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Exercise 1:
Classify the following cost as fixed, variable, or semi variable. Explain the
reasons for your classification of the semi variable costs.
a) Depreciation straight line method: Fixed
b) Direct materials: Variable
c) Factory Insurance: Fixed
d) Heat, light and power: Semi variable
e) Indirect labour: Semi variable
f) Rent: Fixed
g) Repairs to machinery: Semi variable
h) FICA tax: Semi variable
i) Superintendence: Fixed
j) Washroom supplies: Variable
The semi variable cost have both fixed and variable elements. The fixed
element of the cost will be incurred repeatedly over time, while the variable
element will only be incurred as a function of activity volume.

Exercise 3:
Classify the following items as direct or indirect materials:
a) Ailerons on an airplane: Direct material
b) 1-oz perfume bottles: Direct materials
c) Sanding material in furniture making: Indirect materials
d) Ingots used by a foundry for making castings: Direct materials
e) Bags in flour mills: Direct materials
f) Seats to be installed in a railway car: Direct materials
g) Stainless steel cone that holds the mirror in a colour television set:
Direct materials
h) Milk to make ice cream: Direct materials
Exercise 6:
Cost computations. On October 1, the Florida Company had the following
inventories: materials, $24,000; work in process, $12,000; and finished goods,
$36,000. During the month, materials purchases totalled $56,000. Direct
labour for October was $40,000, at a uniform wage of $6.40 per hour.
Marketing and administrative expenses for the month amounted to 10% of net
sales. Inventories on October 31 were as follows: materials, $20,000; work in
process, $8,000; and finish goods, $40,000. Net sales for October total
$200,000. Factory over head is applied on the bases of $8 per direct labour
1. Prime cost
2. Conversion cost
3. Cost of good manufactured
4. Cost of goods sold
5. Income from operations
1. Prime cost:
Prime cost= Raw material used + Direct labor
Raw material used= Raw material purchase + raw material opening – raw
material ending
Raw material used= 56,000+24,000-20,000
Raw material used= 60,000
Prime cost= 60,000+40,000
Prime cost= 100,000
2. Cost conversion:
Cost conversion= Direct labor + FOH
FOH= (40,000/ 6.40)*8= 50,000
Cost conversion= 40,000+50,000
Cost conversion= 90,000
3. Cost of goods manufactured:
COGM= manufacturing cost+ work in process opening- work in process
Manufacturing cost= Prime cost + FOH
Manufacturing cost= 100,000+50,000
Manufacturing cost= 150,000
COGM= 150,000+12,000-8,000
COGM= 154,000
4. COGS:
COGS= COGM + finished goods opening – finished goods ending
COGS= 154,000+36,000-40,000
COGS= 150,000
5. Net income:
Net income= Gross profit – operating expenses
Gross profit = Sales – COGS
Gross profit= 200,000-150,000
Gross profit= 50,000
Net income= 50,000- 20,000
Net income= 30,000