54 Chapter 1

Required:
1 . Complete the above schedule of the company’s total costs and costs per unit.
2. Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per
unit. Prepare a contribution format income statement for the year.
EXERCISE 1–12  Product and Period Cost Flows LO1–3
The Devon Motor Company produces automobiles. On April 1st the company had no beginning invento-
ries and it purchased 8,000 batteries at a cost of $80 per battery. It withdrew 7,600 batteries from the store-
room during the month. Of these, 100 were used to replace batteries in cars being used by the company’s
traveling sales staff. The remaining 7,500 batteries withdrawn from the storeroom were placed in cars
being produced by the company. Of the cars in production during April, 90 percent were completed and
transferred from work in process to finished goods. Of the cars completed during the month, 30 percent
were unsold at April 30th.

Required:
1 . Determine the cost of batteries that would appear in each of the following accounts on April 30th.
a. Raw Materials
b. Work in Process
c. Finished Goods
d. Cost of Goods Sold
e. Selling Expense
2. Specify whether each of the above accounts would appear on the balance sheet or on the income
statement at the end of the month.
EXERCISE 1–13  Variable and Fixed Cost Behavior LO1–4
Munchak Company’s relevant range of production is 9,000–11,000 units. Last month the company pro-
duced 10,000 units. Its total manufacturing cost per unit produced was $70. At this level of activity the
company’s variable manufacturing costs are 40% of its total manufacturing costs.

Required:
Assume that next month Munchak produces 10,050 units and that its cost behavior patterns remain
unchanged. Label each of the following statements as true or false with respect to next month. Do not use a
calculator to answer items 1 through 6. You can use a calculator to answer items 7 through 12. Record your
answers by placing an X under the appropriate heading.

True False
  1. The variable manufacturing cost per unit will remain the same as last month.. . . .
  2. The total fixed manufacturing cost will be greater than last month.. . . . . . . . . . .
  3.  The total manufacturing cost will be greater than last month.. . . . . . . . . . . . . . . .
  4. The average fixed manufacturing cost per unit will be less than last month. . . .
  5.  The total variable manufacturing cost will be less than last month. . . . . . . . . . . .
  6.  The total manufacturing cost per unit will be greater than last month.. . . . . . . . .
  7.  The variable manufacturing cost per unit will equal $28.. . . . . . . . . . . . . . . . . . . .
  8.  The total fixed manufacturing cost will equal $422,100. . . . . . . . . . . . . . . . . . . . .
  9.  The total manufacturing cost will equal $701,400.. . . . . . . . . . . . . . . . . . . . . . . . .
10. The average fixed manufacturing cost per unit (rounded to the nearest cent)
will equal $41.79.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11. The total variable manufacturing cost will equal $280,000.. . . . . . . . . . . . . . . . . .
12. The total manufacturing cost per unit (rounded to the nearest cent) will equal
$69.79. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EXERCISE 1–14  Cost Classification LO1–2, LO1–3, LO1–4, LO1–5

Wollogong Group Ltd. of New South Wales, Australia, acquired its factory building 10 years ago. For
several years, the company has rented out a small annex attached to the rear of the building for $30,000 per
year. The renter’s lease will expire soon, and rather than renewing the lease, the company has decided to
use the annex to manufacture a new product.
Direct materials cost for the new product will total $80 per unit. To have a place to store its finished
goods, the company will rent a small warehouse for $500 per month. In addition, the company must
 Managerial Accounting and Cost Concepts 55

rent equipment for $4,000 per month to produce the new product. Direct laborers will be hired and paid
$60 per unit to manufacture the new product. As in prior years, the space in the annex will continue to be
depreciated at $8,000 per year.
The annual advertising cost for the new product will be $50,000. A supervisor will be hired and paid
$3,500 per month to oversee production. Electricity for operating machines will be $1.20 per unit. The cost
of shipping the new product to customers will be $9 per unit.
To provide funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate
some temporary investments. These investments are presently yielding a return of $3,000 per year.

