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Cost Concept: Exercises

Problem A.
The selected amounts that follow were taken from Kentucky Corporation's accounting records:

Raw material used $ 27,000


Direct labor 35,000
Total manufacturing costs 104,000
Work-in-process inventory, 1/1 19,000
Cost of goods manufactured 100,000
Cost of goods available for sale 175,000
Finished-goods inventory, 12/31 60,000
Sales revenue 300,000
Selling and administrative expenses 125,000
Income tax expense 18,000

Required:
Compute the following:
1. Manufacturing overhead.
2. Work-in-process inventory, 12/31.
3. Finished-goods inventory, 1/1.
4. Cost of goods sold.
5. Gross margin.
6. Net income.

Problem B
Global Systems began business on January 1 of the current year, producing a single product that is popular with home builders.
Demand was very strong, allowing the company to sell its entire manufacturing output of 80,000 units. The following unit costs were
incurred:

Manufacturing costs:
Direct materials $15
Direct labor 8
Variable overhead 11
Fixed overhead 6
Selling and administrative costs:
Variable 5
Fixed 2

Global anticipates an increase in productive output to 100,000 units and sales of 95,000 units in the next accounting period.
The company uses appropriate drivers to determine cost behavior and estimates.

Required:
7. Assuming that present cost behavior patterns continue, compute the total expected costs in the upcoming
accounting period.
8. George Levy is about to prepare a graph that shows the unit cost behavior for variable selling and administrative
cost. If the graphs horizontal axis is volume and the vertical axis is dollars, briefly describe what Georges graph
should look like.
9. Determine whether the following costs are variable or fixed in terms of behavior:
a. Yearly lease payments for a state-of-the-art cutting machine.
b. A fee paid to a consultant who provided advice about quality issues. The fee was based on the number of
consulting hours provided.
c. Cost of an awards dinner for "star" salespeople.

PROBLEM C.
Consider the following items:

A. Tomatoes used in the manufacture of Heinz ketchup


B. Administrative salaries of executives employed by Southwest Airlines
C. Wages of assembly-line workers at a Ford plant
D. Marketing expenditures of the Los Angeles Dodgers baseball club
E. Commissions paid to Coca-Cola's salespeople
F. Straight-line depreciation on manufacturing equipment owned by Dell Computer
G. Shipping charges incurred by Office Depot on out-going orders
H. Speakers used in Sony home-theater systems
I. Insurance costs related to a Mary Kay Cosmetics' manufacturing plant

Required:
Complete the table that follows and classify each of the costs listed as (1) a product or period cost and (2) a variable or
fixed cost by placing an "X" in the appropriate column.

Product or Period Cost Variable or Fixed Cost


Item Product Period Variable Fixed
A
B
C
D
E
F
G
H
I

Problem D
Using the following data for a recent period, calculate the beginning finished goods inventory:

Sales ........................................................................ $40,000


Beginning finished goods inventory ....................... ?
Cost of goods manufactured ................................... $16,000
Ending finished goods inventory ............................ $5,000
Cost of goods sold .................................................. ?
Gross margin ........................................................... $17,000
Administrative and selling expenses ....................... ?
Net operating income .............................................. $10,000
Required:
Complete the missing data

Problem E.
A partial listing of costs incurred during March at Febbo Corporation appears below:

Factory supplies ............................................................. $9,000


Administrative wages and salaries ................................. $85,000
Direct materials .............................................................. $126,000
Sales staff salaries .......................................................... $30,000
Factory depreciation ....................................................... $33,000
Corporate headquarters building rent ............................. $43,000
Indirect labor .................................................................. $26,000
Marketing ....................................................................... $65,000
Direct labor..................................................................... $99,000
Required:
10. How much is the total period cost?
11. How much is the total overhead?

PROBLEM F.
Debra works on the assembly line of a manufacturing company where she installs a component part for one of the company's products.
She is paid $16 per hour for regular time and time and a half for all work in excess of 40 hours per week.

Required:
12. Debra works 42 hours during a week in which there was no idle time. The allocation of Debra's wages for the
week between direct labor cost and manufacturing overhead cost would be:

Problem G.
Circle K Toys, Inc. manufactures toys and children's clothing and sells these products to retail outlets. The following costs were
incurred in performing quality activities at Circle K during the year:

Product recall activities ......................................................... $370,000


Quality training activities ...................................................... $240,000
Quality improvement activities ............................................. $154,000
Warranty claim activities ...................................................... $109,000
Quality inspection and testing activities ................................ $61,000
Rework activities ................................................................... $38,000
Quality data collection and reporting activities ..................... $15,000
Required:
13. How much is the total prevention cost?
14. How much is the total internal failure cost?