Exercises for ch2 PDF

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Exer ci sesf orChapt er2 Quest i ons 2–1

What are the three major elements of product costs in a manufacturing company?

2–2

Define the following: (a) direct materials, (b) indirect materials, (c) direct labor, (d) indirect labor, and (e) manufacturing overhead.

2–3

Explain the difference between a product cost and a period cost.

2–4

Distinguish between (a) a variable cost, (b) a fixed cost, and (c) a mixed cost.

2–5

What effect does an increase in volume have on— a.

Unit fixed costs?

b.

Unit variable costs?

c.

Total fixed costs?

d.

Total variable costs?

2–6

Define the following terms: (a) cost behavior and (b) relevant range.

2–7

What is meant by an activity base when dealing with variable costs? Give several examples of activity bases.

2–8

Managers often assume a strictly linear relationship between cost and volume. How can this practice be defended in light of the fact that many costs are curvilinear?

2–9

Distinguish between discretionary fixed costs and committed fixed costs.

2–10

Does the concept of the relevant range apply to fixed costs? Explain.

2–11

What is the major disadvantage of the high-low method?

2–12

Give the general formula for a mixed cost. Which term represents the variable cost? The fixed cost?

2–13

What is meant by the term least-squares regression?

2–14

What is the difference between a contribution format income statement and a traditional format income statement?

2–15

What is the contribution margin?

2–16

Define the following terms: differential cost, opportunity cost, and sunk cost.

2–17

Only variable costs can be differential costs. Do you agree? Explain.

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Appl yi ngExcel ® Avai l abl ewi t hMcGr awHi l l ' sConnect Account i ngh.

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Page 52

Requi r ed: 1.

Checkyourwor ks heetbychangi ngt hev ar i abl esel l i ngcosti nt heDat aar eat o$900,keepi ngal l oft heot herdat at hesameasi nExhi bi t2–12.I fy ourwor ksheeti soper at i ngpr oper l y ,t henet oper at i ngi ncomeundert het r adi t i onal f or mati ncomest at ementandundert hecont r i but i onf or mat i ncomest at ementshoul dnowbe$700andt hecont r i but i onmar gi nshoul dnowbe$4, 700.I fyoudo notgett heseanswer s,findt heer r or si ny ourwor ksheetandcor r ectt hem.

Howmuchi st hegr ossmar gi n?Di di tchange?Whyorwhynot ? 2.

Supposet hatsal esar e10% hi gherasshownbel ow:

Ent ert hi snewdat ai nt oy ourwor ksheet .Mak esur et haty ouchangeal loft hedat at hatar edi ffer ent —notj us tt hesal es.Pr i ntorcopyt hei ncomest at ement sf r om y ourwor ksheet . Whathappenedt ot hev ar i abl ecost sandt ot hefix edcost swhensal esi ncr easedby10%?Why?Di d t hecont r i but i onmar gi ni ncr easeby10%?Whyorwhynot ?Di dt henetoper at i ngi ncomei ncr easeby 10%?Whyorwhynot ? Page 53

TheFoundat i onal15 ® Avai l abl ewi t hMcGr awHi l l ' sConnect Account i ng.

LEARNI NG OBJECTI VES1,2, 3,4,6,7 Mar t i nezCompany' sr el ev antr angeofpr oduct i oni s7, 500uni t st o12, 500uni t s.Wheni tpr oducesand sel l s10, 000uni t s,i t suni tcost sar easf ol l ows :

Requi r ed: 1.

Forfinanci al account i ngpur poses,whati st het ot al amountofpr oductcost si nc ur r edt omak e 10, 000uni t s ?

2.

Forfinanci al account i ngpur poses,whati st het ot al amountofper i odcost si ncur r edt osel l 10, 000 uni t s ?

3.

I f8, 000uni t sar esol d,whati st hevar i abl ecostperuni tsol d?

4.

I f12, 500uni t sar esol d,whati st hev ar i abl ecostperuni tsol d?

5.

I f8, 000uni t sar esol d,whati st het ot al amountofv ar i abl ecost sr el at edt ot heuni t ss ol d?

6.

I f12, 500uni t sar esol d,whati st het ot al amountofvar i abl ecost sr el at edt ot heuni t ssol d?

7.

I f8, 000uni t sar epr oduced,whati st heav er agefix edmanuf act ur i ngcostperuni tpr oduced?

8.

I f12, 500uni t sar epr oduced,whati st heav er agefix edmanuf act ur i ngcostperuni tpr oduced?

9.

