Individual Project Introduction to the Subject of the Project Prepare income statements for a...

Individual ProjectIntroduction to the Subject of the Project

Prepare income statements for a merchandising company using the

traditional and contribution formats.

Contribution Approach Income Statement

• The contribution approach income statement organizes costs by behavior, first deducting variable expenses to obtain contribution margin, and then deducting fixed expenses to obtain net operating income.

• The traditional approach organizes costs by function, such as production, selling, and administration. Within a functional area, fixed and variable costs are intermingled.

• The contribution margin is total sales revenue less total variable expenses.

The Traditional and Contribution Formats

Comparison of the Contribution Income Statement with the Traditional Income Statement

Traditional Format Contribution Format

Sales 100,000$ Sales 100,000$ Cost of goods sold 70,000 Variable expenses 60,000 Gross margin 30,000$ Contribution margin 40,000$ Selling & admin. expenses 20,000 Fixed expenses 30,000 Net operating income 10,000$ Net operating income 10,000$

Used primarily forexternal reporting.

Used primarily bymanagement.

Uses of the Contribution Format

The contribution income statement format is used as an internal planning and decision-making tool. We will use

this approach for:

1.Cost-volume-profit analysis

2.Budgeting

3.Segmented reporting of profit data

4.Special decisions such as pricing and make-or-buy analysis

this approach for:

2.Budgeting

Review Questions T/F

• 1. Traditional format income statements are prepared primarily for external reporting purposes.

• True

• 2. In a contribution format income statement, sales minus cost of goods sold equals the gross margin.

• False

3. In a traditional format income statement for a merchandising company, the cost of goods sold reports the product costs attached to the merchandise sold during the period.

• True

• 4.Contribution format income statement is useful for external reporting purposes, it has serious limitations when used for internal purposes because it does not distinguish between fixed and variable costs.

• False

• 5. In a contribution format income statement for a merchandising company, cost of goods sold is a variable cost that gets included in the "Variable expenses" portion of the income statement.

• True

• 6. The traditional format income statement is used as an internal planning and decision-making tool. Its emphasis on cost behavior aids cost-volume-profit analysis, management performance appraisals, and budgeting.

• False

Review Questions M/C

• 7.When finished goods are sold, there is an increase in which of the following accounts?

• A- Finished Goods Inventory• B- Cost of Goods Sold• C- Work-in-Process Inventory• D- Cost of Goods Manufactured

Explaining the Individual Project

• Part 1: Summarize what a contribution format income statement depicts, as compared to the traditional format.

• Please discuss

• Part 2: Using the following company data, show how the two income statement formats would look side by side.

• Traditional- versus contribution-format statements are as follows:

Traditional format Sales 1.COGS Gross margin SG&A Profit

Calculation of cost of goods sold

Variable

Variable cost as a 60% of sales (need to be calculated) +Fixed costs of manufacturing (given)

Contribution format Sales 2. Variable COGS Other variable expenses =Contribution margin Fixed COGS Other Fixed costs =Profit

Variable COGS

Variable cost as a 60% of sales (need to be calculated)

• Part 3: Explain why the contribution approach is more useful to project profits. As an example, show your calculations when using a projected sales increase of 20%.

• Please discuss and make the following calculation

Contribution margin 3. Fixed costs Projected profit

3. Fixed cost =

Fixed costs of manufacturing + Fixed selling and administrative costs

Explaining the Individual Project• Part 4: Using the following data, show how expected profits would be

different if there was a sales increase of 10% and she used variable COGS of 50% vs. 60%. As an offset, this implies an increase in fixed COGS of $1,000,000.

60% COGS 50% COGS

Sales with 10% increase Less: Variable COGS Less: Other variable costs Contribution margin Fixed COGS Other fixed costs Profit

WEEK 1 LECTURE

• Cost Accounting and Cost Concepts

Learning Objectives

• 1-Identify and give examples of each of the three basic manufacturing cost categories.

• 2-Distinguish between product costs and period costs and give examples of each.

• 3-Understand cost behavior patterns including variable costs, fixed costs, and mixed costs.

