Chapter 2 - Answer PDF

Preview

Summary

COST ACCOUNTING AND CONTROL – Solutions ManualCHAPTER 2 COST TERMS, CONCEPTS AND CLASSIFICATIONSI. Answers to Questions A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, an activity, a depar...

Description

COST ACCOUNTING AND CONTROL – Solutions Manual CHAPTER 2 COST TERMS, CONCEPTS AND CLASSIFICATIONS

I.

Answers to Questions 1.

A cost object is anything for which a separate measurement of costs is desired. Examples include a product, a service, a project, a customer, a brand category, an activity, a department and a program.

2.

Cost assignment is a general term that encompasses both (1) tracing accumulated costs to a cost object and (2) allocating accumulated costs to a cost object. Cost tracing is the assignment of indirect costs to a chosen cost object. Cost allocation is the assigning of indirect costs to a chosen cost object. The relationship between these terms is as follows: Direct costs

Cost tracing

Indirect costs

Cost allocation

Cost Assignment

Cost object

3.

Cost reduction efforts frequently focus on: 1. Doing only value-added activities, and 2. Efficiently managing the use of the cost drivers in those value-added activities.

4.

Descriptions of the three sectors are:  Service-sector companies provide services or intangible products to their customers—for example, legal advice or an audit. These companies do not have any inventory of intangible products at the end of an accounting period.  Merchandising-sector companies provide tangible products they have previously purchased in the same basic form from suppliers. Merchandise purchased from suppliers but not sold at the end of an accounting period is held as inventory.  Manufacturing-sector companies provide tangible products that have been converted to a different form from the products purchased from suppliers. At the end of an accounting period, inventory of a manufacturer can include direct materials, work in process and finished goods. Thus, manufacturing and merchandising companies have inventory, while service companies do not. Manufacturing companies have direct materials, work in process and finished goods inventories, whereas merchandising companies have only goods purchased for resale inventory (merchandise inventory).

2-1

5.

Capitalized costs are costs that are first recorded as an asset (capitalized) when they are incurred. These costs are presumed to provide future benefits to the company. Examples are costs to acquire computer equipment and motor vehicles. Noncapitalized costs are costs that are recorded as expenses of the accounting period when they are incurred. Examples are salaries: Service Merchandising Manufacturing

Capitalized Costs Cost to purchase computer equipment. Cost of shelving used to display merchandise. Cost of materials used in manufacturing process

Noncapitalized Costs Cost of telephone calls. Salary of checkout people. Cost of petrol consumed by sales people.

6.

A product cost is the sum of the costs assigned to a product for a specific purpose. Purposes for computing a product cost include:  Product pricing and product emphasis.  Contracting with government agencies.  Financial statements presentation.

7.

The phrase “different costs for different purposes” refers to the fact that the word “cost” can have different meanings depending on the context in which it is used. Cost data that are classified and recorded in a particular way for one purpose may be inappropriate for another use.

8.

Fixed costs remain constant in total across changes in activity, whereas variable costs change in proportion to the level of activity.

9.

Examples of direct costs of the food and beverage department in a hotel include the money spent on the food and beverages served, the wages of table service personnel, and the costs of entertainment in the dining room and lounge. Examples of indirect costs of the food and beverage department include allocations of the costs of advertising for the entire hotel, of the costs of the grounds and maintenance department, and of the hotel general manager’s salary.

10. The cost of idle time is treated as manufacturing overhead because it is a normal cost of the manufacturing operation that should be spread out among all of the manufactured products. The alternative to this treatment would be to charge the cost of idle time to a particular job that happens to be in process when the idle time occurs. Idle time often results from a random event, such as a power outage. Charging the cost of the idle time resulting from such a random event to only the job that happened to be in process at the time would overstate the cost of that job.

11. a.

Uncontrollable cost 2-2

b. c.

