dirccl matcrials:
Tolal product costs. $784,000 Raw materials inventory, beginning.. . . $ 10,000
materials....
$784,000+4,000 bookcases = $196 per bookcase Add: Purchases of raw 90.000
Raw materials available for usce... 100,000
3. The cost per bookcase would increase. This is because the fixed costs Deduct: Raw materials inventory, ending.17.000
Raw materials used in production.. $ 83,000
would be spread over fewer units, causing the cost per unit to rise. ****

Direct'labor.. 60,000
4. a. Yes, there probably would be a
disagreement. The president is likely Manufacturing overhead:
to want a price of at least $ 196, which is the average cost per unit to Depreciation, factory. 42,000
manufacture 4,000 bookcases. He may expect an even higher price Insurance, factory...
than this to cover a portion of the administrative costs as well. The
5,000
Maintenance, faclory.. 30,000
neighbor will probably be thinking of cost as including only materials
Uuililics, factory... 27,000
uscd, or perhaps malerials and direct labor. Supplies, factory...
at full
1,000
b. The lcrm is opportunity cost. Since the company is opcrating Indirect labor...
the full, regular price of a sel lo .65,000
capacily, the president must give up Total overhead costs.
sell a bookcase lo the neighbor. Therefore, the president's
cost is
Total manufacturing costs.....
170.000
reallythe full, regular price of a set. Add:
313,000
Work in process inventory, beginning 7.000
320,000
Deduct: Work in process
Cost of
inventory, ending. 30,000
goods manufactured.. $290,0000

41
 Problem 2-20 (60 minutes)
Problem 2-19 (continued) 1. SKYLER cOMPANY
Schedule of Cost of Goods Manufactured
2. MEDCO, INC. For the Month Ended June 30
Income Statement
Direct materials:
Salcs...... ** 1150,000 Raw materials inventory, June 1.... $ 17,000
Less cost of goods sold: Add: Purchases of raw materials.. 190,000
Finished goods inventory, beginning. $ 10,00o Raw materials available for use.. *****
207,000
Add: Cost of goods inanufactured. 290,000 Deduct: Raw materials inventory, June 30. 42,000
Goods available for
sale...... 300,000 Raw materials used in production.... $165,000
Deduct: Finished goods inventory, ending. 40,000 260,000 Direct labor....... o. 90,000
Gross m a r g i n . . . . * * * ' * * * 190,000 Manufacturing overhead:
Rent on facilities (80% x $40,000)... 32,000
Less operating expenses:
80,000
Selling expenses.... . . Insurance (75% x $8,000)... 6,000
70,000150,000 45,000
Administrative expenses....
40,000
Utilities (90% x $50,000)..
Net operating i n c o m e . . . . . . . Indirect labor...... . 108,000
Maintenance, factory. 7,000
10,000 units $8.30 per unit.
=

3. Direct materials: $83,000 Depreciation, factory equipment... _12,000

10,000 units =$4.20 per unit.
Depreciation: $42,000 Total overhead costs. 210,000
Total manufacturing costs.. 465,000
4. Direct materials: Add: Work in process inventory, June 1... 70,000
Unit cost: $8.30 (unchanged) unit = $124,500. 535,000
units x $8.30 per
Total cost: 15,000 Deduct: Work in process inventory, June 30.. 85,000
Depreciation: unit.
Unit cost: $42,000 + 15,000 units = $2.80 per Cost of goods manufactured... $450,0000
Total cost: $42,000 (unchanged)
because of the
to $2.80,
S.Unit cost for depreciation
dropped from $4.20 Since fixed costs do not
betwcen the two years. decrease on a
unit
increase in production will
level changes, they
in total as the activity
change rises.
basis as the activity level

