Chapter 2- Cost Accounting and Control 2019 Edition by Norma De Leon COMPREHENSIVE SOLUTION PDF

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Disclaimer: As the title implies, this is a mere suggestion of answers. For concerns and incorrect solution, feel free to email me at my contact information below. Lynmar S. EnorasaCOST ACCOUNTING AND CONTROL 2019 Edition NORMA D. DE LEON CHAPTER 2: COST CONCEPTS AND CLASSIFICATION SUGGESTED ANSWERS...

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COST ACCOUNTING AND CONTROL 2019 Edition NORMA D. DE LEON CHAPTER 2: COST CONCEPTS AND CLASSIFICATION SUGGESTED ANSWERS PROBLEM 1 (pg. 38) 1. Direct Materials – Metals are necessary materials required to finish manufacturing tables and other furniture. These are used for frames and foundations of some tables which requires a metallic structure. 2. Manufacturing Overhead – Insurance on factory machines cannot be directly related into units of production. Thus, it is considered a manufacturing overhead. 3. Direct Materials – Leathers used in manufacturing furniture is crucial to form the external look or design of the furniture like sofas. 4. Direct Labor – Since wages can be measured per hour or unit produced, it can be directly attributed to manufacturing per units. 5. Manufacturing Overhead – Depreciation of factory machinery can also not be directly related into units of production. It is usually based on straight-line method but sometimes depreciated according to units produced. 6. Manufacturing Overhead – Administrative salaries are not part of direct labor as they primarily function to manage business affairs and not to manufacture products. 7. Direct Materials – Furnitures are literally made out of wood. 8. Manufacturing Overhead – Just as discussed in this book, indirect materials are considered manufacturing overhead. Sandpaper, bolts and nails are all indirect materials. 9. Manufacturing Overhead – Property taxes on factory building cannot be directly related to units of production but are necessary compliance to continue manufacturing operations. 10. Manufacturing Overhead – Usually, rents are fixed costs that cannot also be directly related to units of production but are necessary for business operations.

PROBLEM 2 (pg. 38) 1. Factory rent - Fixed Costs: Regardless of how many units are being produced, factory rent will be generally the same. 2. Wages for workers paid based on units produced – Variable Costs: Since it specifically said that wages are paid based on units produced, then it implies a variable cost. Meaning, the higher units that worker produces will give him more income. 3. Equipment maintenance – Mixed Costs: Maintenance are necessary expenses to maximize machines’ efficiency. However, there are regular and unexpected cost of maintenance. Regular maintenance includes annual check-up for the equipment and other band-aid solutions to longer its life. On the other hand, an equipment sometimes malfunctions and needs a fix fee from a professional. This chance of malfunctioning increases as it produces higher units of production. Thus, it can be fixed or variable. 4. Cost accountant’s salary – Fixed Costs: Accountant’s salary cannot be directly attributed to units of production. 5. Depreciation based on output – Variable Costs: Since depreciation was based on output, this is a variable cost. Meaning, the higher output that equipment produce, the higher amount it will be depreciated. 6. Salary of factory supervisor – Mixed Costs: This is an example of a semi-variable cost. Meaning, their salary increases as production increase (variable) but there are certain points that an increase of worker does not necessarily mean an immediate additional supervisor required. Thus, it can also be variable or fixed. 7. Telephone (monthly) – Mixed Costs: Telephone has fixed monthly bills. However, in general, there are additional fees when user exceeds a certain limit and start imposing a charge based on the excess calls. Thus, it can also be variable or fixed. 8. Paper in the manufacture of books – Variable Costs: Papers are direct materials needed to produce books. Usually, you can attribute papers to how many books you can produce per number of papers. When no book is needed to be produced, paper is not also needed. Thus, paper is a variable cost.

Disclaimer: As the title implies, this is a mere suggestion of answers. For concerns and incorrect solution, feel free to email me at my contact information below. Lynmar S. Enorasa © July 2021

9. Wages of machine operators – Variable Costs: Since machine operators directly work for manufacturing, it is important that the ratio of employees to units of production is accurate to avoid overworking or work surplus. Thus, it is a variable cost. 10. Commission of salesmen – Mixed Costs: If you ever heard of commissions, there are many types of it. Some salesmen are given fixed salaries beyond their commission being received. So, in general, commissions can be fixed or variable. PROBLEM 3 (pg. 38) 1. Metal for the manufacture of golf clubs – M 2. Wages of drivers of delivery trucks – M 3. Rent on factory building – M 4. Freight-in of materials purchased – S 5. President’s salary – A PROBLEM 4 (pg. 39) 1. Wood used in bookcases 2. Machinery depreciation based on machinery hours 3. Fire insurance on factory equipment 4. Wiring used in radios 5. Indirect materials 6. Sales commissions 7. Bottles used to package liquid 8. Gasoline for a delivery truck 9. Straight-line depreciation of trucks used for delivery of sales to customers 10. Machine operator’s hourly wages