I f8, 000uni t sar epr oduced,whati st het ot al amountoffix edmanuf act ur i ngcosti ncur r edt o suppor tt hi sl evel ofpr oduct i on?

10. I f12, 500uni t sar epr oduced,whati st het ot al amountoffix edmanuf act ur i ngcosti ncur r edt o suppor tt hi sl evel ofpr oduct i on? 11. I f8, 000uni t sar epr oduced,whati st het ot al amountofmanuf act ur i ngover headcosti ncur r edt o suppor tt hi sl evel ofpr oduct i on?Whati st hi st ot al amountexpr essedonaperuni tbasi s ? 12. I f12, 500uni t sar epr oduced,whati st het ot al amountofmanuf act ur i ngover headcosti ncur r edt o suppor tt hi sl evel ofpr oduct i on?Whati st hi st ot al amountexpr essedonaperuni tbasi s ? 13.

I ft hesel l i ngpr i cei s$22peruni t ,whati st hecont r i but i onmar gi nperuni tsol d?

14. I f11, 000uni t sar epr oduced,whatar et het ot al amount sofdi r ectandi ndi r ectmanuf act ur i ng cost si ncur r edt osuppor tt hi sl ev el ofpr oduct i on? 15. Whatt ot al i ncr ement al costwi l l Mar t i nezi ncuri fi ti ncr easespr oduct i onf r om 10, 000t o10, 001 uni t s ?

Exer ci ses ® Al lappl i cabl eexer ci sesar eavai l abl ewi t hMcGr awHi l l ' sConnect Account i ng.

LO1] EXERCI SE2–1 I dent i f yi ngDi r ectandI ndi r ectCost s[ Nor t hwestHospi t al i saf ul l ser vi cehospi t alt hatpr ovi desev er y t hi ngf r om maj orsur ger yandemer gency r oom car et oout pat i entcl i ni cs.

Requi r ed: Foreachcosti ncur r edatNor t hwes tHospi t al ,i ndi cat ewhet heri twoul dmostl i k el ybeadi r ectcostoran i ndi r ectcostoft hespeci fiedcostobj ectbypl aci nganXi nt heappr opr i at ecol umn.

Page 54

LO2] EXERCI SE2–2 Cl assi f yi ngManuf act ur i ngCost s[

ThePCWor ksassembl escust om comput er sf r om component ss uppl i edbyv ar i ousmanuf act ur er s.The companyi sv er ysmal landi t sassembl yshopandr et ai lsal esst or ear ehousedi nasi ngl ef aci l i t yi na Redmond,Washi ngt on,i ndust r i al par k.Li st edbel owar esomeoft hecost st hatar ei ncur r edatt he company .

Requi r ed: Foreachcost ,i ndi cat ewhet heri twoul dmostl i k el ybecl assi fiedasdi r ectl abor ,di r ectmat er i al s , manuf act ur i ngover head,sel l i ng,oranadmi ni st r at i vecost . 1.

Thecostofahar ddr i vei nst al l edi nacomput er .

2.

Thecostofadv er t i si ngi nt hePugetSoundComput erUsernewspaper .

3.

Thewagesofempl oy eeswhoassembl ecomput er sf r om component s.

4.

Sal escommi ssi onspai dt ot hecompany' ssal espeopl e.

5.

Thewagesoft heassembl ys hop' ss uper vi sor .

6.

Thewagesoft hecompany' saccount ant .

7.

Depr eci at i ononequi pmentusedt ot estassembl edcomput er sbef or er el easet ocust omer s.

8.

Rentont hef aci l i t yi nt hei ndust r i al par k.

[ LO3] EXERCI SE2–3 Cl assi ficat i onofCost sasPr oductorPer i odCost Supposet haty ouhav ebeengi venasummerj obasani nt er natI ssacAi r cams,acompanyt hat manuf act ur essophi st i cat edspycamer asf orr emot econt r ol l edmi l i t ar yr econnai ssanceai r cr af t .The company ,whi chi spr i v at el yowned,hasappr oachedabankf oral oant ohel pi tfinancei t sgr owt h.The bankr equi r esfinanci al st at ement sbef or eappr ovi ngsuchal oan.Youhav ebeenask edt ohel ppr epar e t hefinanci al st at ement sandwer egi vent hef ol l owi ngl i stofcost s : 1.

Depr eci at i ononsal esper sons' car s.

2.

Rentonequi pmentusedi nt hef act or y .

3.

Lubr i cant susedf ormachi nemai nt enance.

4.

Sal ar i esofper sonnel whowor ki nt hefini shedgoodswar ehouse.

5.

Soapandpapert owel susedbyf act or ywor ker satt heendofashi f t .