Required:
Using the table shown below, describe each of the costs associated with the new product decision in four
ways. In terms of cost classifications for predicting cost behavior (column 1), indicate whether the cost
is fixed or variable. With respect to cost classifications for manufacturers (column 2), if the item is a
manufacturing cost, indicate whether it is direct materials, direct labor, or manufacturing overhead. If it is
a nonmanufacturing cost, then select “none” as your answer. With respect to cost classifications for pre-
paring financial statements (column 3), indicate whether the item is a product cost or period cost. Finally,
in terms of cost classifications for decision making (column 4), identify any items that are sunk costs or
opportunity costs. If you identify an item as an opportunity cost, then select “none” as your answer in
columns 1–3.

Cost Classifications for:

(1) (3)
Predicting (2) Preparing (4)
Cost Item Cost Behavior Manufacturers Financial Statements Decision Making

EXERCISE 1–15  Traditional and Contribution Format Income Statements LO1–6

The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information shown
below for the quarter ended March 31:

Amount

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Selling price per pair of skis . . . . . . . . . . . . . . . . . . . . . . . $750
Variable selling expense per pair of skis . . . . . . . . . . . . $50
Variable administrative expense per pair of skis . . . . . $10
Total fixed selling expense . . . . . . . . . . . . . . . . . . . . . . . . $20,000
Total fixed administrative expense . . . . . . . . . . . . . . . . . $20,000
Beginning merchandise inventory . . . . . . . . . . . . . . . . . . $30,000
Ending merchandise inventory . . . . . . . . . . . . . . . . . . . . $40,000
Merchandise purchases . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000

Required:
1 . Prepare a traditional income statement for the quarter ended March 31.
2. Prepare a contribution format income statement for the quarter ended March 31.
3. What was the contribution margin per unit?
EXERCISE 1–16  Cost Classifications for Decision Making LO1–5
Warner Corporation purchased a machine 7 years ago for $319,000 when it launched product P50. Unfor-
tunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new
model 300 machine costing $313,000 or by a new model 200 machine costing $275,000. Management
has decided to buy the model 200 machine. It has less capacity than the model 300 machine, but its
capacity is sufficient to continue making product P50. Management also considered, but rejected, the
alternative of dropping product P50 and not replacing the old machine. If that were done, the $275,000
invested in the new machine could instead have been invested in a project that would have returned a total
of $374,000.
56 Chapter 1

Required:
1. What is the total differential cost regarding the decision to buy the model 200 machine rather than the
model 300 machine?
2. What is the total sunk cost regarding the decision to buy the model 200 machine rather than the model
300 machine?
3. What is the total opportunity cost regarding the decision to invest in the model 200 machine?
EXERCISE 1–17  Classifying Variable and Fixed Costs and Product and Period Costs LO1–3, LO1–4
Below are listed various costs that are found in organizations.
  1. Hamburger buns in a Wendy’s restaurant.
  2. Advertising by a dental office.
  3. Apples processed and canned by Del Monte.
  4. Shipping canned apples from a Del Monte plant to customers.
  5. Insurance on a Bausch & Lomb factory producing contact lenses.
  6. Insurance on IBM’s corporate headquarters.
  7. Salary of a supervisor overseeing production of printers at Hewlett-Packard.
  8. Commissions paid to automobile salespersons.
  9. Depreciation of factory lunchroom facilities at a General Electric plant.
10. Steering wheels installed in BMWs.

Required:
Using the table shown below, describe each of the costs mentioned above in two ways. In terms of cost
classifications for predicting cost behavior (column 1), indicate whether the cost is fixed or variable with
respect to the number of units produced and sold. With respect to cost classifications for preparing finan-
cial statements (column 2), indicate whether the item is a product cost or period cost (selling and admin-
istrative cost).

Cost Classifications for:

(1) (2)
Predicting Preparing
Cost Item Cost Behavior Financial Statements

PROBLEMS
PROBLEM 1–18  Direct and Indirect Costs; Variable Costs LO1–1, LO1–4
The following cost data pertain to the operations of Montgomery Department Stores, Inc., for the month
of July.