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PROBLEM 5 (pg. 39) 1. The formula for prime costs is: Prime Costs = Direct Materials + Direct Labor To solve for it, we first need to compute for the (a) Direct Materials and (b) Direct Labor, then we can get (c) Prime Costs. a. Direct Materials Materials Less: Indirect Materials Direct Materials b. Direct Labor Labor Less: Indirect Labor Direct Labor c. Prime Costs Direct Materials Direct Labor P rime Co s t s

65,000 (15,000) 50,000

70,000 (18,000) 52,000

50,000 52,000 102,000

2. The formula for conversion costs is: Conversion Costs = Direct Labor + Factory Overhead Since we already have the direct labor and factory overhead, we can now solve for the conversion costs: Direct Labor 52,000 Factory overhead 95,000 C o n v er s i o n C o s t s 147,000

Disclaimer: As the title implies, this is a mere suggestion of answers. For concerns and incorrect solution, feel free to email me at my contact information below. Lynmar S. Enorasa © July 2021

3. The formula for total product costs is: Total Product Costs = Direct Materials + Direct Labor + Factory Overhead Since we already have direct materials, direct labor and factory overhead, we can now compute for total product costs: Direct Materials 50,000 Direct Labor 52,000 Factory overhead 95,000 T o t a l P r o d u ct C o s t s 197 ,0 00 4. The formula for total period costs is: Total Period Costs = General/Administrative Expense + Selling Expenses In this problem, there are no selling expense given. (unless office salaries function as marketing or selling department) Nevertheless, to get total period costs, we just need to add the remaining general and administrative expense and office salaries to get total period costs. General and administrative expenses 2,600 Office Salaries 18,600 T o t a l P er i o d C o s t s 21,200 5. The formula for net income is: Net Income = Revenue – Expenses To solve for the net income, we need to get first the (a) revenue and solve for the (b) total expenses, then we can compute for the (c) net income: a. Revenue Selling Price per Unit Units Sold (90% of 5,000) R ev en u e

50 x 4,500 225,000

b. Expense Just as discussed in this book, expense category of manufacturing business consists (1) Cost of Goods Sold and (2) Operating Expenses. Therefore, we need to compute these variables before solving for the total expense. (1) Cost of Goods Sold – In merchandising business, we usually get cost of sold by adding beginning inventory and purchases then comparing it to the ending inventory. However, in manufacturing business, it is more accurate when we use the given costs of production as basis for solving this. Since we already have the total product costs, we can get the estimated cost per unit produced because it was stated that an output of 5,000 units was produced for the entire year. Then, we can solve for COGS by multiplying Cost per Unit to the number of units sold during the year. Remember, we do not recognize expenses unless the related revenue is recognized during the period. (Matching Principle) Therefore, we must not recognize the cost of production for the unsold units. Total Product Costs 197,000 Units Produced ÷ 5,000 C o s t p er U n i t 39.40

Cost per Unit Units Sold Co s t o f Goo d s So ld

39.40 x 4,500 177,300

(2) Operating Expenses – In all types of businesses, operating expenses consists of selling and administrative expenses. In short, it is just the same as our total period costs. Therefore, we can now compute for the total expense:

Cost of Goods Sold Total Period Cost Ex p en s e

177,300 21,200 198,500

Disclaimer: As the title implies, this is a mere suggestion of answers. For concerns and incorrect solution, feel free to email me at my contact information below. Lynmar S. Enorasa © July 2021

c. Net Income Revenue Less: Expense N et I n co m e

225,000 (198,500) 26,500

PROBLEM 6 (pg. 40) 1. The formula for prime costs is: Prime Costs = Direct Materials + Direct Labor Since we already have the needed variables, by substitution: Direct Material 285,000 Direct Labor 245,000 P rime Co s t 530,000 2. The formula for conversion costs is: Conversion Costs = Direct Labor + Factory Overhead Since we already have the necessary variables to solve for the conversion costs, we just need to add them. However, in this problem, the factory overhead is divided into fixed and variable cost. Nonetheless, we just need to add them all to get the factory overhead. Therefore, in computation: Direct Labor 245,000 Fixed Factory Overhead Costs 175,000 Variable Factory Overhead Costs 155,000 C o n v e r s io n C o s t 575 ,0 00 3. The formula for total product costs is: Total Product Costs = Direct Materials + Direct Labor + Factory Overhead