Controllable cost Uncontrollable cost

12. Product costs are costs that are associated with manufactured goods until the time period during which the products are sold, when the product costs become expenses. Period costs are expensed during the time period in which they are incurred. 13. The most important difference between a manufacturing firm and a service industry firm, with regard to the classification of costs, is that the goods produced by a manufacturing firm are inventoried, whereas the services produced by a service industry firm are consumed as they are produced. Thus, the costs incurred in manufacturing products are treated as product costs until the period during which the goods are sold. Most of the costs incurred in a service industry firm to produce services are operating expenses that are treated as period costs. 14. Product costs are also called inventoriable costs because they are assigned to manufactured goods that are inventoried until a later period, when the products are sold. The product costs remain in the finished goods inventory account until the time period when the goods are sold. 15. A sunk cost is a cost that was incurred in the past and cannot be altered by any current or future decision. A differential cost is the difference in a cost item under two decision alternatives. 16. a. b.

Direct cost Direct cost

c. Indirect cost d. Indirect cost

17. The two properties of a relevant cost are: 1. it differs between the decision options 2. it will be incurred in the future 18. The three types of product costs are: 1. direct materials – the materials used in manufacturing the product, which become a physical part of the finished product. 2. direct labor – the labor used in manufacturing the product. 3. factory overhead – the indirect costs for materials, labor, and facilities used to support the manufacturing process, but not used directly in manufacturing the product. 19. The three types of manufacturing inventories are: 1. materials inventory – the store of materials used in the manufacturing process or in providing the service. 2. work in process inventory – accounts for all costs put into the manufacturing of products that are started but not complete at the financial statement date. 3. finished goods inventory – the cost of goods that are ready for sale. 20. The income statement of a manufacturing company differs from the income statement of a merchandising company in the cost of goods sold section. A merchandising company sells finished goods that it has purchased from a 2-3

supplier. These goods are listed as “purchases” in the cost of goods sold section. Since a manufacturing company produces its goods rather than buying them from a supplier, it lists “cost of goods manufactured” in place of “purchases.” Also, the manufacturing company identifies its inventory in this section as Finished Goods inventory, rather than as Merchandise Inventory. 21. Manufacturing overhead is an indirect cost since these costs cannot be easily and conveniently traced to particular units of products 22. Direct labor cost (34 hours  P15 per hour)................................... P510 Manufacturing overhead cost (6 hours  P15 per hour)................ 90 Total wages earned.......................................................................... P600 Direct labor cost (45 hours  P14 per hour)................................. P630 Manufacturing overhead cost (5 hours  P7 per hour)................ 35 Total wages earned.................................... P665 23.

II. Answers to Exercises Exercise 1 (Schedule of Cost of Goods Manufactured and Sold; Income Statement) Requirement 1 Amazing Aluminum Company Schedule of Cost of Goods Manufactured For the Year Ended December 31, 20X1 Direct material: Raw-material inventory, January 1.......................... Add: Purchases of raw material.............................. Raw material available for use................................ Deduct: Raw-material inventory, December 31

P 60,000 250,000 P310,000 70,000

Raw material used

P240,000

Direct labor..................................................................... Manufacturing overhead: Indirect material

400,000 P 10,000

Indirect labor

25,000

Depreciation on plant and equipment Utilities ........................................................................... ........................................................................... Other 2-4

100,000 25,000 30,000

........................................................................... ........................................................................... Total manufacturing overhead

190,000

Total manufacturing costs............................................... Add: Work-in-process inventory, January 1.................. Subtotal........................................................................... .................................................................................. Deduct: Work-in-process inventory, December 1......... Cost of goods manufactured...........................................

P830,000 120,000 P950,000 115,000 P835,000

Requirement 2 Amazing Aluminum Company Schedule of Cost of Goods Sold For the Year Ended December 31, 20X1 Finished goods inventory, January 1.................................................. Add: Cost of goods manufactured..................................................... Cost of goods available for sale......................................................... Deduct: Finished goods inventory, December 31............................. Cost of goods sold...............................................................................

P150,000 835,000 P985,000 165,000 P820,000

Requirement 3 Amazing Aluminum Company Income Statement For the Year Ended December 31, 20X1 Sales revenue...................................................................................... Less: Cost of goods sold.................................................................... Gross margin....................................................................................... Selling and administrative expenses.................................................. Income before taxes............................................................................ Income tax expense............................................................................. Net income ........................................................................................