• 4-Analyze a mixed cost using a scattergraph plot and the high-low method.

• 5- Prepare income statements for a merchandising company using the traditional and contribution formats.

Learning Objective

• 6-Understand the differences between direct and indirect costs.

• 7-Understand cost classifications used in making decisions: differential costs, opportunity costs, and sunk costs.

The Product

DirectMaterials

DirectLaborDirectLabor

ManufacturingOverhead

Classifications of Manufacturing Costs

Manufacturing Costs

• Direct materials are an integral part of a finished product and their costs can be conveniently traced to it.

• Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience.

• Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is also called “touch labor.”

Manufacturing Costs

• Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but the workers involved do not directly work on the product.

• Manufacturing overhead includes all manufacturing costs except direct materials and direct labor.

• Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs.

Learning Objective 1

Identify and give examples of each of the three basic

manufacturing cost categories.

Example of Direct Materials

Raw materials that become an integral part of the product and that can be conveniently traced directly to it.

Example: A radio installed in an automobileExample: A radio installed in an automobile

Example of Direct Labor

Those labor costs that can be easily traced to individual units of product.

Example: Wages paid to automobile assembly workersExample: Wages paid to automobile assembly workers

Example of Manufacturing Overhead

Manufacturing costs that cannot be easily traced directly to specific units produced.

Examples: Indirect materials and indirect laborExamples: Indirect materials and indirect labor

Wages paid to employees who are not directly involved in

production work. Examples: maintenance workers,

janitors, and security guards.

Materials used to support the production process.

Examples: lubricants and cleaning supplies used in the automobile

assembly plant.

Example of Nonmanufacturing Costs

Selling Costs

Costs necessary to secure the order and deliver the

product.

Administrative Costs

All executive, organizational, and clerical

costs.

• 1. Managerial accounting is primarily concerned with the organization as a whole rather than with segments of the organization.

• False

• 2. Managerial accounting places less emphasis on nonmonetary data than financial accounting.

• False

• 3. Direct labor is a part of both prime cost and conversion cost.

• True

• 4. Direct material cost combined with manufacturing overhead cost is known as conversion cost.

• False

• 5. Wages paid to production supervisors would be considered direct labor.

• False

• 6. Advertising is a product cost as long as it promotes specific products.

• False

• 7. For a lamp manufacturing company, the cost of the insurance on its vehicles that deliver lamps to customers is best described as a: A. prime cost.B. manufacturing overhead cost.C. period cost.D. differential (incremental) cost of a lamp.

• C. period cost

• 8. Manufacturing overhead consists of: A. all manufacturing costs.B. indirect materials but not indirect labor.C. all manufacturing costs, except direct materials and direct labor.D. indirect labor but not indirect materials.

• C. all manufacturing costs, except direct materials and direct labor.

• 9. Which of the following costs would not be included as part of manufacturing overhead? A. Insurance on sales vehicles.B. Depreciation of production equipment.C. Lubricants for production equipment.D. Direct labor overtime premium.

• A. Insurance on sales vehicles.

10. Conversion cost consists of which of the following? A. Manufacturing overhead cost.B. Direct materials and direct labor cost.C. Direct labor cost.D. Direct labor and manufacturing overhead cost.

• D. Direct labor and manufacturing overhead cost.

Distinguish between product costs and period costs and

give examples of each.

Product Costs

• The three major elements of product costs in a manufacturing company are

• 1.direct materials, • 2.direct labor, and • 3.manufacturing overhead.• A product cost is any cost involved in purchasing or

manufacturing goods. • In the case of manufactured goods, these costs consist of

direct materials, direct labor, and manufacturing overhead. • A period cost is a cost that is taken directly to the income

statement as an expense in the period in which it is incurred.

Examples ofProduct Costs Versus Period Costs

Product costs include direct materials, direct

labor, and manufacturing

overhead.

Period costs include all selling costs and

administrative costs.