Corporate legal office salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $56,000

Apparel Department cost of sales—Evendale Store . . . . . . . . . . . . . $90,000
Corporate headquarters building lease . . . . . . . . . . . . . . . . . . . . . . . . $48,000
Store manager’s salary—Evendale Store . . . . . . . . . . . . . . . . . . . . . . . $12,000
Apparel Department sales commission—Evendale Store . . . . . . . . . $7,000
Store utilities—Evendale Store . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,000
Apparel Department manager’s salary—Evendale Store . . . . . . . . . $8,000
Central warehouse lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000
Janitorial costs—Evendale Store . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,000

The Evendale Store is one of many stores owned and operated by the company. The Apparel Department is
one of many departments at the Evendale Store. The central warehouse serves all of the company’s stores.

Required:
1 . What is the total amount of the costs listed above that are direct costs of the Apparel Department?
2. What is the total amount of the costs listed above that are direct costs of the Evendale Store?
3. What is the total amount of the Apparel Department’s direct costs that are also variable costs with
respect to total departmental sales?
 Managerial Accounting and Cost Concepts 57

PROBLEM 1–19  Traditional and Contribution Format Income Statements LO1–6

Todrick Company is a merchandiser that reported the following information based on 1,000 units sold:

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $300,000
Beginning merchandise inventory . . . . . . . . . . $20,000
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000
Ending merchandise inventory . . . . . . . . . . . . $7,000
Fixed selling expense . . . . . . . . . . . . . . . . . . . . ?
Fixed administrative expense . . . . . . . . . . . . . . $12,000
Variable selling expense . . . . . . . . . . . . . . . . . . $15,000
Variable administrative expense . . . . . . . . . . . ?
Contribution margin . . . . . . . . . . . . . . . . . . . . . . $60,000
Net operating income . . . . . . . . . . . . . . . . . . . . $18,000

Required:
1 . Prepare a contribution format income statement.
2. Prepare a traditional format income statement.
3. Calculate the selling price per unit.
4. Calculate the variable cost per unit.
5. Calculate the contribution margin per unit.
6. Which income statement format (traditional format or contribution format) would be more useful to
managers in estimating how net operating income will change in responses to changes in unit sales? Why?
PROBLEM 1–20  Variable and Fixed Costs; Subtleties of Direct and Indirect Costs LO1–1, LO1–4
Madison Seniors Care Center is a nonprofit organization that provides a variety of health services to the
elderly. The center is organized into a number of departments, one of which is the Meals-On-Wheels pro-
gram that delivers hot meals to seniors in their homes on a daily basis. Below are listed a number of costs
of the center and the Meals-On-Wheels program.
example The cost of groceries used in meal preparation.
a. The cost of leasing the Meals-On-Wheels van.
b. The cost of incidental supplies such as salt, pepper, napkins, and so on.
c. The cost of gasoline consumed by the Meals-On-Wheels van.
d. The rent on the facility that houses Madison Seniors Care Center, including the Meals-On-Wheels
program.
e. The salary of the part-time manager of the Meals-On-Wheels program.
f. Depreciation on the kitchen equipment used in the Meals-On-Wheels program.
g. The hourly wages of the caregiver who drives the van and delivers the meals.
h. The costs of complying with health safety regulations in the kitchen.
i. The costs of mailing letters soliciting donations to the Meals-On-Wheels program.

Required:
For each cost listed above, indicate whether it is a direct or indirect cost of the Meals-On-Wheels program,
whether it is a direct or indirect cost of particular seniors served by the program, and whether it is variable
or fixed with respect to the number of seniors served. Use the form below for your answer.

