Solution Exercises WEEK 1 PDF

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Solution Exercises WEEK 1...

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EXERCISE 2-1 Classifying Manufacturing Costs [LO1]

Your Boat, Inc. assembles custom sailboats from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a Gig Harbor, Washington, boathouse. Below are listed some of the costs that are incurred at the company. For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, selling, or an administrative cost.

Direct Material

1. The wages of employees who build the sailboats.

Direct Labor

Manufacturing Overhead

4. The wages of the assembly shop's supervisor. 5. Rent on the boathouse.

Administrative cost

x

2. The cost of advertising in the local newspapers.

3. The cost of an aluminum mast installed in a sailboat.

Selling cost

x

x

x x

6. The wages of the company's bookkeeper.

x

7. Sales commissions paid to the company's salespeople. 8. Depreciation on power tools.

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x

x

EXERCISE 2-2 Classification of Costs as Period or Product Costs [LO2] Suppose that you have been given a summer job at Fairwings Avionics, a company that manufactures sophisticated radar sets for commercial aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its tremendous growth. The bank requires financial statements before approving such a loan. Classify each cost listed below as either a product cost or a period cost for purposes of preparing the financial statements for the bank.

Product Cost Period Cost

1. The cost of the memory chips used in a radar set.

X=direct material

2. Factory heating costs.

X= overhead

3. Factory equipment maintenance costs.

X=overhead

4. Training costs for new administrative employees.

5. The cost of the solder that is used in assembling the radar sets.

X=admin

X=overhead

6. The travel costs of the company's salespersons. 7. Wages and salaries of factory security personnel.

X=selling X=overhead

8. The cost of air-conditioning executive offices.

X=admin

9. Wages and salaries in the department that handles billing customers.

X=admin

10. Depreciation on the equipment in the fitness room used by factory workers. X=overhead

11. Telephone expenses incurred by factory management.

X=overhead

12. The costs of shipping completed radar sets to customers.

13. The wages of the workers who assemble the radar sets.

X=selling

X=direct labor

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14. The president's salary.

15. Health insurance premiums for factory personnel.

X=admin

X=overhead

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EXERCISE 2-3 Fixed and Variable Cost Behavior [LO3]

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Koffee Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,100 and the variable cost per cup of coffee served is $0.26. Required: 1. Fill in the following table with your estimates of total costs and average cost per cup of coffee at the indicated levels of activity for a coffee stand. Round off the cost of a cup of coffee to the nearest tenth of a cent.

2. Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases? Explain.

6 1800

1900

2000

Fixed cost

1100

1100

1100

Variable cost

0.26*1800=468

0.26*1900=494

0.26*2000=520

Total cost

1100+468=1568

1100+494=1594

1100+520=1620

Average cost per unit

1568/1800=$0.871

1594/1900=$0.839

1620/2000=$0.81

EXERCISE 2-5 Traditional and Contribution Format Income Statements [LO5] Redhawk, Inc., is a merchandiser that provided the following information:

1. Prepare a traditional income statement.

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2. Prepare a contribution format income statement.

SALES

TRADITIONAL FORMAT $

CONTRIBUTION FORMAT SALES

COST OF GOODS SOLD

VARIABLE EXPENSES

GROSS MARGIN

CONTRIBUTION MARGIN

SELLING AND ADM. EXPENSES

FIXED EXPENSES

NET OPERATING INCOME

NET OPERATING INCOME

EXERCISE 2-6 Identifying Direct and Indirect Costs [LO6] The Empire Hotel is a four-star hotel located in downtown Seattle. Required: For each of the following costs incurred at the Empire Hotel, indicate whether it would most likely be a direct cost or an indirect cost of the specified cost object by placing an X in the appropriate column.

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1

Indirect

2

Indirect

3

indirect

4

Indirect

5

Indirect

6

Direct

7

Indirect

8

direct

EXERCISE 2-7 Differential, Opportunity, and Sunk Costs [LO7]

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The Sorrento Hotel is a four-star hotel located in downtown Seattle. The hotel's operations vice president would like to replace the hotel's antiquated computer terminals at the registration desk with attractive state-of-the-art flat-panel displays. The new displays would take less space, would consume less power than the old computer terminals, and would provide additional security since they can only be viewed from a restrictive angle. The new computer displays would not require any new wiring. The hotel's chef believes the funds would be better spent on a new bulk freezer for the kitchen. Required: For each of the items below, indicate by placing an X in the appropriate column whether it should be considered a differential cost, an opportunity cost, or a sunk cost in the decision to replace the old computer terminals with new flat-panel displays. If none of the categories apply for a particular item, leave all columns blank.

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EXERCISE 2-8 Cost Behavior; Contribution Format Income Statement [LO3, LO5] EXCEL Parker Company manufactures and sells a single product. A partially completed schedule of the company's total and per unit costs over a relevant range of 60,000 to 100,000 units produced and sold each year is given below:

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Required:

1. Complete the schedule of the company's total and unit costs.

2. Assume that the company produces and sells 90,000 units during the year at the selling price of $7.50 per unit. Prepare a contribution format income statement for the year.

EXERCISE 2-9 Cost Classification [LO1, LO2, LO3, LO7]

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Several years ago Medex Company purchased a small building adjacent to its manufacturing plant in order to have room for expansion when needed. Since the company had no immediate need for the extra space, the building was rented out to another company for rental revenue of $40,000 per year. The renter's lease will expire next month, and rather than renewing the lease, Medex Company has decided to use the building itself to manufacture a new product. Direct materials cost for the new product will total $40 per unit. It will be necessary to hire a supervisor to oversee production. Her salary will be $2,500 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $18 per unit. Manufacturing operations will occupy all of the building space, so it will be necessary to rent space in a warehouse nearby in order to store finished units of product. The rental cost will be $1,000 per month. In addition, the company will need to rent equipment for use in producing the new product; the rental cost will be $3,000 per month. The company will continue to depreciate the building on a straight-line basis, as in past years. Depreciation on the building is $10,000 per year. Advertising costs for the new product will total $50,000 per year. Costs of shipping the new product to customers will be $10 per unit. Electrical costs of operating machines will be $2 per unit. To have 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 $6,000 per year. Required: List the different costs associated with the new product decision down the extreme left column (under Name of the Cost). Then place an X under each heading that helps to describe the type of cost involved. There may be X's under several column headings for a single cost. (For example, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost.)

13 1. Direct material

Variable Cost x

2. Supervisor’s salary

Fixed Cost

Period costs Selling and Administrative

Direct material x

Product costs Direct Manufacturing labor overhead

x

x

3. Direct labor costs

x x

4. Rental cost of warehouse 5. Rental cost of equipment 6. Depreciation of the building 7. advertising

x x

x

x

x

x

8. shipping costs

x

x x

x 9. electrical costs

x x

14 EXERCISE 2-11 Traditional and Contribution Format Income Statements [LO5] EXCEL Haaki Shop, Inc. is a large retailer of surfboards. The company assembled the information shown below for the quarter ended May 31:

Required:

1. Prepare a traditional income statement for the quarter ended May 31.

2. Prepare a contribution format income statement for the quarter ended May 31.

3. What was the contribution toward fixed expenses and profits for each surfboard sold during the quarter? (State this figure in a single dollar amount per surfboard.)...