MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual

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. ixed costs remain constant in total across changes in activity! whereas variable costs change in proportion to the level of activity.

". #xamples 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. #xamples 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$s salary. %. The cost of idle time is treated as manufacturing overhead because it is a normal cost of the manufacturing operation that should be spread out among all of the manufactured products. The alternative to this treatment would be to charge the cost of idle time to a particular &ob that happens to be in process when the idle time occurs. Idle time often results from a random event! such as a power outage. Charging the cost of the idle time resulting from such a random event to only the &ob that happened to be in process at the time would overstate the cost of that &ob. '. a. (ncontrollable cost b. Controllable cost c. (ncontrollable cost ). *roduct costs are costs that are associated with manufactured goods until the time period during which the products are sold! when the product costs become expenses. *eriod costs are expensed during the time period in which they are incurred.
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C!a"t#$ 8 Cost Concepts and Classifications

+. 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. ,ost of the costs incurred in a service industry firm to produce services are operating expenses that are treated as period costs. -. *roduct 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. .. / sun0 cost is a cost that was incurred in the past and cannot be altered by any current or future decision. / differential cost is the difference in a cost item under two decision alternatives. 11. a. b. c. d. 2irect cost 2irect cost Indirect cost Indirect cost

11. The two properties of a relevant cost are3 1. it differs between the decision options 2. it will be incurred in the future 12. The three types of product costs are3 1. direct materials 4 the materials used in manufacturing the product! which become a physical part of the finished product. 2. direct labor 4 the labor used in manufacturing the product. ". factory overhead 4 the indirect costs for materials! labor! and facilities used to support the manufacturing process! but not used directly in manufacturing the product. 1". The three types of manufacturing inventories are3 1. materials inventory 4 the store of materials used in the manufacturing process or in providing the service.

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Cost Concepts and Classifications C!a"t#$ 8

2. wor0 in process inventory 4 accounts for all costs put into the manufacturing of products that are started but not complete at the financial statement date. ". finished goods inventory 4 the cost of goods that are ready for sale. 1%. 2irect 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 E&#$'is# (S'!#(ul# o) Cost o) Goo(s Manu)a'tu$#( an( Sol(* In'o+# Stat#+#nt) Requirement 1 /ma5ing /luminum Company 6chedule of Cost of 7oods ,anufactured or the 8ear #nded 2ecember "1! 211' 2irect material3 9aw:material inventory! ;anuary 1.............. /dd3 *urchases of raw material.................. 9aw material available for use..................... 2educt3 9aw:material inventory! 2ecember "1 9aw material used 2irect labor....................................................... ,anufacturing overhead3 Indirect material Indirect labor 2epreciation on plant and e<uipment (tilities =ther .............................................................. ..............................................................
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* )1!111 2'1!111 *"11!111 +1!111 *2%1!111 %11!111 * 11!111 2'!111 111!111 2'!111 "1!111

C!a"t#$ 8 Cost Concepts and Classifications

Total manufacturing overhead Total manufacturing costs.................................. /dd3 >or0:in:process inventory! ;anuary 1...... 6ubtotal............................................................. .................................................................... 2educt3 >or0:in:process inventory! 2ecember 1.................................................. Cost of goods manufactured............................... Requirement 2 /ma5ing /luminum Company 6chedule of Cost of 7oods 6old or the 8ear #nded 2ecember "1! 211' inished goods inventory! ;anuary 1......................................... /dd3 Cost of goods manufactured............................................ Cost of goods available for sale................................................ 2educt3 inished goods inventory! 2ecember "1..................... Cost of goods sold.................................................................... Requirement 3 /ma5ing /luminum Company Income 6tatement or the 8ear #nded 2ecember "1! 211' 6ales revenue............................................................................ ?ess3 Cost of goods sold.......................................................... 7ross margin............................................................................ 6elling and administrative expenses.......................................... Income before taxes.................................................................. Income tax expense................................................................... @et income .............................................................................. E&#$'is# % Cost Item a. Transportation:in costs on materials purchased b. /ssembly:line wor0ers$ wages
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1.1!111 *-"1!111 121!111 *.'1!111 11'!111 *-"'!111

*1'1!111 -"'!111 *.-'!111 1)'!111 *-21!111

*1!11'!111 -21!111 * 2-'!111 111!111 * 1+'!111 +1!111 * 11'!111

Fixed (F) Variable (V) A A

Period (P) Product (R) 9 9

Cost Concepts and Classifications C!a"t#$ 8

c. *roperty taxes on wor0 in process inventories d. 6alaries of top executives in the company e. =vertime premium for assembly wor0ers f. 6ales commissions g. 6ales personnel office rental h. *roduction supervisory salaries i. Controller$s office supplies &. #xecutive office heat and air conditioning 0. #xecutive office security personnel l. 6upplies used in assembly wor0 m. actory heat and air conditioning n. *ower to operate factory e<uipment o. 2epreciation on furniture for sales staff p. Aarnish used for finishing product <. ,ar0eting personnel health insurance r. *ac0aging materials for finished product s. 6alary of the <uality control manager who chec0s wor0 on the assembly line t. /ssembly:line wor0ers$ dental insurance E&#$'is# , (Cost Classi)i'ations* Manu)a'tu$#$) 1. 2. ". %. '. ). +. -. .. 11. 11. 12. 1". 1%. a! d! g! i a! d! g! & b! f b! d! g! 0 a! d! g! 0 a! d! g! & b! c! f b! d! g! 0 b! c and dB! e and f and gB! 0B
B The building is used or se!eral "ur"oses#

A A A

A A A A

9 * 9 * * 9 * * * 9 9 9 * 9 * 9 9 9

b! c! f b! c! h b! c! f b! c! e b! c and dC! e and f and gC! 0C

C

The building that the urnace heats is used or se!eral "ur"oses# 8-.