6.

Fact or ysuper vi sor s' sal ar i es.

7.

Heat ,wat er ,andpowerconsumedi nt hef act or y .

8.

Mat er i al susedf orboxi ngpr oduct sf orshi pmentov er seas.( Uni t sar enotnor mal l ybox ed. )

9.

Adver t i si ngcos t s.

10.

Wor k er s' compensat i oni nsur ancef orf act or yempl oy ees.

11.

Depr eci at i ononchai r sandt abl esi nt hef act or yl unchr oom.

12.

Thewagesoft her ecept i oni sti nt headmi ni st r at i v eoffices.

13.

Costofl easi ngt hecor por at ej etusedbyt hecompany' sex ecut i v es .

14.

Thecostofr ent i ngr oomsataFl or i dar esor tf ort heannual sal esconf er ence.

15.

Thecostofpackagi ngt hecompany' spr oduct .

Requi r ed: Cl assi f yt heabovecost sasei t herpr oductcost sorper i odcost sf ort hepur poseofpr epar i ngt hefinanci al st at ement sf ort hebank.

LO4] EXERCI SE2–4 Fi xedandVar i abl eCostBehavi or[

Espr essoExpr essoper at esanumberofespr essocoffeest andsi nbus ys ubur banmal l s.Thefix edweekl y expenseofacoffeest andi s$1, 200andt hevar i abl ecostpercupofcoffeeser v edi s$0. 22. Page 55

Requi r ed: 1.

Fi l li nt hef ol l owi ngt abl ewi t hyourest i mat esoft ot al cost sandcostpercupofcoffeeatt he i ndi cat edl ev el sofact i vi t yf oracoffeest and.Roundofft hecos tofacupofcoffeet ot henear est t ent hofacent .

2.

Doest heav er agecostpercupofcoffeeser v edi ncr ease,decr ease,orr emai nt hesameast he numberofcupsofcoffeeser v edi naweeki ncr eases ?Expl ai n.

EXERCI SE2–5 Hi ghLow Met hod[ LO5]

TheCheyenneHot el i nBi gSky ,Mont ana,hasaccumul at edr ecor dsoft het ot al el ect r i cal cost soft he hot el andt henumberofoccupancy daysovert hel asty ear .Anoccupancy dayr epr esent sar oom r ent ed outf oroneday .Thehot el ' sbusi nessi shi ghl yseas onal ,wi t hpeaksoccur r i ngdur i ngt heski seasonandi n t hesummer .

Requi r ed:

1.

Usi ngt hehi ghl owmet hod,est i mat et hefix edcostofel ect r i ci t ypermont handt hevar i abl ecostof el ect r i ci t yperoccupancy day .Roundofft hefix edcostt ot henear estwhol edol l arandt hevar i abl e costt ot henear estwhol ecent .

2.

Whatot herf act or sot hert hanoccupancy daysar el i kel yt oaffectt hevar i at i oni nel ect r i cal cost s f r om mont ht omont h?

EXERCI SE2–6 Tr adi t i onalandCont r i but i onFor matI ncomeSt at ement s[ LO6]

Cher ok eeI nc.i samer chandi sert hatpr ovi dedt hef ol l owi ngi nf or mat i on:

Page 56

Requi r ed: 1.

Pr epar eat r adi t i onal i ncomest at ement .

2.

Pr epar eacont r i but i onf or mati ncomest at ement .

LO7] EXERCI SE2–7 Di ffer ent i al ,Oppor t uni t y ,andSunkCost s[

Nor t hwestHospi t al i saf ul l ser vi cehospi t alt hatpr ovi desev er y t hi ngf r om maj orsur ger yandemer gency r oom car et oout pat i entcl i ni cs.Thehospi t al ' sRadi ol ogyDepar t menti sconsi der i ngr epl aci nganol d i neffici entXr aymachi newi t hast at eof t hear tdi gi t al Xr aymachi ne.Thenewmachi newoul dpr ovi de hi gherqual i t yXr aysi nl esst i meandatal owercostperXr ay .I twoul dal sor equi r el esspowerandwoul d us eacol orl aserpr i nt ert opr oduceeasi l yr eadabl eXr ayi mages .I nst eadofi nv est i ngt hef undsi nt henew Xr aymachi ne,t heLabor at or yDepar t menti sl obbyi ngt hehospi t al ' smanagementt obuyanewDNA anal yz er .