Since we already have direct materials, direct labor and factory overhead, we can now compute for total product costs: Direct Materials 285,000 Direct Labor 245,000 Fixed Factory Overhead Costs 175,000 Variable Factory Overhead Costs 155,000 T ot al P r o d u ct Co s t s 86 0,00 0 4. The formula for total period costs is: Total Period Costs = General/Administrative Expense + Selling Expenses The needed variables to compute total period cost is already given. So, by substitution: Marketing Costs 160,000 Administrative Costs 145,000 T o t a l P er i o d C o s t s 305 ,00 0 PROBLEM 7 (pg. 40) 1. In this problem, the costs are classified into fixed and variable costs. To get the variable manufacturing cost per unit, we just need to get the variable cost per unit excluding the non-manufacturing cost. Thus: Manufacturing overhead 9 per unit Direct labor 30 per unit Direct materials 60 per unit V a r i a b l e m a n u fa c t u r i n g c o s t p e r u n i t 9 9 p e r u n i t Moreover, the financial report in this problem is already in units and in period. There is no need for further computation since what we are looking for is in the same measurement already (per unit).

Disclaimer: As the title implies, this is a mere suggestion of answers. For concerns and incorrect solution, feel free to email me at my contact information below. Lynmar S. Enorasa © July 2021

2. Now, we just need to add all variable cost per unit without exclusion since what is asked now is the totality. Marketing and administrative 6 per unit Manufacturing overhead 9 per unit Direct labor 30 per unit Direct materials 60 per unit Va r ia b l e co s t p e r u n i t 1 0 5 p er u n i t 3. The best approach in solving the full manufacturing cost per unit is by adding the fixed and variable manufacturing cost per unit. In the previous item, we already computed for the variable manufacturing cost per unit. Therefore, we just need to compute for the fixed manufacturing cost per unit to get what we need. However, unlike the variable costs, the measurement used in fixed costs is per period. Thus, we can solve fixed manufacturing cost per unit by the formula: Fixed manufacturing cost per period ÷ Units produced per period By substitution: Fixed manufacturing cost per period Units produced per period F i x e d m a n u fa c t u r i n g c o s t p e r u n i t

30,000 ÷ 1,200 2 5 p er u n i t

Lastly, we can now proceed in computing the full manufacturing cost per unit: Fixed manufacturing cost per unit 25 per unit Variable manufacturing cost per unit 99 per unit F u l l m a n u f a ct u r in g c o s t p e r u n i t 1 2 4 p e r u n it

4. Just like in the previous item, the best approach to solve for the full cost to make and sell per unit is by adding the fixed and variable cost per unit. Since we already have the variable cost per unit, we only need to compute for the fixed cost per unit. To get the fixed cost per unit, we just need to add all fixed cost and divide it by total number of units produced per period (same method as above). Fixed marketing and administrative 24,000 Fixed manufacturing overhead 30,000

F i x ed c o s t p e r p er i o d Fixed cost per period Units produced per period F i x ed c o s t p e r u n i t

54,0 00 54,000 ÷ 1,200 4 5 p er u n i t

Lastly, we can now solve for the full cost to make and sell per unit. Fixed cost per unit 45 per unit Variable cost per unit 105 per unit F u l l co s t t o m a k e a n d s el l p er u n i t 1 5 0 p e r u n i t PROBLEM 8 (pg. 41) The problem asked to use the high-low method in computation. Thus, we need to highlight the highest and lowest points that occurred in the 6-months period. MONTH JULY AUGUST SEPTEMBER OCTOBER NOVEMBER DECEMBER TOTAL

VOLUME IN MACH. H HRS RS 6,000 5,000 4,500 4,000 3,500 3,000 26,000

ELECTRICITY COST 60,000 53,000 49,500 46,000 42,500 39,000 290,000

Disclaimer: As the title implies, this is a mere suggestion of answers. For concerns and incorrect solution, feel free to email me at my contact information below. Lynmar S. Enorasa © July 2021

1. The formula for variable cost per machine hour is: Variable cost per hour = Difference of Highest and Lowest Cost of Production Difference of Highest and Lowest Unit of Production Thus, in order to solve for the variable cost per hour, we need to get first the differences. Since we already identified the highest point (highlighted with dark gray) and the lowest point (highlighted with light gray) in the table, by substitution:

Highest month (July) Lowest month (October) Differences

Machine Hours Electricity Cost 6,000 60,000 -3,000 -39,000 3 ,00 0 21,00 0

Hence, variable rate per machine hour is: Difference in Electricity Cost Difference in Machine Hours V a r i a b l e r a t e p er m a c h i n e h o u r

21,000 ÷ 3,000 7

2. The monthly fixed cost can easily be computed by excluding the variable cost rate that we already solved in either the highest or lowest point. Whichever you use, the answer will still be the same.