Inventory Cost of Good Sold

BalanceSheet

IncomeStatement

Expense

IncomeStatement

Classifications of Costs

Manufacturing costs are oftenclassified as follows:

DirectMaterialDirect

MaterialDirectLaborDirectLabor

ManufacturingOverhead

PrimeCost

ConversionCost

• 11. Although depreciation is always a period cost in a merchandising firm, it can be a product cost in a manufacturing firm.

• True

• 12. In a manufacturing firm, all costs are product costs.

• False

• 13. The cost of shipping parts from a supplier is considered a product cost.

• True

• 14.The costs of acquiring inventory are reported on the balance sheet as an asset labeled “inventory” and are expensed only when products are sold.

• True

• 15.The cost of selling goods and administrative costs are reported on the income statement as expenses when inventory is sold.

• False – The cost of selling goods and administrative costs are reported on the income statement as expenses when they are incurred.

• 16.Product costs are the costs related to inventory and period costs are the costs related to the selling and administrative functions.

• True

• 17. Product costs are any costs that a company incurs to acquire raw materials and convert them to finished goods ready for sale.

• True

• 18. The advertising costs that Pepsi incurred to air its commercials during the Super Bowl can best be described as a: A. variable cost.B. fixed cost.C. product cost.D. prime cost.

• B. fixed cost.

• 19. Each of the following would be a period cost except: A. the salary of the company president's secretary.B. the cost of a general accounting office.C. depreciation of a machine used in manufacturing.D. sales commissions.

• C. depreciation of a machine used in manufacturing.

• 20. Which of the following costs is an example of a period rather than a product cost? A. Depreciation on production equipment.B. Wages of salespersons.C. Wages of production machine operators.D. Insurance on production equipment.

• B. Wages of salespersons.

• 21. Which of the following would be considered a product cost for external financial reporting purposes? A. Cost of a warehouse used to store finished goods.B. Cost of guided public tours through the company's facilities.C. Cost of travel necessary to sell the manufactured product.D. Cost of sand spread on the factory floor to absorb oil from manufacturing machines.

• D. Cost of sand spread on the factory floor to absorb oil from manufacturing machines.

• 22. Which of the following would NOT be treated as a product cost for external financial reporting purposes? A. Depreciation on a factory building.B. Salaries of factory workers.C. Indirect labor in the factory.D. Advertising expenses.

• D. Advertising expenses.

• 23. The salary of the president of a manufacturing company would be classified as which of the following? A. Product costB. Period costC. Manufacturing overheadD. Direct labor

• B. Period cost

• 24. Conversion costs do NOT include: A. depreciation.B. direct materials.C. indirect labor.D. indirect materials.

• B. direct materials.

25. The following costs were incurred in September:

• Conversion costs during the month totaled: A. $50,000B. $59,000C. $137,000D. $67,000

• A. $50,000Conversion cost = Direct labor + Manufacturing overhead= $29,000 + $21,000= $50,000

26. The following costs were incurred in September:

• Prime costs during the month totaled: A. $79,000B. $120,000C. $62,000D. $40,000

• C. $62,000Prime cost = Direct materials + Direct labor= $39,000 + $23,000 = $62,000

Understand cost behavior patterns including variable

costs, fixed costs, and mixed costs.

Cost Classifications for Predicting Cost Behavior

Cost behavior refers to how a cost will

react to changes in the level of activity. The most common classifications are:– Variable costs.

– Fixed costs

– Mixed costs.

Variable Cost

Your total texting bill is based on how many texts you send.

Number of Texts Sent

Variable Cost Per Unit

The cost per text sent is constant at

5 cents per text message.

Number of Texts Sent

The Activity Base (Cost Driver)

A measure of what causes the incurrence

of a variable cost

Unitsproduced

Miles driven

Machine hours

Labor hours

Fixed Cost Your monthly contract fee for your cell phone is

fixed for the number of monthly minutes in your contract. The monthly contract fee does not change based on the number of calls you make.

Number of Minutes UsedWithin Monthly Plan

Fixed Cost Per UnitWithin the monthly contract portion, the average fixed cost per

cell phone call made decreases as more calls are made.

