Problems

2-1 Classify the following cost items according to the function in which they are
incurred. When it comes to production costs, specify which cost element it is;
a) Supervision: Production Cost / Indirect Expenses
b) Auditors' fees: Administrative Costs
c) Clerical salaries:__ Administrative costs
d) Lubricants: Cost of Production / Indirect Manufacturing Expenses
e) Advertising: Distribution and sales costs.
f) Customer service: Distribution and sales costs.
g) Raw material used: : Production cost / labor cost.
h) Sample items: Distribution and sales costs.
i) Superintendence:
j) Labor wages: Cost of Production / labor costs
k) Salesperson commissions Distribution and sales costs.
l) Stationery:__ Administrative Costs
m) Depreciation of office furniture:__ Administrative costs
n) Freight for material purchases: Cost of production / raw material costs
o) Sales executives' salaries: Distribution and sales costs.
p) Production secretary salaries: Cost of Prod. / Indirect Expenses
q) Maintenance and repair: Production Cost / Indirect Expenses_.
Light _: Cost of Production / Indirect Expenses
r) Freight for sales: Distribution and sales costs.
s) Parts for assembly : Cost of Production / labor costs

2.2 Determine which items are controllable by the production manager and which are
not; mark C for controllable and IN for uncontrollable:
a) Depreciation of building: IN
b) Raw material wastes: C
c) Shipping costs: C
d) Overtime payments: C
e) Energetic: C
f) Acquisition price of the material : C
g) Social security contributions: IN
h) Raw material used: C
i) Workers' wages: C
j) Supervisor's salary: C
k) Production manager's salary: IN
l) Research and development study: IN
2-3 Classify the following costs as variable, fixed or semi-variable in terms of their
behavior with respect to the volume or level of activity (Mark with an x)
Semivariable
Variables Fixed s
a) Property taxes X
b) Maintenance and repair X
c) Public services X
d) Salesmen's salaries X
e) Direct materials X
f) Insurance
g) Straight-line depreciation X
h) Sellers' commission X

i) Depreciation for mileage

traveled by a car X
Rental X

2-4 Classify the following costs as product or period (Mark with an X)

Product costs Costs for the period
a) Pears from a fruit cocktail X
b) Overtime premium X
c) Legal commissions X
d) Office equipment insurance X
e) Advertising expense X
f) Travel expenses X

2-5 How should the items listed below, corresponding to a soft drink bottling company,
be classified? As direct product materials? As indirect product materials? (Mark with an
X)
Direct materials Indirect materials
a) Syrups X
b) Carbonated waters X
c) Non-returnable bottles X
d) Corchalata X
e) Baskets of six bottles X
\

2-6 Suppose the high point of a cost line item is $50,000 with production of 20,000
units and the low point is $20,000 with 5000 units.
 a) What is the difference between the costs? $30 000
b) What difference is there between
production volumes 15 000
C) What is the variable cost of each unit
manufactured? 2
d) What is the variable cost when 20,000
units are manufactured? 40,000
e) What is the fixed cost 10,000

2-7 Joaquín Soto works as a public accountant. He enjoys his work, is very skilled and
in demand. Soto has increased his fees considerably over the past two years, but he
cannot accept all the clients who want his services. You have worked an average of nine
hours a day, six days a week for forty-eight weeks a year, your fees average $125 per
hour for decision purposes, you can disregard your variable costs, disregard utility
taxes.
Requested;
a) Soto wants to reduce his hours. Consider not working on Saturdays, but 10 hours
a day from Monday to Friday. What would your annual profit be if you continue
to work the same hours? And what if I adopted the new one.
Current hours Hours worked new
worked 9 schedule 10
Days worked 6 Days worked 5
Weeks worked 48 Weeks worked 48
Fees $ /h 125 Fees $ /h 125
324000 300000

b) ) What would be the opportunity cost for the year if I did not work overtime?
Current hours worked 54
Hours worked new schedule 50
Hours lost from work 4
Hourly fees 125
Weeks worked 48
Opportunity cost 24000
2-8 David Margain retired from employment and plans to operate a business selling bait
in Villa de Santiago, N.L. He has always been interested in boating and fishing and sees
this as an opportunity to live and work in that environment. He estimates that one year's
income and costs will be as follows;
Revenues $380, 000
Cost of materials and
accessories 110, 000
Salary expenses 90800
Rental expenses 40200
Electricity expenses 6000
Variable jacks 4000

Total costs and expenses 251000

Operating income $129,000

While Margain was considering this opportunity, he received a part-time job offer as a
business consultant for $180,000 a year, meaning he would not be able to operate his
business, but he plans to continue renting his office space.
Requested;
a) If Mr. Margain decides to work as a consultant, what is the opportunity cost of
this decision?