C!a"t#$ 8 Cost Concepts and Classifications

1'. b! d! g! 0 E&#$'is# - (E'ono+i' C!a$a't#$isti's o) Costs) 1. 2. ". %. '. ). marginal cost sun0 cost average cost opportunity cost differential cost out:of:poc0et cost

E&#$'is# . (Cost Classi)i'ations* Hot#l) 1. 2. ". %. '. ). +. -. a! c! e! 0 b! d! e! 0 d! e! i d! e! i a! d! e! 0 a! d! e! 0 d! e! 0 b! dC! e! 0

C

$nless the dish%asher has been used im"ro"erl&#

.. h 11. a! d! eB! &

B The hotel general manager ma& ha!e some control o!er the total s"ace allocated to the 'itchen#

11. 12. 1". 1%.

i & a! c! e e! 0

E&#$'is# /
*ic0up Truc0 =utput Aariable production costs 3())) truc's * 2.!)%1!111 8-/ *())) truc's P .01%821222 +())) truc's P 8810%21222

Cost Concepts and Classifications C!a"t#$ 8 ixed production costs Aariable selling costs ixed selling costs Total costs 6elling price per truc0 (nit cost *rofit per truc0 ,01%221222 %!'11!111 1"!))1!111 P 8312221222 %)!111 2.!111 31222 ".!211!111 012221222 1"!))1!111 P % 1 -21222 %1!111 %21 02 010 2 ,01%221222 ,1.221222 ,1//21222 P ..1%821222 "'!.11 31%., 81/-3

III. Problems P$o4l#+ The relevant costs for this decision are the differential costs. These are3 =pportunity cost or lost wages Dta0e homeE F*1!'11 x +1G x 12 monthsH........ *12!)11 Tuition.................................................... 2!211 Ioo0s and supplies.................................. "11 Total differential costs...................... *1'!111 9oom and board! clothing! car! and incidentals are not relevant because these are presumed to be the same whether or not rancis goes to school. The possibility of part:time wor0! summer &obs! 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 recogni5e 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 Dincluding the opportunity costs of lost incomeE.

P$o4l#+ % Requirement (a) =nly the differential outla& costs need be considered. The travel and other variable expenses of *22 per hour would be the relevant costs. /ny amount received in excess would be a differential! positive return to *at. Requirement (b)
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C!a"t#$ 8 Cost Concepts and Classifications

The opportunity cost of the hours given up would be considered in this situation. (nless *at receives more than the *111 normal consulting rate! the contract would not be beneficial. Requirement (c) In this situation *at 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 *111 rate depending on the outcome of *at$s analysis. P$o4l#+ , (tilities for the ba0ery *aper used in pac0aging product 6alaries and wages in the ba0ery Coo0ie ingredients Ia0ery labor and fringe benefits Ia0ery e<uipment maintenance 2epreciation of ba0ery plant and e<uipment (niforms Insurance for the ba0ery Ioxes! bags! and cups used in the ba0ery Ia0ery overtime premiums Ia0ery idle time Total product costs in pesos 2!111 .1 1.!'11 "'!111 1!"11 -11 2!111 %11 .11 1!111 2!)11 '11 ))!2.1

P$o4l#+ /dministrative costs 9ent for administration offices /dvertising =ffice manager$s salary Total period costs in pesos P$o4l#+ . Requirement (a)
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1!111 1+!211 1!.11 1"!111 ""!111

Cost Concepts and Classifications C!a"t#$ 8

6un0 costs not shown could include lost boo0 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 DcorrectlyE that use of differential analyses has several advantages ::: it is <uic0er! re<uires less data! and tends to give a better focus to the decision. The ban0er might suspect the client of hiding some material data in order to ma0e the proposal more acceptable to the financing agency. IA. Multiple Choice Questions 1. 2. ". %. '. ). B I 2 I / C 2 +. -. .. 11. 11. 12. C 2 C C / C 1". 1%. 1'. 1). 1+. 1-. 2 2C IC /C CC C 1.. 21. 21. 22. 2". 2%. / /B I I C C 2'. 2). 2+. 2-. 2.. "1. C I I / BB / I

Controllable costs are those costs that can be influenced by a specified manager within a given time period. BB The answer assumes absorption costing method is used. C 6upporting Computations 1%. *)1 J *11 J *1- J *% K *.2 1). *)1 J *11 J *1- J *"2 K *121 1'. *"2 J *1) K *%1+. *% J *1) K *21

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