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CHAPTER 2- EXERCISE QUESTIONS 1. Classify product costs and period costs Classify each of Ford Motor Company's costs as either product costs or period costs. Ford Motor Company is an automobile manufacturer headquartered in Detroit, Michigan. a. Cost of chemical included in paint to inhibit rust b. Life insurance for the CEO c. Cost of electricity at the Lima Engine Plant in Ohio d. Depreciation on the buildings at the Flat Rock Assembly Plant in Michigan e. Cost of ad campaign and slogan called "By Design" to highlight the designs of Ford's cars f. Purchase of aluminum to be used in car wheels g. Salaries of Ford engineers researching ways to reduce CO2 emissions h. Cost of new software to schedule production i. Salaries of Ford Motor Company's top executives

2. Classify a manufacturer's costs Classify each of the following costs as a period cost or a product cost. If you classify the cost as a product cost, further classify it as direct material (DM), direct labor (DL), or manufacturing overhead (MOH). a. Property taxes-30% of building is used for sales, marketing, and administrative offices; 70% of building is used for manufacturing b. Wages and benefits paid to assembly-line workers in the manufacturing plant c. Depreciation on automated production equipment d. Salaries paid to quality control inspectors in the plant e. Repairs and maintenance on factory equipment f. Standard packaging materials used to package individual units of product for sale (for example, cereal boxes in which cereal is packaged) g. Lease payment on administrative headquarters h. Telecommunications costs for the customer service call center

3. Classify costs incurred by a dairy processing company Each of the following costs pertains to Bailey Dairy Products Company, a dairy processing company. Classify each of the company's costs as a period cost or a product cost. Further classify product costs as direct material (DM}, direct labor (DL}, or manufacturing overhead (MOH). Cost 1. Television advertisements for Bailey's products 2. Lubricants used in running bottling machines 3. Research and development related to elimination of antibiotic residues in milk 4. Gasoline used to operate refrigerated trucks delivering finished dairy products to grocery stores 5. Company president's annual bonus 6. Depreciation on refrigerated trucks used to collect raw milk from local dairy farmers 7. Plastic gallon containers in which milk is packaged 8. Property insurance on dairy processing plant 9. Cost of milk purchased from local dairy farmers 10. Depreciation on tablets used by sales staff 11. Wages and salaries paid to machine operators at dairy processing plant

4. Classify costs as fixed or variable Classify each of the following costs as fixed or variable: a. Cost of French fries used at a McDonald 's restaurant b. Hourly wages paid to cashiers at The Home Depot c. Monthly sugar costs for The Hershey Company d. Cost of fuel used by Old Dominion Freight Line, a national trucking company e. Shipping costs at Amazon .com f. Monthly rent for Onyx Nail Bar, a nail salon in Dallas, Texas g. Sales commissions at Tampa Honda in Florida h. Monthly insurance costs for the building housing the administrative offices of Panera Bread in St. Louis, Missouri i. Monthly depreciation of equipment used in the customer service department at Klaben Ford Lincoln, a car dealership in Kent, Ohio

j. Cost of rubber used to manufacture LL.Bean boots k. Cost of oranges sold at a Kroger's grocery store I. Monthly office lease costs for the Portland office of E & Y, a global audit firm m. Monthly cost of coffee at a Dunkin' Donuts store n. Property taxes for an Applebee's Neighborhood Grill & Bar o. Depreciation of exercise equipment at an LA Fitness club

5. Describe other cost terms Complete the following statements with one of the terms listed here. You may use a term more than once, and some terms may not be used at all. Differential costs Marginal cost Uncontrollable costs costs Controllable costs Average cost

Variable costs Fixed costs

Sunk

a. A(n) ___ is the cost of making one more unit. b. Gasoline is one of many ___ in the operation of a motor vehicle. c. A product's ___ and not the product's--------- should be used to forecast total costs at different production volumes. d. Within the relevant range, ___ do not change in total with changes in production volume. e. The ____ per unit declines as a production facility produces more units. f. Costs that differ between alternatives are called ___ _ g. In the long run, most costs are---~ meaning that management is able to influence or change the amount of the cost. h. ___ are costs that have already been incurred.

6. Work backward to find missing amounts Gamma Electronics manufactures and sells a line of smartphones. Unfortunately, Gamma Electronics suffered serious fire damage at its home office. As a result, the accounting records for October were partially destroyed-and completely jumbled. Gamma Electronics has hired you to help figure out the missing pieces of the accounting puzzle. Assume that the Raw Materials Inventory contains only direct materials. Revenues in October ...... .......... .............................. .......... .......... ..................... . $27,600 Work in process inventory, October 31 ................................................................. . $ 1,700 Raw materials inventory, October 31 ..................................................................... . $ 3,200

Direct labor in October ............ ........................................ .......... ............................ . $ 3,400 Manufacturing overhead in October ..................................................................... . $ 6,300 Work in process inventory, October 1 ................................................................... . 0 Finished goods inventory, October 1 .................................................................... . $ 4,900 Direct materials used in October ........................................................................... . $ 8,600 Gross profit in October .......... ................. ............. .......... .............................. ......... . . $12,800 Purchases of direct materials in October ............................................................... . $ 9,200 Requirement Find the following amounts: a. Cost of Goods Sold in October b. Beginning Raw Materials Inventory c. Ending Finished Goods Inventory

7. Compute direct materials used and Cost of Goods Manufactured Justine Industries is calculating its Cost of Goods Manufactured at year-end. The company 's accounting records show the following: The Raw Materials Inventory account had a beginning balance of $17,000 and an ending balance of $12,000. During the year, the company purchased $55,000 of direct materials. Direct labor for the year totaled $121,000, while manufacturing overhead amounted to $151,000. The Work Process Inventory account had a beginning balance of $22,000 and an ending balance of $21,000. Assume that Raw Materials Inventory contains only direct materials. Compute the Cost of Goods Manufactured for the year. (Hint: The first step is to calculate the direct materials used during the year.)

8. Compute total and average costs Bubbly Soda spends $2 on direct materials, direct labor, and variable manufacturing overhead for every unit (12-pack of soda) it produces. Fixed manufacturing overhead costs $7 million per year. The plant, which is currently operating at only 75% of capacity, produced 25 million units this year. Management plans to operate closer to full capacity next year, producing 35 million units. Management doesn't anticipate any changes in the prices it pays for materials, labor, and manufacturing overhead. Requirements 1. What is the current total product cost (for the 25 million units}, including fixed and variable costs? 2. What is the current average product cost per unit? 3. What is the current fixed cost per unit?

4. What is the forecasted total product cost next year (for the 35 million units}, including fixed and variable costs? 5. What is the forecasted average product cost next year? 6. What is the forecasted fixed cost per unit? 7. Why does the average product cost decrease as production increases?...