Opportunity cost $139,800

b) What is the sunk cost in this decision analysis?

Submerged cost $ 40,200

2.9 Apollo Company employs a maintenance expert when the factory operates between
zero and 1000 machine-hours and follows the rule of employing another maintenance
expert every 1000 machine-hours fractional increase. Each maintenance expert receives
$6000 per month.

a) What will Apollo's maintenance cost be when the factory operates at

1. 7500 machine hours?
1 expert: 1000 machine hours fraction
Machine hours: 7,500
Salaries: $ 6000
Number of experts= hm/hmf
: 7500/1000= 7.5
MMTTO Expenses: Amount Expert X salary per month
: 7.5 (6000)= 45,000

2. 2500 machine hours?

1 expert: 1000 machine hours fraction
Machine hours: 2,500
Salaries: $ 6000
Number of experts= hm/hmf
: 2500/1000= 2.5
MMTTO Expenses: Amount Expert X salary per month
: 2.5 (6000)= 15,000

c) If each unit produced by Apollo used 1.5 machine-hours, what would be the
maintenance cost per unit if they were produced.

Hours per unit 1.5

Hourly expense= salary/1000 6000/1000= 6
Expenditure per unit = Hours per unit (Expenditure per hour) 1.5 (6)= 9

1. 1800 units
1800 (9) = 16200
2. 2400 units
2400(9)= 21600

3. It is said that the higher the production, the lower the fixed cost per unit. Does
this rule hold true at the 1800 and 2400 units produced levels Why?

No, because, the cost per hours worked remains the same, in different units
produced, when the production range increases, so does the need to hire more
machine hours.

2.10 Baja California Norte, S. A., S. A. de C. V., S.A. A, performs a study on the
maintenance it has used, as it wishes to determine how its costs are distributed. So far
you have the following data for each of the last six bimonthly periods.

Bimonthly Maintenance hours Total maintenance expenses

1 4900 21010
 2 4700 20330
3 4850 20840
4 5000 21350
5 4950 21180
6 5200 22030

Requested;
a) Obtain the total fixed and variable costs at the maximum and minimum levels of
activities using the high and low point technique.

Unit CV = (Y2-Y1)/(X2-X1)
= ($ 22030- $ 20330)/ (5200-4700)
= $ 1700/500
= $3.4 per hour.
Fixed costs using the maximum level:
CF = CT-CV(x)
= $ 22030 – $ 3.4 (5200)
= $ 22030 – $17680
= $ 4350
Variable costs at maximum level = $ 17680
Variable costs at the minimum level = $3.4 (4700) = $ 15980

Total fixed costs

b) What would be the estimated maintenance expense in the first two months of the
following year, considering the result of a)?

Labor hours Production cost

9000 51750
8000 47250
10500 58500
12000 65250
10500 58500

c) What would be the estimated maintenance expense in the first half of the
following year, considering the result of a)?

a)
Unit CV = (Y2-Y1)/(X2-X1)
= ($ 65250 - $ 47250)/(12000-8000)
= $ 18000/4000
 = $ 4.5 per hour
Fixed cost at maximum level

CF =CT - CV (x)
= $ 65250 – $ 4.5 (12000)
= $ 65250 - $ 54000
= $ 11250

b)
CT at the 10000 hr level. = $ 11250 + $ 4.5(10000)
= $ 11250 + $ 45000
= $ 56250
CT at the 11000 hr level. = $ 11250 + $ 4.5(11000)
= $ 11250 + $ 49500
= $ 60720

2-12 Regio S.A. is interested in a company that means an important competition. The
plant operates at between 80 and 100% of its capacity. When its activity level is 80%,
variable manufacturing costs total $108,000. At its normal level of 90%, the company
uses 40,500 direct labor hours and has total manufacturing costs of $37,500 to $37,500.
Requested;
a) What is the amount of variable costs per MOD hour?
b) What is the fixed cost (Assume that fixed costs would change only if 1005 of
Regio's capacity is exceeded)?
c) What would be the total cost of production if the company were to work at
1- 100% of its capacity
2- 50% of its capacity

2-13 The following are considered representative of what occurred in one year in the
company Sonora, S.A., in terms of its production costs.