Variable or Fixed
Direct or Indirect with Respect to the
Direct or Indirect Cost of Particular Number of Seniors
Cost of the Seniors Served Served by the
Meals-on-Wheels by the Meals-on- Meals-on-Wheels
Program Wheels Program Program

Item Description Direct Indirect Direct Indirect Variable Fixed

Example The cost of

groceries
used in meal
preparation . . X X X
58 Chapter 1

PROBLEM 1–21  Traditional and Contribution Format Income Statements LO1–6

Marwick’s Pianos, Inc., purchases pianos from a large manufacturer for an average cost of $2,450 per unit
and then sells them to retail customers for an average price of $3,125 each. The company’s selling and
administrative costs for a typical month are presented below:

Costs Cost Formula

Selling:
 Advertising . . . . . . . . . . . . . . . . . . . . . . . . $700 per month
  Sales salaries and commissions . . . . . . $950 per month, plus 8% of sales
  Delivery of pianos to customers . . . . . . $30 per piano sold
 Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . $350 per month
  Depreciation of sales facilities . . . . . . . . $800 per month
Administrative:
  Executive salaries . . . . . . . . . . . . . . . . . . $2,500 per month
 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . $400 per month
 Clerical . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000 per month, plus $20 per piano sold
  Depreciation of office equipment . . . . . $300 per month

During August, Marwick’s Pianos, Inc., sold and delivered 40 pianos.

Required:
1 . Prepare a traditional format income statement for August. 
2. Prepare a contribution format income statement for August. Show costs and revenues on both a total
and a per unit basis down through contribution margin.
3. Refer to the income statement you prepared in (2) above. Why might it be misleading to show the
fixed costs on a per unit basis?
PROBLEM 1–22  Cost Terminology; Contribution Format Income Statement LO1–2, LO1–4, LO1–6
Miller Company’s total sales are $120,000. The company’s direct labor cost is $15,000, which repre-
sents 30% of its total conversion cost and 40% of its total prime cost. Its total selling and administrative
expense is $18,000 and its only variable selling and administrative expense is a sales commission of 5%
of sales. The company maintains no beginning or ending inventories and its manufacturing overhead costs
are entirely fixed costs.

Required:
1 . What is the total manufacturing overhead cost?
2. What is the total direct materials cost?
3. What is the total manufacturing cost?
4. What is the total variable selling and administrative cost?
5. What is the total variable cost?
6. What is the total fixed cost?
7. What is the total contribution margin?
PROBLEM 1–23  Cost Classification LO1–1, LO1–3, LO1–4
Listed below are costs found in various organizations.
  1. Property taxes, factory.
  2. Boxes used for packaging detergent produced by the company.
  3. Salespersons’ commissions.
  4. Supervisor’s salary, factory.
  5. Depreciation, executive autos.
  6. Wages of workers assembling computers.
  7. Insurance, finished goods warehouses.
  8. Lubricants for production equipment.
  9. Advertising costs.
10. Microchips used in producing calculators.
11. Shipping costs on merchandise sold.
 Managerial Accounting and Cost Concepts 59

1 2. Magazine subscriptions, factory lunchroom.

13. Thread in a garment factory.
14. Executive life insurance.
15. Ink used in textbook production.
16. Fringe benefits, materials handling workers.
17. Yarn used in sweater production.
18. Wages of receptionist, executive offices.

Required:
Prepare an answer sheet with column headings as shown below. For each cost item, indicate whether it
would be variable or fixed with respect to the number of units produced and sold; and then whether it
would be a selling cost, an administrative cost, or a manufacturing cost. If it is a manufacturing cost, indi-
cate whether it is a direct cost or an indirect cost with respect to units of product. Three sample answers
are provided for illustration.

