Solution manual managerial accounting by cabrera 2010 chapter 08 answer

The cost of idle time is treated as manufacturing overhead because it is a normal cost of the manufacturing operation that should be spread out among all of the manufactured products.. P

CHAPTER 8 COST CONCEPTS AND CLASSIFICATIONS

I Questions

1 The phrase “different costs for different purposes” refers to the fact that the word “cost” can have different meanings depending on the context

in which it is used Cost data that are classified and recorded in a particular way for one purpose may be inappropriate for another use

2 Fixed costs remain constant in total across changes in activity, whereas variable costs change in proportion to the level of activity

3 Examples of direct costs of the food and beverage department in a hotel include the money spent on the food and beverages served, the wages

of table service personnel, and the costs of entertainment in the dining room and lounge Examples of indirect costs of the food and beverage department include allocations of the costs of advertising for the entire hotel, of the costs of the grounds and maintenance department, and of the hotel general manager’s salary

4 The cost of idle time is treated as manufacturing overhead because it is

a normal cost of the manufacturing operation that should be spread out among all of the manufactured products The alternative to this treatment would be to charge the cost of idle time to a particular job that happens to be in process when the idle time occurs Idle time often results from a random event, such as a power outage Charging the cost of the idle time resulting from such a random event to only the job that happened to be in process at the time would overstate the cost of that job

5 a Uncontrollable cost

b Controllable cost

c Uncontrollable cost

6 Product costs are costs that are associated with manufactured goods until the time period during which the products are sold, when the product costs become expenses Period costs are expensed during the time period in which they are incurred

7 The most important difference between a manufacturing firm and a service industry firm, with regard to the classification of costs, is that the goods produced by a manufacturing firm are inventoried, whereas the services produced by a service industry firm are consumed as they are produced Thus, the costs incurred in manufacturing products are treated as product costs until the period during which the goods are sold Most of the costs incurred in a service industry firm to produce services are operating expenses that are treated as period costs

8 Product costs are also called inventoriable costs because they are assigned to manufactured goods that are inventoried until a later period, when the products are sold The product costs remain in the finished goods inventory account until the time period when the goods are sold

9 A sunk cost is a cost that was incurred in the past and cannot be altered

by any current or future decision A differential cost is the difference in

a cost item under two decision alternatives

10 a Direct cost

b Direct cost

c Indirect cost

d Indirect cost

11 The two properties of a relevant cost are:

1 it differs between the decision options

2 it will be incurred in the future

12 The three types of product costs are:

1 direct materials – the materials used in manufacturing the product, which become a physical part of the finished product

2 direct labor – the labor used in manufacturing the product

3 factory overhead – the indirect costs for materials, labor, and facilities used to support the manufacturing process, but not used directly in manufacturing the product

13 The three types of manufacturing inventories are:

1 materials inventory – the store of materials used in the manufacturing process or in providing the service

2 work in process inventory – accounts for all costs put into the manufacturing of products that are started but not complete at the financial statement date

3 finished goods inventory – the cost of goods that are ready for sale

14 Direct materials include the materials in the product and a reasonable allowance for scrap and defective units, while indirect materials are materials used in manufacturing that are not physically part of the finished product

II Exercises

Exercise 1 (Schedule of Cost of Goods Manufactured and Sold; Income Statement)

Requirement 1

Amazing Aluminum Company Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2005 Direct material:

Raw-material inventory, January 1 P 60,000

Add: Purchases of raw material 250,000

Raw material available for use P310,000

Deduct: Raw-material inventory,

Direct labor 400,000 Manufacturing overhead:

Depreciation on plant and equipment 100,000

Total manufacturing costs P830,000 Add: Work-in-process inventory, January 1 120,000 Subtotal

P950,000 Deduct: Work-in-process inventory,

December 1 115,000 Cost of goods manufactured P835,000

Requirement 2

Amazing Aluminum Company Schedule of Cost of Goods Sold For the Year Ended December 31, 2005 Finished goods inventory, January 1 P150,000 Add: Cost of goods manufactured 835,000 Cost of goods available for sale P985,000 Deduct: Finished goods inventory, December 31 165,000 Cost of goods sold P820,000

