MODULE 1

SUGGESTED SOLUTIONS TO EXERCISES

PROBLEM 1
Note: Many correct answers are possible.
A. The cost of each alternative (make vs. buy) would be needed along
with information about suppliers that pertains to reliability and product
quality (e.g., testimonials from a supplier's current customers that cite
any problems with on-time deliveries, product stockouts, or abnormally
high spoilage rates of purchased goods). Given the company is
currently making the part, what would happen to the facilities if the
firm begins to purchase from outside suppliers? Could the facilities be
subleased, used for other profitable products, or downsized (with
equipment being sold)? What would happen to existing employees
would there be any layoffs and how much would the company save?
B. The manager needs information about construction or leasing costs
along with figures that focus on subsequent operating costs. Also,
projected sales, market share figures, and data about competitors
would be helpful.
PROBLEM 2
A. Cost centers and profit centers are different types of responsibility
units within an organization. With a cost center, a manager is held
accountable for the amount of cost incurred; in contrast, with a profit
center, managers are evaluated on the amount of profit generated,
namely, revenues minus expenses.
B. The number of service requests is likely to drop because users will now
be charged for services provided. In cases where services are free,
users sometimes use and abuse the privilege.
C. The profit center form of organization will probably result in a more
service-oriented maintenance group. The profit-center manager would
be willing to perform services as long as capacity is available and
revenues exceed expenses. Naturally, the added profit is viewed
favorably, and the quality of services may actually increase. On the
other hand, if organized as a cost center, providing additional service
will likely result in higher costs, which could be viewed unfavorably in
performance evaluations.
PROBLEM 3
A. Direct costs are logically and practically related (i.e., easily traceable)
to a particular cost object. An indirect cost, on the other hand, is not.
Whether a cost is direct or indirect depends on the cost object under
consideration. A cost may be easily traceable to a company, for
example, but not easily traced to a department of that firm.
B. Direct materials form an integral part of the finished product and, at
the same time, are easily traced to that product. Indirect materials,
which are part of manufacturing overhead, generally do not meet these
guidelines. Note, though, that some indirect material may be easily
traced to the product (e.g., five squirts of wood glue in a piece of
furniture) but it may be too costly to do so.

C. Manufacturing overhead consists of indirect materials, indirect labor,

plant depreciation, factory utilities, and other factory-related costs.
This cost component reflects all manufacturing costs other than direct
materials and direct labor. Direct labor, in contrast, consists of wages
of those employees who work directly on the goods in production
(machine operators, assembly-line workers, and so forth).
PROBLEM 4
A. PC, V
B. MOH, F
C. MOH, F
D. DL, V
E. MOH, V
F. DM, V
G. PC, F
H. PC, F
I. MOH, F
PROBLEM 5

Item
A
B
C
D
E
F
G
H
I

Product or Period Cost

Product
Period
X
X
X
X
X
X
X
X
X

Variable or Fixed Cost

Variable
Fixed
X
X
X
X
X
X
X
X
X

PROBLEM 6
A.

Fixed manufacturing overhead per unit:

$400,000 20,000 scrapers produced = $20
Average unit manufacturing cost:
Direct materials
Direct labor
Variable manufacturing overhead
Fixed manufacturing overhead
Average unit cost

B.

Production (units)
Sales (units)
Ending finished-goods inventory (units)
3,000 units x $140 = $420,000

25
35
60
20
140

20,000
17,000
3,000

C.

Finished goods, Jan. 1

Add: Cost of goods manufactured (20,000 units x $140)
Cost of goods available for sale
Deduct: Finished goods, Dec. 31
Cost of goods sold

$
$
$

---2,800,000
2,800,000
420,000
2,380,000

D. 1. No change. Direct labor is a variable cost, and the cost per unit will remain
constant.
2. No change. Despite the increase in the number of units produced, this is a
fixed cost, which remains the same in total.
PROBLEM 7
1. Prime cost
P430,000
2. Conversion costs
P525,000
3. Inventoriable costs
P710,000
4. Period costs
P305,000