43
42
 Problem 2-20 (continued)
Problem
2-21 (60 minutes)
2.
SKYLER COMPANY
Income Statement VALENKO COMPANY
For the Month Ended June 30 Schedule of Cost of Goods Manufactured
Sales.. *****.
$600,000 Direct materials:
Less cost of goods sold: Inventory, beginning.. $ 50,000
Raw materlals
Finished goods inventory, June 1... Purchases of raw materiaBs.... 260,000
$ 20,000 Add:
available for use.... . 310,000
Add: Cost of goods manufactured.. 450,000 Raw materials
inventory, ending.. 40,000
Goods available for sale.. .470,000 Deduct: Raw materials
materials used in production. $270,000
Deduct: Finished goods inventory, June 30... 60,000 410,000 Raw 65,000 *
Gross margin. . Direct labor
***********
.
190,000 Manufacturing overhead:
Less operating expenses:
8,000
Selling and administrative salaries. 35,000 Insurance, factory..
Rent, factory building 90,000
Renton facilities (20% x $40,000).. 8,000 52,000
Depreciation, sales equipment.. 10,000 Utilities, factory e***
Cleaning supplies, factory... 6,000
Insurance (25% x $8,000) ,000 Depreciation, factory equipment.. 110,000
Utilities (10% x $50,000) 5,000
Maintenance, factory. 74,000
Advertising.. 80,000 140,000 Total overhead c o s t s . . 340,000
Net operating income. $50,000 Total manufacturing costs.. 675,000 (given)
Add: Work in process inventory, beginning.. 48,000
3. In preparing the income statement shown in the text, the accountant
failed to distinguish betwcen productcosts and period costs, and also 723,000
failed to recognize the change in inventories between the Deduct: Work in process inventory, ending. 33,000
end of the month. Once these errors have been
beginning and $690,000
corrected, thefinancial
condition of the company looks much better and selling the
Cost of goods manufactured.
may not be advisable.
company
44
45
 Problem 2-21 (continued) Problem 2-22 (30 minutes)
that discretionary expenditures be
action was to direct
The cost of goods sold section of the income statement follows: Richart's first that these "discretionary
the first of the new year. Providing
. Mr.
delaved until operations, this is a
Finished goods inventory, beginning. be delayed without hampering
$ 30,000 expenditures" can expenditures, the company can
Add: Cost of goods manufactured. aood business decision. By delaying a bit more interest. There
is
690,000* longer and thereby earn
Goods available for sale.. ... 720,000 (given) bit
keep its cash a about second action was to ask
unethical such an action. Ihe
nothing the clerk's order was a
Deduct: Finished goods inventory, endin... 85,000 that the order
for the parts be cancelled. Since
unethical about this action either.
Cost of goods sold... ....F635,000 (given) there is nothing
mistake,
to ask the accounting department
to delay
These items must be computed by working backwards up through the The third action was This action is
bill IS paid in January.
statements. An effective way of doing this is to place the form and of the delivery until the strikes
recognition to ignore transactions
known balances on the chalkboard, and then work toward the unknown accounting department
dubious. Asking the of the accounting system. If the accounting
figures. of the integrity
at the heart difficult to run a business or obtain
system cannot
be trusted, it is very
the purchaseof
2. Direct materials: $270,000 30,000 units $9.00 per unit. funds from outsiders. However, inbë Mr. RIchart's defense,
shouldn't recorded as an expense. He has
Rent, factory building: $90,000 30,000 units = $3.00 per unit. the raw materials really
awkward position because the company's
been placed in an extremely
is flawed.
3. Direct materials: accounting policy
Per unit: $9.00 (unchanged) with respect to raw materials is
Total: 50,000 units x $9.00 per unit = $450,000. 2. The company's accounting policy
should be recorded as an assct when delivered
incorrect. Raw materials
Rent, factory building: rather than as an expense. If the correct accounting policy were
Per unit: $90,000 + 50,000 units $1.80 per unit. there would be no reason for Mr. Richart to ask the accounting
followed, of the raw materials.
Total: $90,000 (unchanged). department to delay recognition of the delivery to delay
because of the This flawed accounting policy creates incentives for managers
4. The unit cost for rent dropped from $3.00 to $1.80, deliveries of raw materials until after the end of the fiscal year. This
fixed costs do not
increase in production between the two years. Since unit COuld lead to raw materials shortages and poor relations with suppliers
change in total as the activitylevel they will decrease on a
changes, who would like to record their sales before the end of the year.
basis as the activity level rises.
does not foster
The company's "manage-by-the-numbers" approach to "do anything so
ethical behavior-particularly when managers are told
"no excuses
long as you hit the target profits for the year." Such
pressure from the top too often leads to unethical behavior wnen
managers have difficulty meeting target profits.

