CHAPTER 3.docx

Review Questions

COST CONCEPTS AND CLASSIFICATIONS

1

1. Why is the the cost of idle idle time treate treated d as manufactu manufacturing ring overhea overhead? d? 2. Indicate Indicate whether whether each each of the followin following g costs is a direct direct cost or an indire indirect ct cost of the the restaurant restaurant in a hotel. hotel. a. Cost Cost of food food serv served ed b. Chef’s Chef’s salary salary and fringe fringe benefi benefits ts c. Part of the the cost of maintain maintaining ing the grounds grounds around around the hotel, hotel, which which is allocated allocated to the the restaurant. restaurant. d. Part of of the cost cost of advertisi advertising ng the hotel, hotel, which which is allocat allocated ed to the restau restaurant rant . !ist and and briefly briefly descri describe be the three three ty"es ty"es of "roduc "roductt costs. costs. #. !ist and and briefly briefly describe describe the the three three ty"es of of manufactur manufacturing ing inventor inventories. ies. $. %escribe %escribe how the income income statement statement of a manufacturi manufacturing ng com"any differ differs s from the income income statement statement of a merchandising com"any. &. '( variable cost is a cost that varies "er unit of of "roduct, whereas whereas a fi)ed cost is constant constant "er unit of "roduct.* %o you agree? +)"lain. . Why is manufac manufacturi turing ng overhead overhead consider considered ed an indirect indirect cost cost of a unit unit of "roduct? "roduct? EXERCISES Exercise 1 (Scheu!e o" Cost o" #oos $%nu"%cture %n So!& Inco'e St%te'ent  (ma-ing (luminum Com"any, a manufacturer of recyclable soda cans, had the following following inventory balances at the beginning and end of 2$/ Inventory Classification aw aterial Wor3 in "rocess 4inished 5oods

0anuary 1, 2$ P &, 12, 1$,

%ecember 1, 2$ P , 11$, 1&$,

%uring 2$, the com"any "urchased P 2$, of raw material and s"ent P #, on direct labor. anufacturing overhead costs were as follows/ Indirect material P 1, Indirect labor 2$, %e"reciation on "lant and e6ui"ment 1, 7tilities 2$, 8ther , 9ales revenue was P 1,1$, for the year. 9elling 9elling and administrative e)"enses for the year amounted to P 11,. :he firm’s ta) rate is # " ercent. Re)uire* 1. Pre"are Pre"are a schedule schedule of of cost cost of goods manufactur manufactured. ed. 2. Pre"a Pre"are re a sche schedul dule e of cost cost of of goods goods sold. sold. . Pre"a Pre"are re an incom income e statem statement ent.. Exercise + 4or each of the following costs incurred in a manufacturing o"eration, indicate whether the costs would be fi)ed or variable ;4 or in on>in costs on materi materials als "urchased "urchased l. 9u"" 9u""li lies es used used in asse assemb mbly ly wor3 wor3 b. (ssemb (ssembly> ly>li line ne wor3er’ wor3er’s s wages wages m. 4actory 4actory heat and air condition conditioning ing c. Pro"e Pro"erty rty ta)e ta)es s on wor3 wor3 in "roces "rocess s invent inventori ories es n. Power Power to to o"era o"erate te fact factory ory e6ui" e6ui"men mentt d. 9alari 9alaries es of to" to" e)ecu e)ecutiv tives es in the the com"a com"any ny o. %e"rec %e"reciat iation ion on on furnit furniture ure for for sales sales staff  staff  e. 8vert 8vertime ime "rem "remium ium for for assem assembly bly wor3 wor3ers ers ". shirt designers and "ainters Wages of sales "ersonnel %e"reciation on sewing machines ent on the building. Part of the building’s first floor is used to ma3e and "aint :>shirts. Part of it is used for the retail sales sho". :he second floor is used for administrative offices and storage of raw materials and finished goods Cost of daily advertisements in local media Wages of designers who e)"eriment with new fabrics, "aints, and :>shirt designs Cost of hiring a "ilot to fly along the beach "ulling a banner advertising the sho" 9alary of the owner’s secretary Cost of re"airing the gas furnace Cost of insurance for the "roduction of em"loyees

m.

