Accounting 225 Quiz Section #2

Chapter 2-1 Class Exercises

1. Wollogong Group Ltd. of New South Wales, Australia, acquired its factory building about 10 years ago.
For several years the company has rented out a small annex attached to the rear of the building. The
company has received a rental income of $30,000 per year on this space. The renters lease will expire
soon, and rather than renewing the lease, the company has decided to use the space itself to manufacture
a new product.
Direct materials cost for the new product will be $80 per unit. To have a place to store finished units of
product, the company will rent a small warehouse nearby. The rental cost will be $500 per month. In
addition, the company must rent equipment for use in producing the new product; the rental cost will be
$4,000 per month. Workers will be hired to manufacture the new product, with direct labor cost
amounting to $60 per unit. The space in the annex will continue to be depreciated on a straight-line
basis, as in prior years. This depreciation is $8,000 per year.
Advertising costs for the new product will total $50,000 per year. A supervisor will be hired to oversee
production; her salary will be $1,500 per month. Electricity for operating machines will be $1.20 per
unit. Costs of shipping the new product to customers will be $9 per unit.
To provide funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate
some temporary investments. These investments are presently yielding a return of about $3,000 per year.

Product Cost

Name of the Cost

Period
Cost

(selling
Variable Fixed Direct Direct Manufacturing
and
Opportunity Sunk
Cost
Cost Materials Labor
Overhead
admin)
Cost
Cost

Accounting 225 Quiz Section #2

Chapter 2-1 Class Exercises
2. You are an intern at WiddiGnomerson Corporation. Management has asked for your help in preparing
some reports for June. Raw materials beginning inventory balance was $20,000. The company
purchased $69,000 of raw materials during the month; the ending raw materials inventory balance was
$32,000. Direct labor cost incurred in June was $24,000, which was 25% of conversion cost for the
month. Beginning work-in-process balance was $22,000; the ending balance was $19,000. Beginning
and ending finished goods balances were $53,000 and $51,000, respectively. The company incurred
$20,000 in selling expense and $35,000 administrative expense during the month.
Use the space below for T-Accounts:

a. What was the prime cost for June?

b. What was the Cost of Goods Manufactured for June?

c. What was the Cost of Goods Sold for June?

Accounting 225 Quiz Section #2

Chapter 2-1 Class Exercises
3. For each item in the table below, indicate whether the cost behavior appears to be fixed (F), variable
(V), or mixed (M).

Cost Item
Cost A
Cost B
Cost C

Total Cost to
Produce 5,000 units
$13,500
$22,500
$62,500

Total Cost to
Produce 3,000 units
$13,500
$15,500
$37,500

F, V, or M?

4. Lucerne Corporation purchased a machine 7 years ago for $339,000 when it launched Product X05K.
Unfortunately, this machine has now broken down and cannot be repaired. The machine can be replaced
by a new Model 360 machine costing $353,000 or by a new Model 280 machine costing $332,000.
Management has decided to buy the Model 280 machine. It has less capacity than the Model 360, but its
capacity is sufficient to continue making product X05K to meet anticipated demand. Management also
considered, but rejected, the alternative of dropping product X05K and not replacing the old machine. If
that had been done, the $332,000 invested in the new machine could instead have been invested in a
project that would have returned a total of $426,000. (1 point each response)
a. In consideration of the decision to buy the Model 280 rather than the Model 360 machine, the
differential cost was
and the sunk cost was
.

b. Identify the amount of any opportunity cost involved in the decision to invest in the Model 280 machine.
If there is none, enter zero in the space provided.
.

5. For each item in the table below, indicate whether the cost is direct (D) or indirect (I) with respect to the
cost object listed next to it.
Cost Item
Cost Object
Salary of the president of a home
A particular home being built
construction company.
Cost of lubrication oil used at the auto
The auto repair shop
repair shop of an automobile dealer
The total tip given to a waiter by a group A particular member of the group
of 10 people dining together

D or I?