47
46
 Proplem 2-23 (continued)
has
appear that Bergen, Inc. 's program
analysis it would
r obeen the above since:
m successful,
declined
of total production have
costs as a percentage
. total quality 13.1%.
to customer dissatisfaction,
from 23.4%
costs, those costs signaling to 2.3%. These declines in
external failure
N L co . of total production
have declined
from 8% returns should translate into
increased

warranty repairs and customer

future.
sales in the reduced from 4.6% to 2.3% of
costs have been
.internal failure
which represents a 50% drop.
production costs, 5.0% to 2.6% of total
decreased from
.appraisal costs have 48%. Higher quality is reducing the demand for
production-a drop pf
final testing. prevention where problems
shifted to the area of
quality costs have customer becomes
involved. Maintenance,
are solved
before the from 5.8% of total
reviews have increased
training, and design from 24.9% of total quality costs to
and
production cost to 6% decreases in
increase is more than offset by
45.7%. The $30,0Q0
other quality costs.

current reaction quality improvement programnis

to the
2. Tony Reese's
favorable as he is seeing the having the quality
benefits of
more
and solved before they reach the production floor
problems investigated
training, and additional pre-
Because of improved designs, quality
rework costs have declined.
production inspections, scrap and customer service.
fewer resources are now required for
Consequently, work is
increased and throughput time has decreased;
Throughput has
how moving much faster through the department.

To measure the cost of not implementing the quality

3. opportunity
program, Bergen Inc. could assume that:
calculate
sales and market share would continue to decline and then
the revenue and income lost.
tne company would have to compete on price rather than quality and
calculate the impact of having to lower product prices.
Problem 2-24 (15 minutes)

Direct or Ind.rart Variable or Fixed

Cot of the
with Respect to the
Direct or Indirect Number of
iminmatio7 Cost of Particular
Ceter Immunizations
Item Patients
Description Direct Indirect Direct Indirect
Administered
a. The salary of the head nurse in the -

Variable Fixed
Immunization Center.. *******°********* **" X
b. Costs of incidental X X
supplies consumed in the
Immunization Center such as paper
The cost of lighting and
towels. X X
heating the
immunization Center. * ' * * ************ X
The cost of disposable syringes used in the
Immunization Center ****** ********* X X X
e. The salany of the Central Area
Well-Baby Clinic's
Information Systems manager.
f.
. X X
The costs of mailing letters
soliciting donations
to the Central Area
Well-Baby Clinic. ******* X X
9. The wages of nurses who work in the X
munization Center*...
. ************"***}
X
h. The cost of medical malpractice insurance for . X
he Central Area
vell-Baby Clinic. ****** X
i Dereciation on the fixtures and equipment in
Immuni-ation Center * A
e wages of the nurses could be variable and -
a direct cost of serving paricL ar pat.erts

Problem 2-25 (45 minutes)

Case Case 2 Case 3 Case 4
Direct materials.. . . S 7,000 $ 9,000 $ 6,000 $8,000
Direct labor... ... 2,000 4,000 5,000 3,000
Manufacturing overhead. 10,000 12.000 7,000 21.000
Total manufacturing costs...
19,000 *
25,000 18,000 32,000
1,000 2,000 1,500*
Beginning work in process inventory...... 3,000
work in process inventory... (4.000) (3,500) (4,000)* (2.000)
Ending
Cost of goods manufactured. S18,000 $22.500 $16.000 $31.500
Sales.... ***.*****. $25,000 $40,000 $30,000 S50,000
8,000 7,000 9,000
Beginning finished g0ods inventory. 6,000
.18.000 22.500 16.000 31.500
Cost of g0ods manufactured.. 23,000* 40,500
. 24,000 *
30,500
Goods available for sale.... 7,000
9,000 4,000 5.000
Ending finished goods inventory... . 15.000* 26,500 18.000 33.500
Cost of goods sold.
10,000 13,500* 12,000* 16,500
Gross margin... 6,000 8.000 9.000 10,000
Operating expenses.. 4000 *
S.5500 S3,000 S 6,500
Net operairg income...

