Chapter 1

Exercises 1
Planning and control decisions. Gregor Company makes and sells brooms and mops. It takes the
following actions, not necessarily in the order given. For each action (a–e), state whether it is a a. planning
planning b. control
decision or a control decision. c. control
a. Gregor asks its advertising team to develop fresh advertisements to market its newest product. d. planning
b. Gregor calculates customer satisfaction scores after introducing its newest product. e.planning
c. Gregor compares costs it actually incurred with costs it expected to incur for the production ofall correct
the
new product.
d. Gregor’s design team proposes a new product to compete directly with the Swiffer.
e. Gregor estimates the costs it will incur to distribute 30,000 units of the new product in the first
quarter
of next fiscal year.

Exercises 2
Cost classification. A company manufactures and retails clothing. You are required to group the
costs that are listed below and numbered (1)–(20) into the following classifications (each cost is
intended to belong to only one classification):
(i) direct materials;
(ii) direct labour;
(iii) direct expenses;
(iv) indirect production overhead;
(v) research and development costs;
(vi) selling and distribution costs;
(vii) administration costs; 1. iv
(viii) finance costs. 2.vii
1 lubricant for sewing machines;
2 floppy disks for general office computer; 3.vii
3 maintenance contract for general office photocopying 4.vii
machine; 5. viii
4 telephone rental plus metered calls; 6.iv
5 interest on bank overdraft; 7.v-->vi
6 Performing Rights Society charge for music broadcast 8. iv
throughout the factory;
9.iii-->i
7 market research undertaken prior to a new product launch;
8 wages of security guards for factory; 10.iii
9 carriage on purchase of basic raw material; 11. vi
10 royalty payable on number of units of product XY produced; 12.vi
11 road fund licences for delivery vehicles; 13. vi
12 parcels sent to customers; 14. vii
13 cost of advertising products on television;
15. vii
14 audit fees;
15 chief accountant’s salary; 16. ii
16 wages of operatives in the cutting department; 17. vi
18.ii-->iv
19.ii --> iv
20. v
 Mixing Department manager
Materials handlers (of the Mixing Department)
Machinist (running the mixing machines)
Machine Maintenance personnel (of the Mixing Department
Maintenance supplies (if separately identified for the Mixing Department)
17 cost of painting advertising slogans on delivery vans;
18 wages of storekeepers in materials store;
19 wages of forklift truck drivers who handle raw materials;
20 developing a new product in the laboratory.

Exercises 3
Direct, indirect, fixed, and variable costs. California Tires manufactures two types of tires that it
sells as wholesale products to various specialty retail auto supply stores. Each tire requires a
three-step process. The first step is mixing. The mixing department combines some of the
necessary direct materials
to create the material mix that will become part of the tire. The second step includes the forming
of each
tire where the materials are layered to form the tire. This is an entirely automated process. The
final step is finishing, which is an entirely manual process. The finishing department includes
curing and quality control. 1.i-f --> d-v
1. Costs involved in the process are listed next. For each cost, indicate whether it is a direct
2.d-f -->v
variable,
direct fixed, indirect variable, or indirect fixed cost, assuming “units of production of each kind3.d-f -->v
of tire” 4. i-f
is the cost object. 5.d-f -->i
Costs: 6.i-v -->f
Rubber Mixing department manager 7. i-v -->f
Reinforcement cables Material handlers in each department 8. i-v -->
Other direct materials Custodian in factory
probably some
Depreciation on formers Night guard in factory
variable and
Depreciation on mixing machines Machinist (running the mixing machine)
some fixed
Rent on factory building Machine maintenance personnel in each department
(e.g., electricity
Fire insurance on factory building Maintenance supplies for factory
may bevariable
Factory utilities Cleaning supplies for factory
but heating
Finishing department hourly laborers Machinist (running the forming machines)
costs may be
2. If the cost object were the “mixing department” rather than units of production of each kind of
fixed)
tire,
which preceding costs would now be direct instead of indirect costs?
9. d-v
Exercises 4
Classification of costs, manufacturing sector. The Cooper Furniture Company of Potomac,
Maryland, assembles two types of chairs (Recliners and Rockers). Separate assembly lines are
used for each type of chair.
Classify each cost item (A–I) as follows:
a. Direct or indirect (D or I) cost for the total number of Recliners assembled.
b. Variable or fixed (V or F) cost depending on how total costs change as the total number of
Recliners
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 Recliners assembled.)
You will have two answers (D or I; V or F) for each of the following items:
 Cost Item D or I V or F
A. Cost of fabric used on Recliners
B. Salary of public relations manager for Cooper Furniture
C. Annual convention for furniture manufacturers; generally Cooper Furniture attends
D. Cost of lubricant used on the Recliner assembly line
E. Freight costs of Recliner frames shipped from Durham to Potomac, MD
F. Electricity costs for Recliner assembly line (single bill covers entire plant)
G. Wages paid to temporary assembly-line workers hired in periods of high Recliner
production (paid on hourly basis)
H. Annual fire-insurance policy cost for Potomac, MD plant
I. Wages paid to plant manager who oversees the assembly lines for both chair types

Exercises 5
The Northshire Hospital Trust operates two
types of specialist X-ray scanning machine, XR1 and XR50.
Details for the next period are estimated as follows:
Machine XR1 XR50
Running hours 1 100 2 000
(£) (£)
Variable running costs
(excluding plates) 27 500 64 000
Fixed costs 20 000 97 500
A brain scan is normally carried out on machine type XR1: this task uses special X-ray plates
costing £40 each and takes four hours of machine time. Because of the nature of the process,
around 10 per cent of the scans produce blurred and therefore useless results.
Required:
(a) Calculate the cost of a satisfactory brain scan on machine type XR1. (7 marks)
(b) Brain scans can also be done on machine type XR50 and would take only 1.8 hours per scan
with a reduced reject rate of 6 per cent. However, the cost of the X-ray plates would be £55 per
scan.
Required:
Advise which type should be used, assuming sufficient capacity is available on both types of
machine.