P1,105,000 820,000 P 285,000 110,000 P 175,000 70,000 P 105,000

Exercise 2

a. b. c. d. e. f.

Cost Item Transportation-in costs on materials purchased Assembly-line workers’ wages Property taxes on work in process inventories Salaries of top executives in the company Overtime premium for assembly workers Sales commissions 2-5

Fixed (F) Variable (V)

Period (P) Product (R)

V V V

R R R

F V V

P R P

g. h. i. j. k. l. m. n. o. p. q. r. s. t.

Sales personnel office rental Production supervisory salaries Controller’s office supplies Cost Item Executive office heat and air conditioning Executive office security personnel Supplies used in assembly work Factory heat and air conditioning Power to operate factory equipment Depreciation on furniture for sales staff Varnish used for finishing product Marketing personnel health insurance Packaging materials for finished product Salary of the quality control manager who checks work on the assembly line Assembly-line workers’ dental insurance

F F F Fixed (F) Variable (V) F F V F V F V F V

P R P Period (P) Product (R) P P R R R P R P R

F F

R R

Exercise 3 (Cost Classifications; Manufacturer) 1. 2. 3.

a, d, g, i a, d, g, j b, f

4. 5. 6. 7. 8. 9.

b, d, g, k a, d, g, k a, d, g, j b, c, f b, d, g, k b, c and d*, e and f and g*, k* * The building is used for several purposes. b, c, f b, c, h b, c, f b, c, e b, c and d†, e and f and g†, k† † The building that the furnace heats is used for several purposes. b, d, g, k

10. 11. 12. 13. 14. 15.

Exercise 4 (Economic Characteristics of Costs) 1. 2.

marginal cost sunk cost

4. opportunity cost 5. differential cost 2-6

3. average cost 6. out-of-pocket cost Exercise 5 (Cost Classifications; Hotel) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

11. 12. 13. 14.

a, c, e, k b, d, e, k d, e, i d, e, i a, d, e, k a, d, e, k d, e, k b, d†, e, k † Unless the dishwasher has been used improperly. h a, d, e*, j * The hotel general manager may have some control over the total space allocated to the kitchen. i j a, c, e e, k

Exercise 6 Pickup Truck Output 3,000 trucks P 29,640,000 39,200,000 4,500,000 13,660,000 P 87,000,000

6,000 trucks P 59,280,000 39,200,000 9,000,000 13,660,000 P121,140,000

9,000 trucks P 88,920,000 39,200,000 13,500,000 13,660,000 P155,280,000

Selling price per truck

46,000

40,100

35,900

Unit cost

29,000

20,190

17,253

Profit per truck

17,000

19,910

18,647

Variable production costs Fixed production costs Variable selling costs Fixed selling costs Total costs

2-7

Exercise 7 Va r i a bl e Cos t 1 . Wo o du s e di nat a b l e( P2 0 0 p e r t a b l e ) 2 . L a b o r c o s t t oa s s e mb l ea t a b l e( P8 0p e r t a b l e ) 3 . Sa l a r yo f t h ef a c t o r y s u p e r v i s o r( P7 6 , 0 0 0p e r y e a r ) 4 . Co s t o f e l e c t r i c i t yt o p r o d u c et a b l e s( P4p e r ma c h i n e h o u r ) 5 . De p r e c i a t i o no fma c h i n e s u s e dt op r o d u c et a b l e s ( P2 0 , 0 0 0p e r y e a r ) 6 . Sa l a r yo f t h ec o mp a n y p r e s i d e n t ( P2 0 0 , 0 0 0p e r y e a r ) 7 . Ad v e r t i s i n ge x p e n s e ( P5 0 0 , 0 0 0p e r y e a r ) 8 . Co mmi s s i o n sp a i dt o s a l e s p e r s o n s( P6 0p e r t a b l e s o l d ) 9 . Re n t a l i n c o mef o r g o n eo n f a c t o r ys p a c e * 1