*Missing Gata in the problem.

Problem 2-26 (45 minutes)
Problem 2-26 (continued)
1. number of units in the finished goods inventory at the
HICKEY COMPANY Compute the
a To
we must first compute the number of units sold
Schedule of Cost of Goods Manufactured end of the year,
during the year.

Direct materials: Total sales $650,000 = 26,000 units sold

$25 per unit
Rawmaterlals inventory, beginning.... ..$ 20,000 Unit selling price
Add: Purchases of raw materials.. ... 160,000 goods inventory, beginning 0
Units in the finished
. .

Raw materials available for use. ... 180,000 during the year.. . 30,000
Units produced
Deduct: Raw materials inventory, ending.. 10.000 sale... ... 30,000
Units available for
Raw materials used in produclion.... the year (abové) ... 26,000
Units sold during
****

$170,000
in the finished goods inventory, ending.....
Direct labor . .. 4,000
80,000 Units
Manufacturing overhead:
cost per unit during the year woúld be:
Indirect labor... 60,000 b. The average production
Building rent (80% x $50,000) *****
40,000 Cost goods manufactured $450,000 -= $15 per unit.
of
Utilities, factory. 35,000 Number of units produced 30,000 units
Royalty on patent
Thus, the cost of the units in the finished goods inventory at the end
($1 per unit x 30,000 units) . .

30,000 of the year would be: 4,0p0 units x $15 per unit $60,000.
=

Maintenance, factory.. ******°

25,000
Rent on equipment: ICKEY COMPANY
$6,000 +($0.10 per unit x 30,000 units) 9,000 Income Staement
Other factory overhead costs.. . 11,000
Total overhead costs. 210,000 Sales...***e******'se*o $650,000
Total manufacturing costs. 460,000 Less cost of goods sold:
30,000 Finished goods inventory, beginning.
Add: Work in process inventory, beginning. ..$
490,000 Add: Cost of goods manufactured.. 450.000
-40,000 Goods available for sale... *** 450,000
Deduct: Work in process inventory, ending.. $450,000
Cost of goods manufactured. Finished goods inventory, ending. 60,000 390,000
Gross margin.. 260,000
.
**********

Less operating expenses

Advertising. 50,000
Building rent (20% x $50,000). 10,000
Selling and administrative salaries.. 140,000
Other selling and
administrativé expense..
Net operating income...
20,000220,000
$ 40,000
 Case 2-27 (60 minutes)
Case 2-27 (continued)
distinction has been made betwecn
No period expenses and proctuct an income
statement can be prepared, the cost of
the 4,000
costs on the income statement prepared Dy
Louganis. Product coste 3. Before
the ending finished goods inventory must be
determined.
toa direct materials, direct labor, and monitors in thus,
be assigned
manuracturing overhead)
to inventory accounts and rlow through to the shoult Altogcther, the company procduced 20,000 units durlng the quartcr;
income cost per unit would be:
statement as cost of goods Sola oniy Wnen inished products are sold the production
Since there were ending inventories, some of the product costs Cost of goods manufactured $680,000 =$34 per unit
should
appear on the balance sheet as asscts rather than on the inconme the quarter 20,000 units
Units produced during
statement as expenaes.
(20,000-16,000 4,000) were in the ending
=

Since 4,000 monitors

finished goods inventory, the total cost of this inventory would be:
2 $34 per unit $136,000.
MEDICAL TECHNOLOGY, INC. 4,000 units x