Month Labor hours Cost of production

Week 1 9000 $51750
Week 2 8000 47250
 Week 3 10500 58500
Week 4 12000 65250
Week 5 10500 58500

Requested;
a) Using the high and low point method, determine the variable cost per hour of
labor, as well as the fixed cost at the maximum level.

High cost - low cost: 65250- 47250: $18,000

Maximum hour - Minimum hour: 12000- 8000: 4000hr
Average cost/average hours worked: 18000/ 4000: 4.5 rate

Variable cost

Maximum cost: 12,000X4.5: 54,000

Minimum cost: 8000X4.5: 36,000

Fixed cost

Maximum cost 65,250 -54,000 : 11,250

b) If 10,000 hours were expected to be used in week 6, what would be the

estimated maintenance cost based on the result you obtained in a)?
10,000 hours X 4.5 : 45,000
11,000 hours X 4.5 : 49,000

c) If 10000 hours were expected to be used in total during weeks 7, 8 and 9, what
would be the estimated maintenance cost in that period (3 weeks), based on the
result you obtained in a)?

2-14 Moderna Company has observed the following total costs of its global line items
operating at different levels based on direct labor hours;
Direct labor hours
80 000 85 000 90 000 95 000 100 000
Materials 1 440 000 1 530 000 1 620 000 1 710 000 1 800 000
Labor 330 000 345 000 360 000 375 000 39 0000
Ind. fab expenses 520 000 523 000 536 000 541 000 55 000
 Cost of sales 510 000 429 000 570 000 590 000 610 000
Research and development 11 000 110 000 110 000 110 000 110 000
Administrative expenses 55 000 55 000 55 000 55 000 55 000

Requested;
a) Determine the fixed costs and the variable rate of each cost, applying high and
low points. Check the veracity of your data with the intermediate levels.

Materials:

TCV= 1 800 000 - 1 440 000 = 360 000 = 18

100 000 – 80 000 20 000

CF= CSV1 - (TCV)(HMO) Where: CF= Fixed Cost

CF= 1 800 000 - (18) (100 000 ) CSV = Semi Variable Cost
CF= 1,800,000 - 1,800,000 TCV= Variable Cost Rate
CF= 0 HMO= Labor Hours

Labor: Ind. De Fab.

TCV= 390 000 -330 000 = 30 000 =1.5 TCV= 550 000 -520 000 = 30 000 = 1.5
100 000 – 80 000 20 000 100 000 – 80 000 20 000

CF= CSV1 - (TCV)(HMO) CF= CSV1 - (TCV)(HMO)

CF= 390 000 - (1.5) (100 000 ) CF= 550 000 - (1.5) (100 000 )
CF= 390 000 - 150 000 CF= 550 000 - 150 000
CF= 240 000 CF= 400 000

Research and
Cost of sales: Development
TCV= 610 000 -510 000 = 100 000 = 5 TCV= 110 000 -110 000 = 0 = 0
100 000 – 80 000 20 000 100 000 – 80 000 20 000

CF= CSV1 - (TCV)(HMO) CF= CSV1 - (TCV)(HMO)

CF= 610 000 - (5) (100 000 ) CF= 110 000 - (0) (100 000 )
CF= 610 000 - 500 000 CF= 110 000 - 0
CF= 110 000 CF= 110 000

Administrative expenses:
TCV= 55 000 -55 000 = 0 = 0
100 000 – 80 000 20 000

CF= CSV1 - (TCV)(HMO)

CF= 55 000 - (0) (100 000 )
CF= 55 000 - 0
 CF= 55 000

b) Which of these costs do you consider to be a function of direct labor hours and
which are not? Explain

2-15 Based on the data in problem 2-14, solve the following problem. The modern
company hired specialists to apply a different method to obtain the fixed costs and the
variable rate per hour of direct labor. But only manufacturing overhead and labor costs.
The specialists used least squares. What were the results?
Labor: Ind. De Fab:
TCV= 1.5 TCV= 1.5
CF= 240,000 CF= 400,000