Number of Minutes UsedWithin Monthly Plan

ExamplesAdvertising and Research

and Development

ExamplesDepreciation on Buildings and Equipment and Real

Estate Taxes

Types of Fixed Costs

DiscretionaryMay be altered in the short-term by current managerial decisions

CommittedLong-term, cannot be

significantly reduced in the short term.

Fixed Costs and the Relevant Range

Fixed costs would increase in a step fashion at a rate of $30,000 for each additional

1,000 square feet.

For example, assume office space is available at a rental rate of $30,000 per year in increments of 1,000

square feet.

Relevant range

• The relevant range is the range of activity within which assumptions about variable and fixed cost behavior are valid.

• It is the range where the fixed cost remains constant.

Cost Classifications for Predicting Cost Behavior

Behavior of Cost (within the relevant range)

Cost In Total Per Unit

Variable Total variable cost Increase Variable cost per unitand decrease in proportion remains constant.

to changes in the activity level.

Fixed Total fixed cost is not affected Fixed cost per unit decreasesby changes in the activity as the activity level rises and

level within the relevant range. increases as the activity level falls.

Mixed Costs

• Mixed Costs(also called semivariable costs).

• A mixed cost contains both variable and fixed elements.

• Consider the example of utility cost.

Mixed Costs

The total mixed cost line can be expressed as an equation: Y = a + bX

Where: Y = The total mixed cost.

a = The total fixed cost (the

vertical intercept of the line).

b = The variable cost per unit of

activity (the slope of the line).

X = The level of activity.

Mixed Costs – An ExampleIf your fixed monthly utility charge is $40, your variable

cost is $0.03 per kilowatt hour, and your monthly activity level is 2,000 kilowatt hours, what is the amount of your

utility bill?

Y = a + bX

Y = $40 + ($0.03 × 2,000)

Y = $100

• 27. Differential costs can be either fixed or variable.

• True

• 28. A fixed cost is constant per unit of product.

• False

• 29. The variable cost per unit is constant and does not depend on how many units are produced.

• True

• 30. The cost of napkins put on each person's tray at a fast food restaurant is a fixed cost.

• False

• 31. Direct material costs are generally variable costs.

• True

• 32. Property taxes and insurance premiums paid on a factory building are examples of manufacturing overhead.

• True

• 33. Manufacturing overhead combined with direct materials is known as conversion cost.

• False

• 34. All costs incurred in a merchandising firm are considered to be period costs.

• False

• 35. Depreciation is always considered a product cost for external financial reporting purposes in a manufacturing firm.

• False

36. Selling and administrative expenses are product costs under generally accepted accounting principles.

• False

37. A variable cost is a cost whose cost per unit varies as the activity level rises and falls.

• False

38. When the level of activity increases, total variable cost will increase.

• True

• 39. A decrease in production will ordinarily result in an increase in fixed production costs per unit.

• True

• 40. Variable cost: A. increases on a per unit basis as the number of units produced increases.B. remains constant on a per unit basis as the number of units produced increases.C. remains the same in total as production increases.D. decreases on a per unit basis as the number of units produced increases.

• B. remains constant on a per unit basis as the number of units produced increases.

41. Which of the following statements regarding fixed costs is incorrect? A. Expressing fixed costs on a per unit basis usually is the best approach for decision making.B. Fixed costs expressed on a per unit basis will decrease with increases in activity.C. Total fixed costs are constant within the relevant range.D. Fixed costs expressed on a per unit basis will increase with decreases in activity.

• A. Expressing fixed costs on a per unit basis usually is the best approach for decision making.

• 42. The salary paid to the production manager in a factory is: A. a variable cost.B. part of prime cost.C. part of conversion cost.D. both a variable cost and a prime cost.

• C. part of conversion cost.

• 43. Within the relevant range, variable cost per unit will: A. increase as the level of activity increases.B. remain constant.C. decrease as the level of activity increases.D. none of these.

• B. remain constant.

44. The term "relevant range" means the range of activity over which: A. relevant costs are incurred.B. costs may fluctuate.C. production may vary.D. the assumptions about fixed and variable cost behavior are reasonably valid.