Schedule of Cost of Goods Manufactured from the case, the company's income
With this figure and other data
as follows:
For the Quarter Fndcd Junc 30 statement for the quarter can be prepared
Direct materials:
MEDICAL TECHNOLOGY, INC.
Raw materials inventory, beginning . . $ 0 Income Statement
Add: Purchases of raw materials. 310,000 For the Quarter Ended June 30
Raw materials available for use .... 310,000
Deduct: Raw materials inventory, ending.. Sales... $975,0000
40,000 Less cost of goods sold:
Raw materials used in production... $270,000 Finished goods inventory, beginning.... $ 0
Direct labor ,.. ******** 80,000 Add: Cost of goods manufactured 680,000
Manufacturing overhead: Goods available for sale.. 680,000
Cleaning supplies, production... 6,000
Deduct: Finished goods inventory,
Indirect labor cost... 135,000
ending.136,000 S44,000
Gross margin.... 431,000
Maintenance, production. 47,000 Less operating expenses:
Rental cost, facilities
(80% x $65,000) 52,000 Selling and administrative salarics..
Insurance, production.... 9,000 90,000
Utilities (90% x 36,000
Advertising ***** *** *°°°°******°****°°°°***"
200,000
$40,000). Rental cost, facilities (20% x
$65,000) .. 13,000
Depreciation, production equipment. 75,000
Depreciation, office equipment..
Total overhead costs.. 360,000 18,000
Utilities (10% x
Total manufacturing costs.. 710,000 $40,000).. 4,C00
Add: 0 Travel, salespersons.. .60,000 385,000
Work in process inventory, bcginning. Net operating income...
710,000 $ 16,0000
Deduct: Work in process inventory, ending.. 30,000
Cost of goods
manufactured.. $680,000

54
55
Case 2-27 (continued) 2-28 (60 minutes) schedules or
statements
Case items are needed before any
No, the insurance The following cost
4. company probably does not owe Medical Technoloav can be prepared:
$227,000. The key question is how "cost was defined in the
Contract. It is most likely that the insurance contract limits: insurance Direct labor cost:
overhead Direct labor cost
=

reimbursement for losses to those costs that would 4 x Manufacturing

considered product cOstsin other words, direct normally be $520,000 $130,000
=

V4 x

and manufacturing Overhead. The $227,000 materials, direct labor, Materials used
in production:
includes elements of selling and figure is overstated since it labor and direct materials..
$510,000
administrative
expenses as well
as all of
Direct
cost... 130.000
the product costs. The $227,000 figure also does not recognize that direct labor
Less
some costs incurred during the period are in the Direct materlals c o s t . . . $380,0000
and Work in Process inventory accounts, ending Raw Materials
as explained in manufactured:
The insurance company's liability is part (1) above. Cost of goods $960,000
probably just $136,000, which is the Goods available for
sale.. .
amount of cost associated with the ending Finished Goods inventory as beginning... 90,000
shown in part (3) above. Less finished goods inventory,
manufactured... .$870,000
Cost of goods
all known amounts
to proceed from this point is to place
The easiest way schedule of cost of goods
in a partially completed
on the chalkboard income statement. Then fill in
manufactured and a partially completed
amounts by analysis of the available data.
the missing
Direct materials:

Raw materials inventory, beginning. $30,000

Add: Purchases of raw materials.. 420,000
Raw materials available for u s e . . .
450,000
Deduct: Raw materials inventory, ending... A
Raw materials used in production (see above)... 380,000
Direct labor cost (see above).. . 130,000
Manufacturing pverhead cost. . . 520,000
Total manufacturing costs.i 1,030,000
Add: Work in process inventory, beginning.. 50.000
1,080,000
Deduct: Work In proccss inventory, ending..
Cost of goods manufactured (see above). $ 870,000

