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Exercise 1-2.The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that are incurred at the company. Required: For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost. Insert your answer after the colon for each cost. 1. The cost of a hard drive installed in a computer: direct materials 2. The cost of advertising in the Puget Sound Computer User newspaper: selling costs 3. The wages of employees who assemble computers from components: direct labor 4. Sales commissions paid to the company’s salespeople: selling costs 5. The salary of the assembly shop’s supervisor: manufacturing overhead 6. The salary of the company’s accountant: administrative costs 7. Depreciation on equipment used to test assembled computers before release to customers: manufacturing overhead 8. Rent on the facility in the industrial park: manufacturing overhead and administrative cost

Exercise 1-5. Northeast Hospital’s Radiology Department is considering replacing an old inefficient X-ray machine with a state-of-the-art digital X-ray machine. The new machine would provide higher

quality X-rays in less time and at a lower cost per X-ray. It would also require less power and would use a color laser printer to produce easily readable X-ray images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is lobbying the hospital’s management to buy a new DNA analyzer. Required: Classify each item as a differential cost, a sunk cost, or an opportunity cost in the decision to replace the old X-ray machine with a new machine. If none of the categories apply for a particular item, indicate “None”. The example is done for you. Cost Item Ex. Cost of X-ray film used in the old machine

Differential Cost

1.

Cost of the old X-ray machine

Sunk cost

2.

The salary of the head of the Radiology Department

None

3.

The salary of the head of the Laboratory Department

None

4.

Cost of the new color laser printer

Differential cost

5.

Rent on the space occupied by Radiology

None

6.

The cost of maintaining the old machine

Differential cost

7.

Benefits from a new DNA analyzer

Opportunity cost

8.

Cost of electricity to run the X-ray machines

Differential cost

Exercise 1-6

Cherokee Inc. is a merchandiser that provided the following information:

Amount Number of units sold 20,000 Selling price per unit $ 30 Variable selling expense per unit $ 4 Variable administrative expense per unit$ 2 Total fixed selling expense $ 40,000 Total fixed administrative expense $ 30,000 Beginning merchandise inventory $ 24,000 Ending merchandise inventory $ 44,000 Merchandise purchases $180,000

Required: 1. Prepare a traditional income statement. 2. Prepare a contribution format income statement.

Prepare a traditional income statement: Cherokee, Inc. Traditional Income Statement Sales

20,000 x 30

600,000

Cost of goods sold

24,000 + 180,000 – 44,000

160,000

Gross margin

600,000 – 160,000

440,000

Selling and administrative expenses: Selling expenses

4 x 20,000 + 40,000 2 x 20,000 + 30,000

120,000 70,000

440,000 – 120,000 – 70,000

250,000

Administrative expenses

Net operating income

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Prepare a contribution format income statement:

Cherokee, Inc. Contribution Format Income Statement Sales

600,000

Variable expenses: Cost of goods sold

160,000

Selling expenses

80,000

Administrative expenses

40,000

Contribution margin

600,000 – 280,000

280,000

320,000

Fixed expenses: Selling expenses

40,000

Administrative expenses

30,000

Net operating income

320,000 – 70,000

70,000

250,000

Exercise 1-11 Harris Company manufactures and sells a single product. A partially completed schedule of the company’s total costs and costs per unit over the relevant range of 30,000 to 50,000 units is given below: Required: 1. Complete the schedule of the company’s total costs and costs per unit as given in the schedule below. 2. Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a contribution format income statement for the year using the schedule provided below.

Units Produced and Sold 30,000

40,000

50,000

$180,000

$240,000

$300,000

300,000

300,000

300,000

$480,000

$540,000

$600,000

$180,000/30,000 = $6.00

$6.00

$6.00

$10.00

$7.50

$6.00

$16.00

$13.50

$12.00

Total costs: Variable cost Fixed cost Total costs Cost per unit: Variable cost Fixed cost Total cost per unit

Harris Company Contribution Format Income Statement Sales ($16 x 45,000) $720,000 Variable expenses ($6 x 45,000)

$270,000

Contribution margin

$450,000

Fixed expense Net operating income ($450,000 $300,000)

$300,000 $150,000

Exercise 1-14. Wollogong Group Ltd. of New South Wales, Australia, acquired its factory building 10 years ago. For several years, the company has rented out a small annex attached to the rear of

the building for $30,000 per year. The renter’s lease will expire soon, and rather than renewing the lease, the company has decided to use the annex to manufacture a new product. Direct materials cost for the new product will total $80 per unit. To have a place to store its finished goods, the company will rent a small warehouse for $500 per month. In addition, the company must rent equipment for $4,000 per month to produce the new product. Direct laborers will be hired and paid $60 per unit to manufacture the new product. As in prior years, the space in the annex will continue to be depreciated at $8,000 per year. The annual advertising cost for the new product will be $50,000. A supervisor will be hired and paid $3,500 per month to oversee production. Electricity for operating machines will be $1.20 per unit. The cost 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 $3,000 per year. Required: Using the table shown below, describe each of the costs associated with the new product decision in four ways. In terms of cost classifications for predicting cost behavior (column 2), indicate whether the cost is fixed or variable. With respect to cost classifications for manufacturers (column 3), if the item is a manufacturing cost, indicate whether it is direct materials, direct labor, or manufacturing overhead. If it is a nonmanufacturing cost, then select “none” as your answer. With respect to cost classifications for preparing financial statements (column 4), indicate whether the item is a product cost or period cost. Finally, in terms of cost classifications for decision making (column 5), identify any items that are sunk costs or opportunity costs. If you identify an item as an opportunity cost, then select “none” as your answer in columns 2-4. Cost Classifications for: Cost Item Rental revenue forgone, $30,000 per year Direct materials cost, $80 per unit Rental cost of warehouse, $500 per month Rental cost of equipment, $4,000 per month Direct labor cost, $60 per unit Depreciation of the annex space, $8,000 per year Advertising cost, $50,000 per year Supervisor's salary, $3,500 per month Electricity for machines, $1.20 per

Predicting Cost Behavior

Manufacturers

Preparing Financial Statements

Decision Making

None

None

None

Opportunity cost

Variable cost

Direct materials

Product cost

None

Fixed cost

None

Period cost

None

Fixed cost

Manufacturing overhead

Product cost

None

Variable cost

Direct labor

Product cost

None

Fixed cost

None

Period cost

Sunk cost

Fixed cost

None

Period cost

None

Product cost

None

Product cost

None

Fixed cost Variable cost

Manufacturing overhead Manufacturing overhead

unit Shipping cost, $9 per unit Return earned on investments, $3,000 per year

Variable cost

None

Period cost

None

None

None

None

Opportunity cost...