n, Exercise ., (Econo'ic Ch%r%cteristics o" Costs o. :he following terms are used to describe various economic characteristics of costs. t. %ifferential cost 6. 8""ortunity cost u. arginal cost r. 8ut>of>"oc3et cost v. (verage cost s. 9un3 cost ".

w,

x, Re)uire* y. Choose one of the terms listed above to characteri-e each of the amounts described below. 1. :he cost of including one e)tra child in a day care center. 2. :he cost of merchandise inventory "urchased two years ago, which is now obsolete. . :he cost of feeding $ children in a "ublic school cafeteria is P @ "er day, or P 1.& "er child "er day. What economic term describes this P 1.& cost? #. :he management of a high>rise office building uses 2,$ s6uare feet of s"ace in the building for its own management functions. :his s"ace could be rented for P 2$,. What economic term describes this P 2$, in lost rental revenue? $. :he cost of building an automated assembly line in a factory is P @,. :he cost of building a manually o"erated assembly line is P $,. W hat economic term is used to describe the difference between these two amounts? &. eferring to the "receding 6uestion, what economic term is used to describe the P @, cost of building the automated assembly line? /,

%%, Exercise 0 (Cost C!%ssi"ic%tions& ote! ab. 9everal costs incurred by Wow Botel and estaurant are listed below. 4or each cost, indicate which of the following classifications best describe the cost. ore than one classification may a""ly to the same cost item. ac. Cost classifications a. %ifferential cost g. Indirect cost of the food and beverage de"artment b. arginal cost h. Controllable by the 3itchen manager  c. 8""ortunity cost i. 7ncontrollable by the 3itchen manager  d. 9un3 cost  . Controllable by the hotel general manager  e. 8ut>of>"oc3et cost 3. 7ncontrollable by the hotel general manager  f. %irect cost of the food and beverage de"artment l.

m. 1. 2. . #. $. &. . @. A. 1. 11. 12.

1. 1#.

Cost items :he cost of food used in the 3itchen :he cost of general advertising by the hotel, which is allocated to the food and beverage de"artment :he cost of s"ace ;de"reciation= occu"ied by a sauna ne)t to the "ool. :he s"ace could otherwise have been used for a maga-ine and boo3sho". :he discount on room rates given as a s"ecial offer for a '!abor %ay 5ateway 9"ecial.* :he wages earned by table>service "ersonnel. :he salary of the 3itchen manager. :he cost of leasing a com"uter used for reservations, "ayroll and general hotel accounting :he wages of the hotel’s maintenance em"loyees, who s"ent 11 hours ;at P 1# "er hour= re"airing the dishwasher  in the 3itchen. :he difference in the total cost incurred by the hotel when one additional guest is registered. :he cost of s"ace ;de"reciation= occu"ied by the 3itchen. :he "rofit that would have been earned in a maga-ine and boo3sho", if the hotel had one. :he cost of the refrigerator "urchased 1 months ago. :he unit was covered by a warranty for 12 months, during which time it wor3ed "erfectly. It con3ed out after 1 months, des"ite an original estimate that it would last five years. :he cost of dishes bro3en by 3itchen em"loyees. :he cost of a "ool service that cleans and maintains the hotel’s swimming "ool.

n.

o, Exercise 2 ".

6.

:8P Pic3u"s is an u">scale, higher>"riced, s"ecialty "ic3u" truc3 ma3er based in inan, !aguna. :he management accountant for :8P Pic3u"s com"iled information for various levels of "ic3u" truc3 out"ut/

r.

s.

Pic3u" :ruc3 8ut"ut

COST t.CONCEPTS AND CLASSIFICATIONS u.

y.

v.

, truc3s