• D. the assumptions about fixed and variable cost behavior are reasonably valid.

• 45. An example of a committed fixed cost is: A. a training program for salespersons.B. executive travel expenses.C. property taxes on the factory building.D. new product research and development.

C. property taxes on the factory building.

• 46. In describing the cost formula equation Y = a + bX, which of the following statements is correct? A. "X" is the dependent variable.B. "a" is the fixed component.C. In the high-low method, "b" equals change in activity divided by change in costs.D. As "X" increases "Y" decreases.

• B. "a" is the fixed component.

Analyze a mixed cost using the high-low method.

The High-Low Method

• The high-low method uses only two points to determine a cost formula. These two points are likely to be less than typical because they represent extremes of activity.

• The formula for a mixed cost is Y = a + bX. • In cost analysis, the “a” term represents the

fixed cost and the “b” term represents the variable cost per unit of activity.

The High-Low Method – An Example

The variable cost per hour of maintenance is equal to the change in cost divided by the

change in hours.

The variable cost per hour of maintenance is equal to the change in cost divided by the

change in hours.

= $6.00/hour$2,400 400

Total Fixed Cost = Total Cost – Total Variable Cost

Total Fixed Cost = $9,800 – ($6/hour × 850 hours)

Total Fixed Cost = $9,800 – $5,100

Total Fixed Cost = $4,700

Y = $4,700 + $6.00XThe Cost Equation for Maintenance

47. The following data pertains to activity and utility costs for two recent years:

• Using the high-low method, the cost formula for utilities is: A. $1.50 per unitB. $1.20 per unitC. $3,000 plus $3.00 per unitD. $4,500 plus $0.75 per unit

• D. $4,500 plus $0.75 per unit

Variable cost per unit = Change in cost Change in activity = $3,000 4,000 units = $0.75 per unit Fixed cost = Total cost - Variable cost element = $12,000 - ($0.75 per unit 10,000 units) = $12,000 - $7,500 = $4,500

48. The following data pertains to activity and the cost of cleaning and maintenance for two recent months:

• The best estimate of the total month 1 variable cost for cleaning and maintenance is: A. $300B. $500C. $800D. $100

• C. $800

• Cleaning and maintenanceVariable cost per unit = Change in cost Change in activity= ($1,100 - $900) (2,500 units - 2,000 units)= $200 500 units= $0.40 per unit

Total variable cost at 22,000 units = 2,000 units $0.40 per unit= $800

49. The following data pertains to activity and costs for two months:

• Assuming that these activity levels are within the relevant range, the mixed cost for July was: A. $10,000B. $35,000C. $15,000D. $40,000

• C. $15,000Variable cost per unit = $20,000 10,000 units = $2 per unitTotal variable cost in July = $2 per unit 20,000 units = $40,000 per unitFixed cost = $15,000 (given)

Total cost = Variable cost + Fixed cost + Mixed cost$70,000 = $40,000 + $15,000 + Mixed costMixed cost = $70,000 - ($40,000 + $15,000)= $70,000 - $55,000= $15,000

• 50. At an activity level of 9,200 machine-hours in a month, Nooner Corporation's total variable production engineering cost is $761,300 and its total fixed production engineering cost is $154,008. What would be the total production engineering cost per unit, both fixed and variable, at an activity level of 9,300 machine-hours in a month? Assume that this level of activity is within the relevant range. A. $98.42B. $99.49C. $99.31D. $98.96

• C. $99.31Variable cost per unit = $761,300 9,200 units = $82.75 per unitFixed cost per unit at 9,300 units = $154,008 9,300 units = $16.56 per unitTotal cost = Variable cost + Fixed cost= $82.75 per unit + $16.56 per unit= $99.31 per unit

• 51. At an activity level of 4,400 units in a month, Goldbach Corporation's total variable maintenance and repair cost is $313,632 and its total fixed maintenance and repair cost is $93,104. What would be the total maintenance and repair cost, both fixed and variable, at an activity level of 4,600 units in a month? Assume that this level of activity is within the relevant range. A. $420,992B. $425,224C. $415,980D. $406,736

• A. $420,992Variable cost per unit = $313,632 4,400 units = $71.28 unit

Total cost = Total fixed cost + Total variable cost= $93,104 + $71.28 per unit 4,600 units= $93,104 + $327,888= $420,992

Inspection costs at one of Krivanek Corporation's factories are listed below:

Management believes that inspection cost is a mixed cost that depends on units produced.