Requi r ed: Foreachoft hei t emsbel ow,i ndi cat ebypl aci nganXi nt heappr opr i at ecol umnwhet heri tshoul dbe consi der edadi ffer ent i alcost ,anoppor t uni t ycost ,orasunkcosti nt hedeci si ont or epl acet heol dXr ay machi newi t hanewmachi ne.I fnoneoft hecat egor i esappl yf orapar t i cul ari t em,l eaveal l col umnsbl ank.

EXERCI SE2–8 CostBehavi or ;Hi ghLow Met hod[ LO4,LO5] Hoi ChongTr anspor t ,Lt d. ,oper at esafleetofdel i ver yt r ucksi nSi ngapor e.Thecompanyhasdet er mi ned t hati fat r ucki sdr i v en105, 000ki l omet er sdur i ngayear ,t heav er ageoper at i ngcosti s11. 4cent sper ki l omet er .I fat r ucki sdr i v enonl y70, 000ki l omet er sdur i ngayear ,t heav er ageoper at i ngcosti ncr easest o 13. 4cent sperki l omet er .

Requi r ed: 1. 2. 3.

Usi ngt hehi ghl owmet hod,est i mat et hev ar i abl eandfix edcostel ement soft heannual costof t het r uckoper at i on. Expr esst hev ar i abl eandfix edcost si nt hef or m Y=a+bX. I fat r uckwer edr i v en80, 000ki l omet er sdur i ngayear ,whatt ot al costwoul dy ouexpectt obe i ncur r ed?

LO2,LO3] EXERCI SE2–9 CostTer mi nol ogyf orManuf act ur er s[ Ar denCompanyr epor t edt hef ol l owi ngcost sandexpensesf ort hemos tr ecentmont h:

Requi r ed: 1.

Whati st het ot al amountofpr oductcost s ?

2.

Whati st het ot al amountofper i odcost s ?

3.

Whati st het ot al amountofconv er si oncost s ?4.Whati st het ot al amountofpr i mecost s ?

EXERCI SE2–10 CostBehavi or ;Cont r i but i onFor matI ncome St at ement[ LO4,LO6] Har r i sCompanymanuf act ur esandsel l sasi ngl epr oduct .Apar t i al l ycompl et edschedul eoft he company' st ot al andperuni tcost sov ert her el ev antr angeof30, 000t o50, 000uni t spr oducedandsol d annual l yi sgi v enbel ow:

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Requi r ed: 1. 2.

Compl et et heschedul eoft hecompany' st ot al anduni tcost sabove. Assumet hatt hecompanypr oducesandsel l s45, 000uni t sdur i ngt hey earatasel l i ngpr i c eof $16peruni t .Pr epar eacont r i but i onf or mati ncomest at ementf ort hey ear .

LO4, LO5] EXERCI SE2–11 Hi ghLow Met hod;Scat t er gr aphAnal ysi s[

Thef ol l owi ngdat ar el at i ngt ouni t sshi ppedandt ot al shi ppi ngexpensehav ebeenassembl edbyAr cher Company ,awhol esal erofl ar ge,cus t ombui l tai r condi t i oni nguni t sf orcommer ci al bui l di ngs:

Requi r ed: 1.

Pr epar eascat t er gr aphusi ngt hedat agi v enabov e.Pl otcostont hever t i cal axi sandact i vi t yon t hehor i zont al axi s.I st her eanappr oxi mat el yl i nearr el at i onshi pbet weenshi ppi ngexpenseandt he numberofuni t sshi pped?

2.

Usi ngt hehi ghl owmet hod,est i mat et hecostf or mul af orshi ppi ngexpense.Dr awast r ai ghtl i ne t hr ought hehi ghandl owdat apoi nt ss howni nt hescat t er gr apht haty oupr epar edi nr equi r ement1. Mak es ur ey ourl i nei nt er sect st heYaxi s .

3.

Commentont heaccur acyofy ourhi ghl owest i mat esassumi ngal east squar esr egr essi on anal y si sest i mat edt het ot al fix edcost st obe$910. 71permont handt hev ar i abl ecostt obe$217. 86 peruni t .Howwoul dt hest r ai ghtl i net hatyoudr ewi nr equi r ement2di fferf r om ast r ai ghtl i net hat mi ni mi zest hesum oft hesquar eder r or s ?

4.

Whatf act or s,ot hert hant henumberofuni t sshi pped,ar el i kel yt oaffectt hecompany' sshi ppi ng expense?Expl ai n.

