Ex 3-31Exercise 3-31 Classification of CostsSolution

Ex 3-32Exercise 3-32 Classification of CostsSolution

Ex 3-33Exercise 3-33 Classification of CostsSolution

Ex 3-34Exercise 3-34 Activity Levels and Cost DriversSolutionCost ObjectCost Driveraproduct line or customereach product line, or each custom order requiring designbproduct linenumber of customer orderscproduct linenumber of customer ordersdproduct linenumber of purchase orderseproduct line or customer ordernumber of ordersfeach productunits producedgproduct linecannot be traced to product or customer; must beallocated using some reasonable method, for example,materials cost in each orderhcustomernumber of customersIeach productunits producedjproduct linecannot be traced to product or customer; must beallocated using some reasonable method, for example,the number of units produced

Ex 3-35Exercise 3-35 Application of the Direct Cost Concept in the Fashion IndustrySolution

Ex 3-36Exercise 3-36 Complexity of Operations and the Effect on CostSolution

Ex 3-37Exercise 3-37 Average and Total Costs

Ex 3-38Exercise 3-38 Classification of Costs

Ex 3-39Exercise 3-39 Activities and Cost Drivers in a HospitalSolution

Ex 3-40Exercise 3-40 Fixed, Variable, and Mixed CostsMay 2004June 2004Units Produced10,00020,000Costs in each departmentDepartment A$10,000$10,000Department B$25,000$50,000Department C$35,000$45,000Department D$18,000$64,000Department E$22,000$44,000Solution

Ex 3-41Exercise 3-41 Fixed, Variable and Mixed CostsSolution

Ex 3-42Exercise 3-42 Military Contracts and Direct vs. Indirect CostsSolution

Ex 3-43Exercise 3-43 Interpreting Average CostOption to reduce emissions and provide better fuel economyCost for each gallon of gas savedFuel Efficiency (mpg)Current mileage standards26.2$0.00Moderate increase inCAFE40.8$0.57Significant increase in CAF45.8$0.60Partial hybrid (15% of power from electricity)52.6$1.38Full hybrid (40% of power form electricity)59.3$1.80Solution

Ex 3-44Exercise 3-44 Interpreting Average CostMaufacturing FirmsFinance Cost as a Percent of Total RevenueFirms with less than $1 billion in revenues1.6%$1 billion to $5 billion1.1%More than $5 billion1.0%Service FirmsLess than $1 billion in revenues2.1%More than $1 billion1.6%Solution

Ex 3-45Exercise 3-45 Cost of Goods ManufacturedBackgroundThe following information pertains to the Petrie Company:Problem InformationPrime Costs$180,000Conversion costs$215,000Direct materials used$95,000Beginning work in process$75,000Ending work in process$65,000RequirementsDetermine the cost of goods manufacturedSolutionBeginning work in process inventory$75,000Current costs:Direct materials used$95,000Direct labor$85,000Overhead$130,000TOTAL current manufacturing costs$310,000TOTAL manufacturing costs available$385,000Less: ending work in process$65,000Cost of goods manufactured$320,000

Pr 3-46Problem 3-46 Product Costs and Period CostsBackgroundProblem InformationUtilities for the bakery1,600Paper used in packaging product70Salaries and wages in the bakery15,000Cookie ingredients27,000Bakery labor and fringe benefits1,000Administrative costs800Bakery equipment maintenance600Depreciation of bakery plant and equipment1,500Uniforms300Insurance for the bakery600Rent for administrative offices13,200Advertising1,500Boxes, bags, and cupsused in the bakery700Manager's salary10,000Overtime premiums2,000Idle time400Requirements1. What is the total amount of product and period costs?2. a. Which of the additional costs are product costs?b. Which costs are relevant to the decision whether to expand into the U.S.?Solution1.Direct Labor for Galletas AmericanasSalaries & Wages15,000Labor fringe benefits1,000TOTAL16,000Direct Materials for Galletas AmericanasIngredients for cookies27,000Factory Overhead for Galletas AmericanasIndirect MaterialPaper70Indirect LaborManager Salary10,000Manufacturing CostsDepreciation of Plant & Equipment1,500Insurance600Utilities1,600Equipment maintenance600Overtime Premiums2,000Idle time400Uniforms300Boxes, Bags700TOTAL Factory Overhead17,770TOTAL Product Cost60,770Period CostsRent13,200Administrative Costs800Advertising1,500TOTAL Period Costs15,5002. Assume that Galletas is planning to expand into the United States and Canada, initially targeting the UnitedStates. This expansion will not require additional baking facilities, but labor and materials costs will increase, andadvertising costs and packaging costs will increase substantially. Also, U.S. authorities will require certain documentation andinspections that will be an added cost for Galletas.a. Which of the additional costs are product costs?All the additional costs are likely to be product costs, except for the increase in advertising, which is a period cost.b. Which costs are relevant for the decision whether to expand into the United States?The baking facilities costs are not relevant since they will not change, but all other costs are relevant (the increase in materialsand labor, the increase in advertising and packing, and the increase in documentation and inspection costs).