• 52. Using the high-low method, the estimate of the variable component of inspection cost per unit produced is closest to: A. $3.15B. $0.32C. $3.40D. $13.91

• A. $3.15

Variable cost per unit = Change in cost Change in activity = $293 93 units = $3.15 per unit

• 53. Using the high-low method, the estimate of the fixed component of inspection cost per month is closest to: A. $8,743B. $8,887C. $8,683D. $6,869

• D. $6,869

• Variable cost per unit = Change in cost Change in activity= $293 93 units= $3.15 per unit

Total fixed cost = Total cost - Variable cost element= $9,036 - ($3.15 per unit 688 units)= $9,036 - $2,167= $6,869

Glatt Inc., an escrow agent, has provided the following data concerning its office expenses:

Review Questions M/C• Management believes that office expense is a mixed cost that

depends on the number of escrows completed. Note: Real estate purchases usually involve the services of an escrow agent that holds funds and prepares documents to complete the transaction.

54. Using the high-low method, the estimate of the variable component of office expense per escrow completed is closest to: A. $101.08B. $59.12C. $17.11D. $17.15

• C. $17.11

Variable cost per unit = Change in cost Change in activity = $1,403 82 escrows = $17.11 per escrow

• 55. Using the high-low method, the estimate of the fixed component of office expense per month is closest to: A. $6,692B. $8,064C. $7,376D. $7,720

• A. $6,692

Variable cost per unit = Change in cost Change in activity = $1,403 82 escrows = $17.11 per escrow Total fixed cost = Total cost - Variable cost element = $8,779 - ($17.11 per escrow 122 escrows) = $8,779 - $2,087 = $6,692

Prepare income statements for a merchandising company using the

traditional and contribution formats.

Contribution Approach Income Statement

• The contribution approach income statement organizes costs by behavior, first deducting variable expenses to obtain contribution margin, and then deducting fixed expenses to obtain net operating income.

• The traditional approach organizes costs by function, such as production, selling, and administration. Within a functional area, fixed and variable costs are intermingled.

• The contribution margin is total sales revenue less total variable expenses.

The Traditional and Contribution Formats

Comparison of the Contribution Income Statement with the Traditional Income Statement

Traditional Format Contribution Format

Sales 100,000$ Sales 100,000$ Cost of goods sold 70,000 Variable expenses 60,000 Gross margin 30,000$ Contribution margin 40,000$ Selling & admin. expenses 20,000 Fixed expenses 30,000 Net operating income 10,000$ Net operating income 10,000$

Used primarily forexternal reporting.

Used primarily bymanagement.

Uses of the Contribution Format

this approach for:

2.Budgeting

this approach for:

2.Budgeting

• 56. Traditional format income statements are prepared primarily for external reporting purposes.

• True

• 57. In a contribution format income statement, sales minus cost of goods sold equals the gross margin.

• False

58. In a traditional format income statement for a merchandising company, the cost of goods sold reports the product costs attached to the merchandise sold during the period.

• True

• 59.Contribution format income statement is useful for external reporting purposes, it has serious limitations when used for internal purposes because it does not distinguish between fixed and variable costs.

• False

• 60. In a contribution format income statement for a merchandising company, cost of goods sold is a variable cost that gets included in the "Variable expenses" portion of the income statement.

• True

• 61. The traditional format income statement is used as an internal planning and decision-making tool. Its emphasis on cost behavior aids cost-volume-profit analysis, management performance appraisals, and budgeting.