Requirement 3

Amazing Aluminum Company Income Statement For the Year Ended December 31, 2005 Sales revenue P1,105,000 Less: Cost of goods sold 820,000 Gross margin P 285,000 Selling and administrative expenses 110,000 Income before taxes P 175,000 Income tax expense 70,000 Net income P 105,000

Exercise 2

Cost Item Variable (V) Fixed (F) Product (R) Period (P)

a Transportation-in costs on materials

purchased V R

c Property taxes on work in process

d Salaries of top executives in the

company

e Overtime premium for assembly

j Executive office heat and air

conditioning

o Depreciation on furniture for sales staff F P

r Packaging materials for finished product V R

s Salary of the quality control manager

t Assembly-line workers’ dental

Exercise 3 (Cost Classifications; Manufacturer)

1 a, d, g, i

2 a, d, g, j

3 b, f

4 b, d, g, k

5 a, d, g, k

6 a, d, g, j

7 b, c, f

8 b, d, g, k

9 b, c and d*, e and f and g*, k*

* The building is used for several purposes.

10 b, c, f

11 b, c, h

12 b, c, f

13 b, c, e

14 b, c and d†, e and f and g†, k†

† The building that the furnace heats is used for several purposes.

15 b, d, g, k

Exercise 4 (Economic Characteristics of Costs)

1 marginal cost

2 sunk cost

3 average cost

4 opportunity cost

5 differential cost

6 out-of-pocket cost

Exercise 5 (Cost Classifications; Hotel)

1 a, c, e, k

2 b, d, e, k

3 d, e, i

4 d, e, i

5 a, d, e, k

6 a, d, e, k

7 d, e, k

8 b, d†, e, k

† Unless the dishwasher has been used improperly.

9 h

10 a, d, e*, j

* The hotel general manager may have some control over the total space

allocated to the kitchen.

11 i

12 j

13 a, c, e

14 e, k

Exercise 6

Pickup Truck Output

Variable production costs P 29,640,000 P 59,280,000 P 88,920,000

Fixed production costs 39,200,000 39,200,000 39,200,000

Variable selling costs 4,500,000 9,000,000 13,500,000

Fixed selling costs 13,660,000 13,660,000 13,660,000

Total costs P 87,000,000 P121,140,000 P155,280,000

III Problems

Problem 1

The relevant costs for this decision are the differential costs These are:

Opportunity cost or lost wages (take home)

[P1,500 x 70% x 12 months] P12,600 Tuition 2,200

Books and supplies 300

Total differential costs P15,100 Room and board, clothing, car, and incidentals are not relevant because these are presumed to be the same whether or not Francis goes to school The possibility of part-time work, summer jobs, or scholarship assistance could be considered as reductions to the cost of school If students are familiar with the time value of money, then they should recognize that the analysis calls for a comparison of the present value of the differential after-tax cash inflows with the present value of differential costs of getting the education (including the opportunity costs of lost income)

Problem 2

Requirement (a)

Only the differential outlay costs need be considered The travel and other

variable expenses of P22 per hour would be the relevant costs Any amount received in excess would be a differential, positive return to Pat

Requirement (b)

The opportunity cost of the hours given up would be considered in this situation Unless Pat receives more than the P100 normal consulting rate, the contract would not be beneficial

Requirement (c)

In this situation Pat would have to consider the present value of the contract and compare that to the present value of the existing consulting business The final rate may be more or less than the normal P100 rate depending on the outcome of Pat’s analysis

Problem 3

Salaries and wages in the bakery 19,500

Depreciation of bakery plant and equipment 2,000

Boxes, bags, and cups used in the bakery 1,100

Problem 4

Office manager’s salary 13,000

Problem 5

Requirement (a)

Sunk costs not shown could include lost book value on traded assets, depreciation estimates for new investment, and interest costs on capital needed during facilities construction

Requirement (b)

The client might be used to differential cost as a decision tool, and believes (correctly) that use of differential analyses has several advantages - it is quicker, requires less data, and tends to give a better focus to the decision The banker might suspect the client of hiding some material data in order to make the proposal more acceptable to the financing agency

IV Multiple Choice Questions

* Controllable costs are those costs that can be influenced by a specified manager within a given time period

** The answer assumes absorption costing method is used

† Supporting Computations

14 P60 + P10 + P18 + P4 = P92 16 P60 + P10 + P18 + P32 = P120

15 P32 + P16 = P48 17 P4 + P16 = P20