Pr 3-47Problem 3-47 Executional Cost Drivers, Internet RetailerSolution

Pr 3-48Problem 3-48 Structural Cost DriversSolution

Pr 3-49Problem 3-49 Cost of Goods Manufactured and SoldBackgroundBenavides Company produces women's clothing. During 2007, the company incurred thefollowing costs:Problem InformationFactory rent$425,000Direct labor$325,000Utilities-Factory$75,000Purchases of direct materials$465,000Indirect materials$70,000Indirect labor$35,000Inventories for the year were as follows:January 1December 31Direct Materials$30,000$50,000Work in process$40,000$85,000Finished goods$115,000$95,000Requirements1. Prepare a statement of cost of goods manufactured.2. Calculate cost of goods sold.

Pr 3-50Problem 3-50 Cost of Goods ManufacturedBackgroundThe following data pertain to Duvernoy Company for the year ended December 31, 2007:Problem InformationDecember 31, 2006December 31, 2007Purchases of direct materials$60,000Direct labor$45,000Indirect labor$25,000Factory insurance$12,000Depreciation-Factory$80,000Repairs and maintenance-Factory$15,000Marketing expenses$66,000General and administrative expenses$55,000Direct materials inventory$20,000$35,000Work-in-process inventory$33,000$35,000Finished goods inventory$23,000$20,000Sales in 2007$500,0003-50 RequirementsPrepare a schedule of cost of goods manufactured and an income statement for Duvernoy Company similar to those in Exhibit 3.15aSolutionDuvernoy CompanyStatement of Cost of Goods ManufacturedDecember 31, 2007Direct Materials UsedDirect Materials Inventory, Beginning$20,000Direct Materials Purchases$60,000Total Direct Materials Available$80,000Direct Materials Inventory, Ending$35,000Direct Materials Used$45,000Direct Labor-Wages$45,000Factory OverheadRepair and Maintenance$15,000Factory Insurance$12,000Depreciation Expense-Plant$80,000Indirect Labor-Wages$25,000Total Factory Overhead$132,000Total Manufacturing Cost Incurred During Year$222,000Work-in-Process Inventory, Beginning$33,000Total Manufacturing Costs to Account for$255,000Work-in-Process Inventory, Ending$35,000Cost of Goods Manufactured$220,000Duvernoy CompanyIncome StatementFor the Year Ended December 31, 2007Sales Revenue$500,000Cost of Goods SoldFinished Goods Inventory, Beginning$23,000Cost of Goods Manufactured$220,000Total Goods Available for Sale$243,000Finished Goods Inventory, Ending$20,000Cost of Goods Sold$223,000Gross Margin$277,000Marketing Expenses$66,000General and Administrative$55,000Total Selling & Administrative$121,000Net Income$156,000

Pr 3-51Problem 3-51 Cost of Goods Manufactured, Income StatementBackgroundConsider the following information for Household Furnishing, Inc., for the year ended December 31, 2007:Problem InformationDepreciation expense-Administrative office$33,000Depreciation expense-Plant and equipment$88,000Direct labor--Wages$487,000Direct materials inventory, Dec. 31, 2007$25,000Direct materials inventory, Jan. 1, 2007$18,000Direct materials purchases$155,000Finished goods inventory, Dec. 31, 2007$38,000Finished goods inventory, Jan. 1, 2007$15,000Heat, light, & power--Plant$44,000Indirect labor$25,000Property taxes--Plant$34,000Sales representatives' salaries$145,000Sales revenue$1,500,000Factory Supervisor's salary$66,000Supplies--Administrative office$16,000Supplies--Plant$29,000Work-in-Process inventory, Dec. 31, 2007$9,000Work-in-Process inventory, Jan. 1, 2007$23,0003-51 RequirementsPrepare a statement of cost of goods manufactured and an income statement for Household Furnishings for the year ended December 31, 2007, similar to the one in Exhibit 3.15a.Solution

