Chapter 2 Homework Solutions

Exercise 2-2

1.The cost of a harddrive installedinacomputer:directmaterials.

2.ThecostofadvertisinginthePugetSoundComputerUsernewspaper: selling.

3.Thewagesofemployeeswhoassemble computersfromcomponents: direct labor.

4.Sales commissions paid tothecompany’s salespeople: selling.

5.Thewagesoftheassemblyshop’ssupervisor: manufacturingoverhead.

6.Thewages of the company’saccountant:administrative.

7.Depreciationonequipmentused to test assembledcomputers before releaseto customers:manufacturingoverhead.

8.Rent on the facility intheindustrial park: a combinationof manufacturingoverhead, selling,and administrative.The rent would most likelybe prorated onthe basisoftheamount ofspaceoccupiedby manufacturing,selling,andadministrative operations.

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1

ProductCost

PeriodCost

1

1.Depreciation on salespersons’ cars...... X

2.Rentonequipmentusedinthefactory...... X

3.Lubricantsused for machinemaintenance...... X

4.Salaries of personnel whowork inthe finished

Goodswarehouse...... X

5.Soapandpaper towels used byfactory workers at

10.Workers’ compensation insurance for factory

employees...... X

11.Depreciation on chairs andtables inthe factory

lunchroom...... X

12.The wages of the receptionist in the administrative

offices...... X

13.Cost of leasingthe corporate jet used bythe

company'sexecutives...... / X
14. The cost of rentingrooms ataFloridaresort for the
Annualsalesconference...... / X
15. The costof packaging thecompany’sproduct...... / X

1

CyberGamesIncome Statement

Sales...... / $1,450,000
Cost of goodssold:
Beginningmerchandiseinventory...... / $ 240,000
Add:Purchases...... / 950,000
Goodsavailablefor sale...... / 1,190,000
Deduct: Endingmerchandiseinventory.. / 170,000 / 1,020,000
Gross margin...... / 430,000
Sellingandadministrative expenses:
Sellingexpense...... / 210,000
Administrativeexpense...... / 180,000 / 390,000
Net operatingincome...... / $40,000

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Exercise 2-13

Note to the Instructor: There maybesome exceptionstothe answers below.Thepurposeof this problemis togetthestudenttostartthinkingaboutcost behavior andcostpurposes

VariableorSellingAdministrative

Manufacturing

(Product)Cost

CostItemFixedCostCostDirectIndirect

1.Propertytaxes, factory...... FX

2.Boxes usedforpackagingdetergent

Producedbythecompany...... VX

3.Salespersons’commissions...... VX

4.Supervisor’s salary,factory...... FX

5.Depreciation,executive autos...... FX

6.Wages of workers assemblingcomputers.....VX

7.Insurance,finishedgoodswarehouses...... FX

8.Lubricants for productionequipment...... VX 9.Advertisingcosts...... F X

10.Microchipsusedinproducingcalculators...... VX

11.Shippingcostsonmerchandisesold...... VX

12.Magazinesubscriptions,factory lunchroom..FX

13.Threadinagarmentfactory...... VX 14.Billingcosts...... V X*

15.Executivelife insurance...... FX

Problem 2-13(continued)

VariableorSellingAdministrative

Manufacturing

(Product)Cost

CostItemFixedCostCostDirectIndirect

16.Inkusedintextbookproduction...... VX

17.Fringebenefits, assembly-lineworkers...... VX**

18.Yarnusedinsweater production...... VX

19.Wages of receptionist, executiveoffices...... FX

* Couldbe administrative cost.

**Couldbe indirect cost.

PROBLEM 2-20 / Period(Selling
Variable / Fixed / Direct / Direct / Manuf. / andAdmin) / Oppor-tunity / Sunk
NameoftheCostCost / Cost / Materials / Labor / Overhead / Cost / Cost / Cost
Staci's current salary, $3,800
Permonth...... / X / X
Buildingrent, $500 per month. / X / X
Clayandglaze,$2per pot...... / X / X
Wages of productionworkers,
$8perpot...... / X / X
Advertising,$600 per month... / X / X
Sales commission,$4per pot.. / X / X
Rent ofproduction
equipment,$300 permonth. / X / X
Legal andfilingfees, $500...... / X / X / X
Rent ofsalesoffice,$250 per
month...... / X / X

Phonefortaking orders,$40

Permonth...... XX

Interest lost onsavings

account, $1,200 per year....XX

2.The$500cost of incorporatingthe businessisnot a differential cost.

Eventhoughthe cost wasincurredto start the business,it is a sunk cost. WhetherStaciproducespottery orstaysinherpresent job,she

Willhave incurred this cost.

Problem 2-22

1.Acost that is classified as a periodcost willberecognizedontheincome statementasanexpense inthecurrent period.Acostthat isclassified asa product cost willberecognized onthe income statement as an expense (i.e.,cost of goodssold)onlywhenthe associated unitsof product are sold.If some unitsareunsoldat the endof the period,the costs of those unsoldunitsare treated asassets. Therefore, by reclassifyingperiodcosts asproductcosts, thecompanyis abletocarry some costs forward in inventoriesthatwouldhavebeentreated as current expenses.

2.Thediscussionbelowis dividedintotwoparts—Gallant’sactionsto postpone expenditures andthe actions to reclassify periodcosts as productcosts.