EXERCI SE2–12 CostCl assi ficat i on[ LO2,LO3,LO4,LO7] Wol l ogongGr oupLt d.ofNewSout hWal es,Aust r al i a,acqui r edi t sf act or ybui l di ngabout10y ear sago. Forsever al year s,t hecompanyhasr ent edoutasmal l annexat t achedt ot her earoft hebui l di ng.The companyhasr ecei v edar ent al i ncomeof$30, 000pery earont hi sspace.Ther ent er ' sl easewi l l expi r e soon,andr at hert hanr enewi ngt hel ease,t hecompanyhasdeci dedt ouset hespacei t sel ft o manuf act ur eanewpr oduct . Di r ectmat er i al scostf ort henewpr oductwi l l t ot al $80peruni t .Tohav eapl acet ost or efini sheduni t sof pr oduct ,t hecompanywi l l r entasmal l war ehousenear by .Ther ent al costwi l l be$500permont h.I n addi t i on,t hecompanymustr entequi pmentf orusei npr oduci ngt henewpr oduct ;t her ent alcostwi l l be $4, 000permont h.Wor k er swi l l behi r edt omanuf act ur et henewpr oduct ,wi t hdi r ectl aborcostamount i ng t o$60peruni t .Thespacei nt heannexwi l l cont i nuet obedepr eci at edonast r ai ght l i nebasi s,asi npr i or y ear s.Thi sdepr eci at i oni s$8, 000pery ear . Adver t i si ngcos t sf ort henewpr oductwi l l t ot al $50, 000pery ear .As uper vi sorwi l l behi r edt oov er see pr oduct i on;hersal ar ywi l l be$1, 500permont h.El ect r i ci t yf oroper at i ngmachi neswi l l be$1. 20peruni t . Cost sofshi ppi ngt henewpr oductt ocus t omer swi l l be$9peruni t . Page 58

Topr ovi def undst opur chasemat er i al s,meetpayr ol l s,andsof or t h,t hecompanywi l l hav et ol i qui dat e somet empor ar yi nv est ment s .Thesei nvest ment sar epr esent l yyi el di ngar et ur nofabout$3, 000pery ear .

Requi r ed: Pr epar eananswersheetwi t ht hef ol l owi ngcol umnheadi ngs :

Li stt hedi ffer entcost sassoci at edwi t ht henewpr oductdeci si ondownt heext r emel ef tcol umn( under Nameoft heCost ) .Thenpl aceanXundereac hheadi ngt hathel pst odescr i bet het ypeofcosti nv ol v ed. Ther emaybeX' sundersev er al col umnheadi ngsf orasi ngl ecost .( Forexampl e,acostmaybeafix ed cost ,aper i odcost ,andasunkcost ;y ouwoul dpl aceanXundereachoft hesecol umnheadi ngsopposi t e t hecost . )

LO6] EXERCI SE2–13 Tr adi t i onalandCont r i but i onFor matI ncomeSt at ement s[ TheAl pi neHouse,I nc . ,i sal ar ger et ai l erofsnowski s.Thecompanyassembl edt hei nf or mat i onshown bel owf ort hequar t erendedMar ch31:

Requi r ed: 1.

Pr epar eat r adi t i onal i ncomest at ementf ort hequar t erendedMar ch31.

2.

Pr epar eacont r i but i onf or mati ncomest at ementf ort hequar t erendedMar ch31.

3.

Whatwast hecont r i but i ont owar dfix edexpensesandpr ofit sf oreachpai rofski ssol ddur i ngt he quar t er ?( St at et hi sfigur ei nasi ngl edol l aramountperpai rofski s . )

LO4,LO5] EXERCI SE2–14 Hi ghLow Met hod;Pr edi ct i ngCost[

TheLakeshor eHot el ' sguest day sofoccupancyandcust odi al suppl i esex penseov ert hel astsev en mont hswer e:

Guest daysi sameasur eoft heover al l act i vi t yatt hehot el .Forex ampl e,aguestwhost aysatt hehot elf or t hr eeday si scount edast hr eeguest day s.

Requi r ed: 1.

Usi ngt hehi ghl owmet hod,est i mat eacostf or mul af orcus t odi al suppl i esexpense.

2.

Usi ngt hecostf or mul ay ouder i v edabove,whatamountofc ust odi al suppl i esexpensewoul dyou expectt obei ncur r edatanocc upancyl ev elof11, 000guest days ?

3.

Pr epar eascat t er gr aphusi ngt hedat agi v enabov e.Pl otcust odi al suppl i esexpenseont he v er t i cal ax i sandt henumberofguest daysoccupi edont hehor i z ont al axi s.Dr awast r ai ghtl i ne t hr ought het wodat apoi nt st hatcor r espondt ot hehi ghandl owl ev el sofact i vi t y .Mak esur ey ourl i ne i nt er s ect st heYax i s.

4.

C...