6 '57
Case 2-28 (continued)
Group Exercise 2-29

Therefore, "A" (Raw materials inventory, ending) would be $70,000; and on keeping costs down. Producing
"8"(Work in process inventory, ending) wouid be $210,000. This statement reflects Ford's focus of
different colors adds to costs and reduces output in a variety
cars in on the production line involves
considerable
ways. First, changing colors can be The old color must be
Sales... ***
$1,350,000 sctups, during which ume nolhing n e w painted.
color can be applicd, And
Less cost of goods sold:
Durged from paint lines belore the
Finished goods inventory, beginning. diffcrent colors mcan larger paint ivenlories and-pcrhaps most
$90,000 inventories
or inished autos. By producing the Model
Add: Cost of goods manufactured (see importantly--larger
870.000 T in only one color,
Ford was able to kKeep costs low and to keep
above).. . ****** ils costs low. However, the market was
throughput.up-thus keeping
*

Goods available for sale... 960,000 willing to pay for more colors and Ford was slow to adapt to
eventually
Deduct: Finished goods inventor, ending .
810.000 this change.
Gross margin.. 540,000 be achieved by
2. As stated
in the problem, further efficiencies could
*$1,350,000 x (100%-40%) = $810,000. standardized work procedures, specializing work, and
implementing of individual workers.
using machines to enhance the produclivity
Therefore, "C" (Finished goods inventory, ending) would be $150,000.
The procedure outlined above is just one way in which the solution to 3. There indced limits to lowering c0sls-they can't go below zero. Onc
are
limit is the cost of raw materials used in
the case can be approached. Some students may wish to start at the might think that the lowest
can be pushed down over time as
bottom of the income statement (with gross margin) and work upwards produclion. Howcver, cvcin this cosl
raw materials are developed.
from that point. Also, the solution can be obtained by use of T-accounts. morc efficicnt mcans of producing

4. The most obvious applicalion of mass production conccpls to universily

educalion has been the increase in the humber of students in classes-
with large lecture classes.now béing the norm in many introductory
courses. Hospitals have applied the concepts of mass production by
developing standardized procedures and by specializing in certain arcas
such as cardiac care or cancer Lrecalment. Ailines have applied mass
production conccpls by increasing lhe size of the jets they fly and by
reducing the time required to service a jet between flights.

59
Group Exercise 2-30
Exercise 2-30 (continued)
Group
A normally defined as a cost that remains constant.
fived cost is
total
renardless of changes in the level or activity. A variable cost is normalk The following graph depicts how total cOsts behave as a function of how
defined as a cost that varies, in total, in direct proportion to chancec tons of steel are produced.
many
the level of activity. Total cost
Total variable cost
2. The relevant measure of activity for a steel company is probably the
volume of steel produced. Fixet cosis for a steel company include
factory rentand depreciation, property taxes, many administrative costs
of equipment. Variabl costs include
salaries,and periodic depreciation
the cost of raw materials, some energy costs, some labor costs, and
some supply costs. Total fixed cost

3. A number of different measures of activity could be used at a hospital. Tons

Some hospitals use a measure called patient-days, which counts a
patient in the hospital for one day as a patient-day. Fixed costs at a 6. The
how average costs per unit behave as
following graph depicts a
hospital include the rental and depreciation of buildings, administrative of how many tons of steel are produced.
function
salaries, utilities, insurance, and the costs of equipment. Variable costs
include the costs of drugs and supplies and some labor costs.
Universities often use credit-hours or the total number of students
enrolled as the measure of activity. Fixed costs for a university include
the costs of buildings, salaries, utilities, grounds maintenance, and
so on.

Variable costs are mninimal.

be the number of
A mcasure of activity at an auto manufacturer might Average total cost per unit
Fixed costs for an auto manufacturer include the costs of Variable cost per unit
cars produced.
costs
buildings and equipment,insurance, salaries, and utilities. Variable Average fixed cost per unit
materials and perhaps some labor.
include raw
Tons
total fixed costs remain the
4. As the volume of steel produced increases,
unit decreases; total variable costs increase; 7. Once capacily has been set, total fixed costs and variable costs per unit
same; the fixed cost per total cost increases (due to
the same;
the variable cost per unit
remains
and the average unit cost decreases remain the same while the average fixed cost per unit drops and the
Lotal variable cost increases as demand
the increase in total variable cost); (output) increases.
decline in the fixed cost per unit).
(because of the

61