Fi x e dCos t

Pe r i od ( Sel l i nga nd Di r e c t Admi ni s t r a t i v e )Cos t Ma t e r i a l s

X

SunkCos t

Oppor t uni t y Cos t

X

X

X X

X

X

X X

X

Pr od uc tCos t Di r e c t Ma n uf a c t ur i ng La bor Ov e r he a d

X

X

X

X

X

X*

X X1

This is a sunk cost because the outlay for the equipment was made in a previous period. This is an opportunity cost because it represents the potential benefit that is lost or sacrificed as a result of using the factory space to produce tables. Opportunity cost is a special category of cost that is not ordinarily recorded in an organization’s accounting books. To avoid possible confusion with other costs, we will not attempt to classify this cost in any other way except as an opportunity cost.

2-8

Exercise 8 1. 2. 3. 4. 5.

6. 7. 8.

The wages of employees who build the sailboats: direct labor cost. The cost of advertising in the local newspapers: marketing and selling cost. The cost of an aluminum mast installed in a sailboat: direct materials cost . The wages of the assembly shop’s supervisor: manufacturing overhead cost . Rent on the boathouse: a combination of manufacturing overhead, administrative, and marketing and selling cost. The rent would most likely be prorated on the basis of the amount of space occupied by manufacturing, administrative, and marketing operations. The wages of the company’s bookkeeper: administrative cost. Sales commissions paid to the company’s salespeople: marketing and selling cost. Depreciation on power tools: manufacturing overhead cost.

2-9

Exercise 9

1. 2.

Cost The salary of the head chef The salary of the head chef

3. 4. 5. 6.

Room cleaning supplies Flowers for the reception desk The wages of the doorman Room cleaning supplies

7.

Fire insurance on the hotel building Towels used in the gym

8.

Cost Object The hotel’s restaurant A particular restaurant customer A particular hotel guest A particular hotel guest A particular hotel guest The housecleaning department The hotel’s gym The hotel’s gym

Direc t Cost X

Indirec t Cost X X X X

X X X

Note: The room cleaning supplies would most likely be considered an indirect cost of a particular hotel guest because it would not be practical to keep track of exactly how much of each cleaning supply was used in the guest’s room. III. Answers to Multiple Choice Questions 1. 2. 3. 4. 5. 6.

B D B A C D

7. 8. 9. 10. 11. 12.

C D C C A C

13. 14. 15. 16. 17. 18.

D D† B† A† C† C

*

19. 20. 21. 22. 23. 24.

A A* B B C C

25. 26. 27. 28. 29. 30.

C B B A ** A B

Controllable costs are those costs that can be influenced by a specified manager within a given time period. ** The answer assumes absorption costing method is used. † Supporting Computations 14. P60 + P10 + P18 + P4 = P92 16. P60 + P10 + P18 + P32 = P120 15. P32 + P16 = P48 17. P4 + P16 = P20

IV. Answers to Problems

2-10

Problem 1 The relevant costs for this decision are the differential costs. These are: Opportunity cost or lost wages (take home) [P1,500 x 70% x 12 months]............. Tuition............................................................ Books and supplies........................................ Total differential costs............................

P12,600 2,200 300 P15,100

Room and board, clothing, car, and incidentals are not relevant because these are presumed to be the same whether or not Francis goes to school. The possibility of part-time work, summer jobs, or scholarship assistance could be considered as reductions to the cost of school. If students are familiar with the time value of money, then they should recognize that the analysis calls for a comparison of the present value of the differential after-tax cash inflows with the present value of differential costs of getting the education (including the opportunity costs of lost income). Problem 2 Requirement (a) Only the differential outlay costs need be considered. The travel and other variable expenses of P22 per hour would be the relevant costs. Any amount received in excess would be a differential, positive return to Pat. Requirement (b) The opportunity cost of the hours given up would be considered in this situation. Unless Pat receives more than the P100 normal consulting rate, the contract would not be beneficial. Requirement (c) In this situation Pat would have to consider the present value of the contract and comp...