Pr 3-52Problem 3-52 Cost of Goods Manufactured, Income StatementBackgroundConsider the following information for Blue Water Equipment, Inc., a manufacturer of sailboatrigging, blocks, and cordage.Problem InformationAdvertising Expenses$16,000Depreciation Expense--Admin. Office$73,000Depreciation Expense--Plant and Equip.$197,000Depreciation Expense - Delivery Trucks$34,000Direct Materials Inventory, Beginning$33,000Direct Materials Inventory, Ending$28,000Direct Materials Purchases$190,000Direct Labor$345,000Indirect Labor$128,000Finished Goods Inventory, Beginning$66,000Finished Goods Inventory, Ending$43,000Insurance on Plant$44,000Heat and Light for Plant$23,000Repairs on Plant Building$34,000Supervisor's Salary Plant$85,000SuppliesPlant$21,000Supplies--Administrative Office$42,000Work-in-Process Inventory, Beginning$14,000Work-in-Process Inventory, Ending$11,000Sales Representatives' Salaries$216,000Sales Revenue$1,675,0003-52 RequirementsPrepare a statement of cost of goods manufactured and an income statement for Blue Water Equipment, Inc., for the year ended December 31, 2007.SolutionBlue Water Equipment, Inc.Statement of Cost of Goods ManufacturedDecember 31, 2007Direct Materials UsedDirect Materials Inventory, Beginning$33,000Direct Materials Purchases$190,000Total Direct Materials Available$223,000Direct Materials Inventory, Ending$28,000Direct Materials Used$195,000Direct Labor$345,000Factory OverheadInsurance on Plant$44,000Supplies--Plant$21,000Repairs on Plant Building$34,000Depreciation Expense--Plant & Equip.$197,000Heat and Light for Plant$23,000Indirect Labor$128,000Supervisor's Salary Plant$85,000Total Factory Overhead$532,000Total Manufacturing Cost Incurred during year$1,072,000Work-in-Process Inventory, Beginning$14,000Total Manufacturing Costs to Account for$1,086,000Work-in-Process Inventory, Ending$11,000Cost of Goods Manufactured$1,075,000Blue Water Equipment, Inc.Income StatementFor the Year Ended December 31, 2007Sales Revenue$1,675,000Cost of Goods SoldFinished Goods Inventory, Beginning$66,000Cost of Goods Manufactured$1,075,000Total Goods Available for Sale$1,141,000Finished Goods Inventory, Ending$43,000Cost of Goods Sold$1,098,000$577,000Gross MarginAdvertising Expenses$16,000Sales Representatives' Salaries$216,000Supplies--Administrative Office$42,000Depreciation Expense--Admin. Office$73,000Depreciation Expense - Delivery Trucks$34,000Total Selling & Administrative$381,000Net Income$196,000

Pr 3-53Problem 3-53 Cost of Goods Manufactured, Calculating UnkownsBackgroundThe following information was taken from the accounting records of Blazek Manufacturing Company.Unfortunately, some of the data were destroyed by a computer malfunction.Problem InformationCase ACase BSales$100,000?Finished goods inventory, Jan. 1, 2004$15,000$8,000Finished goods inventory, Dec. 31, 2004$16,000?Cost of goods sold?$43,000Gross margin$25,000$3,000Selling and administrative expenses?$1,000Operating Income$10,000$2,000Work-in-Process inventory, Jan. 1, 2004?$14,000Direct material used$18,000$8,000Direct labor$15,000$9,000Factory overhead$20,000?Total manufacturing costs?$35,000Work-in-Process inventory, Dec. 31, 2004$7,000?Cost of goods manufactured?$45,0003-53 RequirementsCalculate the unknowns indicated by question marksSolution