= P185,000 + P245,000

= P245,000 + P125,000 + P155,000

= P430,000 + P125,000 + P155,000

= P160,000 + P145,000

PROBLEM 8
Product costs are costs that relate to the manufacturing process and
consist of direct materials, direct labor, and manufacturing overhead.
Simply stated, these are costs incurred to make a product.
Product costs are attached to the units produced (i.e., work in process)
and, thus, inventoried on the balance sheet. These costs are later charged
to finished goods when the goods are completed. Another transfer occurs
when the finished units are sold, with the costs now transferred to cost of
goods sold on the income statement.
PROBLEM 9
The doctor's observations are incorrect, as gasoline is a variable cost and
insurance is a fixed cost. Gasoline cost will increase with the number of
miles driven, whereas insurance outlays will remain the same. The doctor
seems to have confused the "total" perspective, as defined by
accountants, with the notion of per-unit cost behavior.

PROBLEM 10
1. Direct materials used

30.00
20.00
15.00
3.00
68.00
20,000

Total variable costs per month

1,360,000

2. Fixed manufacturing overhead

10.00
4.00
14.00
20,000

280,000

Direct labor
Variable manufacturing overhead
Variable marketing
Total variable cost per unit
X No. of units produced and sold

Fixed marketing costs

Total fixed cost per unit
X No. of units produced and sold
Total fixed costs per month
PROBLEM 11
A. Marginal cost
B. Sunk cost
C. Average cost
D. Opportunity cost
E. Differential cost
F. Out-of-pocket cost
PROBLEM 12

1.
2.
3.
4.
5.

Direct
Indirect
Direct
Direct
Direct

6. Direct
7. Direct
8. Indirect
9. Direct
10.Direct

PROBLEM 13

1.
2.
3.
4.
5.

Manufacturing
Selling
Manufacturing
Selling
Administrative

6. Manufacturing
7. Administrative
8. Selling
9. Administrative
10.Selling

PROBLEM 14

1. Variable
2. Variable
3. Fixed
4. Variable
5. Fixed
6. Fixed
7. Fixed
8. Variable
9. Fixed
10.Fixed

Product
Product
Product
Product
Product
Period
Period
Period
Product
Period

Direct
Direct
Indirect
Direct
Indirect
Indirect
Indirect
Direct
Indirect
Indirect

PROBLEM 15

1. Fixed
2. Fixed
3. Variable
4. Variable
5. Fixed
6. Variable
7. Variable
8. Fixed
9. Fixed
10. Fixed

Period
Inventoriable
Inventoriable
Inventoriable
Inventoriable
Period
Inventoriable
Inventoriable
Period
Inventoriable

PROBLEM 16
A. Responsibility accounting refers to the various concepts and tools that
are used within an organization to evaluate the performance of people
and various sub-units (such as divisions and departments). Managers
are appointed to oversee these sub-units and held accountable for
items under their control.
B. The manager of a cost center is typically evaluated on the amount of
cost incurred. The costs should be under the manager's control, and
the service provided by the center should be high.
C. Yes. Although Philbun understands the need to run a first-class
operation and contribute to Branson's overall financial performance,
she may have taken things a bit too far. A cost-center manager should
strive to run an operation that provides high-quality service at the
lowest possible cost. This does not necessarily mean cost
minimization, which often results in the elimination of key tasks (i.e.,
the "fine points") needed to achieve quality. It is possible that the
department's late billings and errors in invoices and customer
statements may have been caused by such eliminations.
D. No. A profit-center manager is evaluated on the basis of revenues
generated and costs incurred. The Billing Department does not
produce any revenues for Bransonit merely handles customer
invoices and statements. Sales of company products are likely the
responsibility of a separate Sales Department.

PROBLEM 17
A. No. Although the variances appear on the production manager's
performance report and are often under his or her control, an
adjustment is needed in this case. The problem appears to be the fault
of the purchasing clerk who misplaced the paperwork. Another
explanation may be that the fault lies with the marketing department
for accepting a rush order and possibly putting a strain on the entire
manufacturing system.
B. Yes. These variances should be discussed to determine who's to blame
and then cross-charged against that individual's department.
- done -