• False

• 62. Haar Inc. is a merchandising company. Last month the company's cost of goods sold was $61,000. The company's beginning merchandise inventory was $11,000 and its ending merchandise inventory was $21,000. What was the total amount of the company's merchandise purchases for the month? A. $61,000B. $51,000C. $71,000D. $93,000

• C. $71,000

• Purchases = Cost of goods sold + Ending merchandise inventory - Beginning merchandise inventory= $61,000 + $21,000 - $11,000= $71,000

• 63.When finished goods are sold, there is an increase in which of the following accounts?

• A- Finished Goods Inventory• B- Cost of Goods Sold• C- Work-in-Process Inventory• D- Cost of Goods Manufactured

• 64. Gabruk Inc. is a merchandising company. Last month the company's merchandise purchases totaled $88,000. The company's beginning merchandise inventory was $15,000 and its ending merchandise inventory was $13,000. What was the company's cost of goods sold for the month? A. $88,000B. $90,000C. $86,000D. $116,000

• B. $90,000Cost of goods sold = Beginning merchandise inventory + purchases - Ending merchandise inventory= $15,000 + $88,000 - $13,000= $90,000

• A partial listing of costs incurred during December at Gagnier Corporation appears below:

• 65. The total of the period costs listed above for December is: A. $89,000B. $310,000C. $325,000

• D. $399,000

• B. $310,000Period costs = Administrative wages and salaries + Sales staff salaries + Corporate headquarters building rent + Marketing= $105,000 + $68,000 + $34,000 + $103,000= $310,000

• 66. The total of the manufacturing overhead costs listed above for December is: A. $325,000B. $635,000C. $89,000D. $40,000

• C. $89,000Manufacturing overhead costs = Factory supplies + Factory depreciation + Indirect labor= $8,000 + $49,000 + $32,000= $89,000

• 67. The total of the product costs listed above for December is: A. $310,000B. $89,000C. $635,000D. $325,000

• D-Product costs = Direct materials + Direct labor + Manufacturing overhead= $153,000 + $83,000 + $89,000= $325,000

Understand the differences between direct and indirect

costs.

Assigning Costs to Cost ObjectsDirect costs•Costs that can be

easily and conveniently traced to a unit of product or other cost object.

•Examples: direct material and direct labor

Indirect costs•Costs that cannot

be easily and conveniently traced to a unit of product or other cost object.

•Example: manufacturing overhead

Direct and Indirect CostsExamples – Hotel Business

Direct Indirect Cost Cost Object Cost Cost

1. The salary of the head chef

The hotel’s restaurant X

2. The salary of the head chef

A particular restaurant customer

3. Room cleaning supplies A particular hotel guest X 4. Flowers for the

reception desk A particular hotel guest X

5. The wages of the doorman

A particular hotel guest X

6. Room cleaning supplies The housecleaning department

7. Fire insurance on the hotel building

The hotel’s gym X

8. Towels used in the gym The hotel’s gym X

Note: The room cleaning supplies would most likely be considered an indirect cost of a particular hotel guest because it would not be practical to keep track of exactly how much of each cleaning supply was used in the guest’s room.

The following cost data pertain to the operations of Swestka Department Stores, Inc., for the month of July.

• The Northridge Store is just one of many stores owned and operated by the company. The Cosmetics Department is one of many departments at the Northridge Store. The central warehouse serves all of the company's stores.

• 68. What is the total amount of the costs listed above that are direct costs of the Cosmetics Department? A. $74,000B. $36,000C. $31,000D. $40,000

• D. $40,000

• Direct costs of the Cosmetics Department = Cosmetics Department sales commissions + Cosmetics Department cost of sales + Cosmetics Department manager's salary= $5,000 + $31,000 + $4,000= $40,000

• 69. What is the total amount of the costs listed above that are NOT direct costs of the Northridge Store? A. $40,000B. $34,000C. $141,000D. $78,000

• C. $141,000Costs that are not direct costs of the Northridge Store = Corporate headquarters building lease + Corporate legal office salaries + Central warehouse lease cost= $78,000 + $57,000 + $6,000= $141,000

The following cost data pertain to the operations of Mancia Department Stores, Inc., for the month of February.