Manufacturing
(Product) Cost
Variable Selling Administrative
Cost Item or Fixed Cost Cost Direct Indirect
Direct labor. . . . . . . . . . . V X
Executive salaries. . . . . . F X
Factory rent. . . . . . . . . . . F X

PROBLEM 1–24  Different Cost Classifications for Different Purposes LO1–1, LO1–2, LO1–3, LO1–4,
LO1–5
Dozier Company produced and sold 1,000 units during its first month of operations. It reported the follow-
ing costs and expenses for the month:

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . $69,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,000
Variable manufacturing overhead . . . . . . . . . . $15,000
Fixed manufacturing overhead . . . . . . . . . . . . 28,000
Total manufacturing overhead . . . . . . . . . . . . . $43,000
Variable selling expense . . . . . . . . . . . . . . . . . . $12,000
Fixed selling expense . . . . . . . . . . . . . . . . . . . . 18,000
Total selling expense . . . . . . . . . . . . . . . . . . . . . $30,000
Variable administrative expense . . . . . . . . . . . $ 4,000
Fixed administrative expense . . . . . . . . . . . . . 25,000
Total administrative expense . . . . . . . . . . . . . . $29,000

Required:
1 . With respect to cost classifications for preparing financial statements:
a. What is the total product cost?
b. What is the total period cost?
2. With respect to cost classifications for assigning costs to cost objects:
a. What is total direct manufacturing cost?
b. What is the total indirect manufacturing cost?
3. With respect to cost classifications for manufacturers:
a. What is the total manufacturing cost?
b. What is the total nonmanufacturing cost?
c. What is the total conversion cost and prime cost?
60 Chapter 1

4 . With respect to cost classifications for predicting cost behavior:

a. What is the total variable manufacturing cost?
b. What is the total fixed cost for the company as a whole?
c. What is the variable cost per unit produced and sold?
5. With respect to cost classifications for decision making:
a. If Dozier had produced 1,001 units instead of 1,000 units, how much incremental manufacturing
cost would it have incurred to make the additional unit?
PROBLEM 1–25  Traditional and Contribution Format Income Statements LO1–6
Milden Company is a merchandiser that plans to sell 12,000 units during the next quarter at a selling price
of $100 per unit. The company also gathered the following cost estimates for the next quarter:

Cost Cost Formula

Cost of good sold . . . . . . . . . . . . . . . . . $35 per unit sold

Advertising expense . . . . . . . . . . . . . . $210,000 per quarter
Sales commissions . . . . . . . . . . . . . . . . 6% of sales
Shipping expense . . . . . . . . . . . . . . . . $28,000 per quarter + $9.10 per unit sold
Administrative salaries . . . . . . . . . . . . $145,000 per quarter
Insurance expense . . . . . . . . . . . . . . . . $9,000 per quarter
Depreciation expense . . . . . . . . . . . . . $76,000 per quarter

Required:
1 . Prepare a contribution format income statement for the next quarter.
2. Prepare a traditional format income statement for the next quarter.

BUILDING YOUR SKILLS

ANALYTICAL THINKING LO1–1, LO1–2, LO1–3, LO1–4
The Dorilane Company produces a set of wood patio furniture consisting of a table and four chairs. The
company has enough customer demand to justify producing its full capacity of 2,000 sets per year. Annual
cost data at full capacity follow:

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $118,000

Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,000
Factory supervision . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,000
Property taxes, factory building . . . . . . . . . . . . . . . . . . $3,500
Sales commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $80,000
Insurance, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,500
Depreciation, administrative office equipment . . . . . $4,000
Lease cost, factory equipment . . . . . . . . . . . . . . . . . . . $12,000
Indirect materials, factory . . . . . . . . . . . . . . . . . . . . . . . $6,000
Depreciation, factory building . . . . . . . . . . . . . . . . . . . $10,000
Administrative office supplies (billing) . . . . . . . . . . . . . $3,000
Administrative office salaries . . . . . . . . . . . . . . . . . . . . $60,000
Direct materials used (wood, bolts, etc.) . . . . . . . . . . . $94,000
Utilities, factory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $20,000

Required:
1. Prepare an answer sheet with the column headings shown below. Enter each cost item on your answer
sheet, placing the dollar amount under the appropriate headings. As examples, this has been done
already for the first two items in the list above. Note that each cost item is classified in two ways: first,
as variable or fixed with respect to the number of units produced and sold; and second, as a selling and
administrative cost or a product cost. (If the item is a product cost, it should also be classified as either
direct or indirect as shown.)