The decision topostpone expendituresisquestionable.It isonethingto postponeexpenditures dueto acash bind;It isquite another to postpone expenditures in order tohit a profit target. Postponingthese expenditures may have the effect ofultimatelyincreasingfuture costs andreducingfuture profits. If orders to the company’s suppliers are changed,it maydisruptthesuppliers’ operations.The additionalcosts may be passed on toGallant’s companyandmay create illwillanda feelingof mistrust. Postponingmaintenanceonequipmentisparticularly questionable.The result may be breakdowns,inefficientand/orunsafe operations, anda shortened lifefor the machinery.

Interestingly,inasurveyof649managersreportedinManagementAccounting,only12%statedthatitisunethicaltodeferexpensesand therebymanipulatequarterlyearnings.Theproportionwhofeltit was unethicalincreasedto24%whenit involved annual earnings. Another 41%saidthat deferring expenses isa questionablepractice whenit involved quarterly reports and35%saidthiswhenannualreports were involved.Finally,47%saidthat itis completely ethical tomanipulate quarterly reports inthis way and41%gave the green lightfor annual reports.(SeeWilliamJ.Bruns, Jr.andKennethA.Merchant,“The DangerousMoralityofManagingEarnings,”ManagementAccounting, August1990,pp.22-25)

Problem 2A-3

1.No. It appears that the overtime spent completingthe jobwassimplya matter ofhowthejobhappenedtobescheduled.Underthese circumstances, anovertimepremium probablyshouldnotbechargedto acustomerwhosejobhappenstofallattheendoftheday’sschedule.

2.Direct labor (9hours×$14per hour)...... $126 Generaloverhead(1hour×$7perhour)...... 7 Totalcost...... $133

3.Achargefor anovertimepremiummightbejustifiedif thecustomer requesteda“rush”orderthatcausedtheovertime.

Problem 2A-5

1. / Totalwagesfor theweek:
Regulartime(40hours×$20perhour)...... / $800
Overtime(6hours×$30perhour)...... / 180
Totalwages...... / $980
Allocationof total wages:
Direct labor(46hours×$20perhour)...... / $920
Manufacturing overhead
(Overtime:6hours×$10perhour)...... / 60
Totalwages...... / $980
2. / Totalwagesfor theweek:
Regulartime(40hours×$20perhour)...... / $ 800
Overtime(8hours×$30perhour)...... / 240
Totalwages...... / $1,040
Allocationof total wages:
Direct labor(45hours×$20perhour)......
Manufacturing overhead:
(Idletime:3hours×$20per hour)...... / $60 / $ 900
(Overtime:8hours×$10per hour)...... / 80 / 140
Totalwages...... / $1,040
3. / Totalwagesandfringebenefits fortheweek:
Regulartime(40hours×$20perhour)...... / $ 800
Overtime(10hours×$30perhour)...... / 300
Fringebenefits(50hours× $6perhour)...... / 300
Totalwagesandfringebenefits...... / $1,400
Allocationof wages andfringe benefits:
Direct labor(48hours×$20perhour)......
Manufacturing overhead:
(Idletime:2hours×$20per hour)...... / $40 / $ 960
(Overtime:10hours×$10perhour)...... / 100
(Fringebenefits: 50 hours×$6perhour)...... / 300 / 440
Totalwagesandfringebenefits...... / $1,400

Problem 2A-5(continued)

2.Allocationof wages and fringe benefits:

Direct labor:
Wagecost (48hours×$20per hour)...... / $960
Fringe benefits(48 hours×$6perhour)...... / 288 / $1,248
Manufacturing overhead:
(Idletime:2hours×$20per hour)...... / 40
(Overtime:10hours×$10perhour)...... / 100
(Fringebenefits: 2hours×$6per hour)...... / 12 / 152
Totalwagesandfringebenefits...... / $1,400

Problem 2B-3

1.FlorexCompany

QualityCost Report

LastYearThisYear

Amount(inthousands)

PercentofSales

Amount(inthousands)

PercentofSales

Prevention costs:
Quality engineering...... / $420 / 0.56 / $570 / 0.76
Systems development...... / 480 / 0.64 / 750 / 1.00
Statistical process control. / 0 / 0.00 / 180 / 0.24
Totalpreventioncosts...... / 900 / 1.20 / 1,500 / 2.00
Appraisalcosts
Inspection...... / 750 / 1.00 / 900 / 1.20
Producttesting...... / 810 / 1.08 / 1,200 / 1.60
Suppliesused intesting... / 30 / 0.04 / 60 / 0.08
Depreciation of testing
equipment...... / 210 / 0.28 / 240 / 0.32
Totalappraisal costs...... / 1,800 / 2.40 / 2,400 / 3.20
Internal failurecosts:
Net cost ofscrap...... / 630 / 0.84 / 1,125 / 1.50
Reworklabor...... / 1,050 / 1.40 / 1,500 / 2.00
Disposal of defective
products...... / 720 / 0.96 / 975 / 1.30
Total internalfailurecosts... / 2,400 / 3.20 / 3,600 / 4.80
External failure costs:
Costoffieldservicing...... / 1,200 / 1.60 / 900 / 1.20
Warranty repairs...... / 3,600 / 4.80 / 1,050 / 1.40
Productrecalls...... / 2,100 / 2.80 / 750 / 1.00
Total external failurecosts.. / 6,900 / 9.20 / 2,700 / 3.60
Totalqualitycost...... / $12,000 / 16.00 / $10,200 / 13.60

Problem 2B-3(continued) 2.

$14,000

$12,000

$10,000

$8,000

$6,000

$4,000

ExternalFailureInternalFailureAppraisalPrevention

$2,000

$0

LastYearThisYear

18%

16%

14%

12%

10%

8%

6%

4%

2%

0%

Last YearThisYear

ExternalFailureInternalFailureAppraisalPrevention