• The Brentwood Store is just one of many stores owned and operated by the company. The Shoe Department is one of many departments at the Brentwood Store. The central warehouse serves all of the company's stores.

• 70. What is the total amount of the costs listed above that are direct costs of the Shoe Department? A. $80,000B. $88,000C. $130,000D. $92,000

• D. Direct costs of the Shoe Department = Shoe Department cost of sales + Shoe Department sales commissions + Shoe Department manager's salary= $80,000 + $8,000 + $4,000= $92,000

• 71. What is the total amount of the costs listed above that are NOT direct costs of the Brentwood Store? A. $152,000B. $92,000C. $79,000D. $38,000

• A-Costs that are not direct costs of the Brentwood Store = Corporate legal office salaries + Corporate headquarters building lease + Central warehouse lease costA= $62,000 + $79,000 + $11,000= $152,000

Understand cost classifications used in

making decisions: differential costs,

opportunity costs, and sunk costs.

• Every decision involves a choice between at least two alternatives.

• Only those costs and benefits that differ between alternatives are relevant in a decision. All other costs and benefits can and should be ignored as irrelevant.

Cost Classifications for Decision Making

Differential Cost and Revenue

Costs and revenues that differ among alternatives.

Example: You have a job paying $1,500 per month in your hometown. You have a job offer in a neighboring city that pays $2,000 per month. The commuting cost to the city is $300 per month.

Differential revenue is: $2,000 – $1,500 = $500

Differential cost is: $300

Opportunity Cost

The potential benefit that is given up when one alternative

is selected over another.

Example: If you werenot attending college,you could be earning$15,000 per year. Your opportunity costof attending college for one year is $15,000.

Sunk Costs

Sunk costs have already been incurred and cannot be changed now or in the future. These

costs should be ignored when making decisions.

Example: Suppose you had purchased gold for $400 an ounce, but now it is selling for $250 an ounce. Should you wait for the gold to reach $400 an ounce before selling it? You may say, “Yes” even though the $400 purchase is a sunk costs.

• 72. Automation results in a shift away from variable costs toward more fixed costs.

• True

• 73. In order for a cost to be variable it must vary with either units produced or units sold.

• False

• 74. The concept of the relevant range does not apply to fixed costs.

• False

• 75. Indirect costs, such as manufacturing overhead, are always fixed costs.

• False

• 76. Discretionary fixed costs arise from annual decisions by management to spend in certain fixed cost areas.

• True

• 77. Even if operations are interrupted or cut back, committed fixed costs remain largely unchanged in the short term because the costs of restoring them later are likely to be far greater than any short-run savings that might be realized.

• True

• 78. Committed fixed costs are fixed costs that are not controllable.

• False

• 79. mixed cost is partially variable and partially fixed.

• True

• Temblador Corporation purchased a machine 7 years ago for $319,000 when it launched product E26T. Unfortunately, this machine has broken down and cannot be repaired. The machine could be replaced by a new model 330 machine costing $323,000 or by a new model 230 machine costing $285,000. Management has decided to buy the model 230 machine. It has less capacity than the model 330 machine, but its capacity is sufficient to continue making product E26T.

• Management also considered, but rejected, the alternative of dropping product E26T and not replacing the old machine. If that were done, the $285,000 invested in the new machine could instead have been invested in a project that would have returned a total of $386,000.

• 80. In making the decision to buy the model 230 machine rather than the model 330 machine, the differential cost was: A. $34,000B. $38,000C. $4,000D. $67,000

• B. $38,000 • Differential cost = $323,000 - $285,000 =

$38,000

• 81. In making the decision to buy the model 230 machine rather than the model 330 machine, the sunk cost was: A. $319,000B. $386,000C. $285,000D. $323,000

• A. $319,000The $319,000 cost of the old machine is a sunk cost.

• 82. In making the decision to invest in the model 230 machine, the opportunity cost was: A. $386,000B. $319,000C. $285,000D. $323,000

• A. $386,000The $386,000 return from alternative investment is an opportunity cost.

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