Variable rate per machine hour Machine hours (lowest point) Variable cost (lowest point)

7 x 3,000 21,000

Electricity Cost (lowest point) Less: Variable Cost (lowest point) F i x ed E l ect r i ci t y C o s t

39,000 (21,000) 18,000

Now, let’s try it in the highest point (December) to prove the point in the book.

Variable rate per machine hour Machine hours (highest point) Variable cost (highest point)

7 x 6,000 42,000

Electricity Cost (highest point) Less: Variable Cost (highest point) F i x ed E l ect r i ci t y C o s t

60,000 (42,000) 18,000

3. The formula we will use to determine the projected cost is: Y = FC + VC or Y = FC + VX where: Y – total cost (projected cost) FC – fixed cost per period VC – variable cost per period V – variable rate per unit of production X – activity level or current unit of production In this problem, we can either use any of the two given formulas. However, the best approach to use here is the second formula since we already have the needed variables to substitute and compute the total cost or projected cost. We have: FC – 18,000 per period (no. 2 requirement) V – 7 per machine hour (no. 1 requirement) X – 4,800 machine hours (given in no. 3 requirement) Thus, the total electricity cost if 4,800 machine hours are projected to be used next month will be: Y = FC + VX = 18,000 + (7)(4,800) = 18,000 + 33,600 = 51,600

Disclaimer: As the title implies, this is a mere suggestion of answers. For concerns and incorrect solution, feel free to email me at my contact information below. Lynmar S. Enorasa © July 2021

PROBLEM 9 (pg. 41) MONTH January February March

MACHINE HOURS 3,500 2,000 4,000

ELECTRICITY EXPENSE 31,500 20,000 35,600

1. The formula for variable cost per machine hour is: Variable cost per hour = Difference of Highest and Lowest Cost of Production Difference of Highest and Lowest Unit of Production Thus, in order to solve for the variable cost per hour, we need to get first the differences. Since we already identified the highest point (highlighted with dark gray) and the lowest point (highlighted with light gray) in the table, by substitution: Machine Hours Electricity Expense Highest month (March) 4,000 35,600 Lowest month (February) -2,000 -20,000 Differences 2,000 15,600 Hence, variable rate per machine hour is: Difference in Electricity Expense 15,600 Difference in Machine Hours ÷ 2,000 V a r i a b l e r a t e p er m a c h i n e h o u r 7.8 0

Electricity Expense (highest point) Less: Variable Cost (highest point) F i x ed E l ect r i ci t y C o s t

35,600 (31,200) 4,4 00

3. The best formula to use in this problem is still: Y = FC + VX where: Y – total cost (projected cost) FC – fixed cost per period V – variable rate per unit of production X – activity level or current unit of production Since we already have the needed variables to substitute and compute the total cost or projected cost. We have: FC – 4,400 per period (no. 2 requirement) V – 7.80 per machine hour (no. 1 requirement) X – 4,500 machine hours (given in no. 3 requirement) Thus, the total electricity expense if 4,800 machine hours are projected to be used next month will be: Y = FC + VX = 4,400 + (7.80)(4,500) = 4,400 + 35,100 = 39,500

2. Just like the previous problem, the monthly fixed cost can easily be computed by excluding the variable cost rate that we already solved in either the highest or lowest point. Since we’ve already proved this one, we will just use the highest point for solving from this point.

Variable rate per machine hour Machine hours (highest point) Variable cost (highest point)

7.80 x 4,000 31,200

Disclaimer: As the title implies, this is a mere suggestion of answers. For concerns and incorrect solution, feel free to email me at my contact information below. Lynmar S. Enorasa © July 2021

PROBLEM 10 (pg. 42) In this problem, we will be asked to compute the fixed and variable costs using the high-low method and least square method. Just like in the previous problems, we will highlight the highest (dark gray) and lowest (light gray) points in the table to proceed in solving for the first method. MONTH NO. 1 2 3 4 5 6 7 8 9 10 11 12

MACHINE HOURS 175 170 160 190 175 200 160 150 210 180 170 145

OVERHEAD COSTS 4,500 4,225 4,321 5,250 4,800 5,100 4,450 4,200 5,475 4,760 4,325 3,975

1. The first step in estimating the fixed and variable portion using the high-low method is to solve for (a) variable rate using the formula: Variable cost per hour = Difference of Highest and Lowest Cost of Production Difference of Highest and Lowest Unit of Production

a. Variable cost per hour

Highest month (No. 9) Lowest month (No. 12) Differences

Machine Hours Overhead Costs 210 5,475 -145 -3,975 65 1,5 00

D...