Pr 3-54Problem 3-54 Cost of Goods Manufactured, Income StatementBackgroundNorton Industries, Inc., a manufacturer of cable for the heavy construction industry, closes its books andprepares financial statements at the end of each month. The statement of cost of goods sold for April2007 follows:Norton IndustriesStatement of Cost of Goods SoldFor the Month Ended April 30, 2007($000) omittedInventory of finished goods, March 31$50Cost of goods manufactured$790Cost of goods available for sale$840Less inventory of finished goods, April 30$247Cost of goods sold$593Additional Information:The company manufactured 7,825 tons of cable during May 2007.Utilities expense breakdown:Manufacturing-related80%Selling and Administrative expense20%Rent breakdown:Office building100%Property expense breakdown:Manufacturing facilities100%Insurance Breakdown:Manufacturing-related60%Selling and Administrative expense40%Tons of cable manufactured, May 20077,825The inventory balances at May 31, 2007, follow:Direct materials inventory$23,000Work-in-Process inventory$220,000Finished goods inventory$175,000Depreciation expense includes the following:Manufacturing plant$20,000Manufacturing equipment$30,000Office equipment$4,000$54,000Norton IndustriesPreclosing Account BalancesMay 31, 2007($000) omittedCash and Marketable securities$54Accounts and notes receivable$210Direct materials inventory (4/30/04)$28Work-in-process inventory (4/30/04)$150Finished goods inventory (4/30/04)$247Property, plant, and equipment (net)$1,140Accounts, notes, and taxes payable$70Bonds Payable$600Paid-in capital$100Retained earnings$930Sales$1,488Sales discounts$20Other revenue$2Purchases of direct materials$510Direct Labor$260Indirect factory labor$90Office salaries$122Sales salaries$42Utilities$135Rent$9Property tax$60Insurance$20Depreciation$54Interest expense$6Freight-in for materials purchases$153-54 RequirementsBased on Exhibit 3.15, prepare the following: Statement of cost of goods manufactured for Norton Industries for May 2007 and an Income statement for Norton Industries for May 2007.SolutionNorton IndustriesStatement of Cost of Goods ManufacturedFor the Month Ended May 31, 2007($000) omittedDirect Materials UsedDirect Materials Inventory, April 30$28Direct Materials Purchases$510Freight in$15Total Direct Materials Available$553Direct Materials Inventory, May 31$23Direct Materials Used$530Direct Labor-Wages$260Factory OverheadIndirect factory labor$90Utilities$108Property taxes--Plant$60Insurance$12Depreciation$50Total Factory Overhead$320Total Manufacturing Cost Incurred During Year$1,110Work-in-Process Inventory, April 30$150Total Manufacturing Costs to Account for$1,260Work-in-Process Inventory, May 31$220Cost of Goods Manufactured$1,040Norton IndustriesIncome StatementFor the Month Ended May 31, 2007($000) omittedSales Revenue$1,488Less: Sales Discounts$20Net Sales$1,468Cost of Goods Sold:Finished Goods Inventory, April 30$247Cost of Goods Manufactured$1,040Total Goods Available for Sale$1,287Finished Goods Inventory, May 31$175Cost of Goods Sold$1,112Gross Margin$356General, Selling, & Administrative Expense:Office Salaries$122Sales Salaries$42Insurance$8Utilities$27Rent$9Depreciation$4Interest$6Total General, Selling, & Administrative Expense$218Income from operations$138Other revenue$2Net Income$140

MBD00187961.docIn contracts with the U.S. government, direct costs are reimbursable. Indirect costs can be a problem however, when a contract is terminated because the approved cost assignment procedures are no longer appropriate.

The determination of whether a cost is direct or indirect can be critical in some situations. To understand the problem, consider this typical case. A contractor enters into a multiyear, fixed-price development contract with the military. The job requires a significant investment in inspection equipment that the contractor uses only for the military contract. Equipment cost is not treated as a direct cost, however, because governmental cost standards require depreciation costs of all similar assets to be treated consistently, either as direct or indirect costs. Thus, the inspection equipment must be treated as an indirect cost. Because the equipment is an indirect cost, its cost cannot be fully recovered until the project is completed. If the contract is terminated early, only a portion of the cost of the inspection equipment can be recovered.

Required How do you think this issue should be resolved?

MBD005A0326.docRequired Give a brief critical review of these research results. What questions would you have for the researchers who presented these results?

MBD005AF39B.docCase A. Food Fare is a small chain of restaurants that has developed a loyal customer base by providing fast-food items with more choices (e.g., how the hamburger should be cooked; self-serve toppings) and a more comfortable atmosphere. The menu has a small number of popular items, including several different hamburgers, grilled chicken sandwiches, and salads. Recently, to broaden its appeal, Food Fare added barbecue, seafood, and steak to its menu.

Case B. Gilman Heating and Air Conditioning, Inc., provides a broad range of services to commercial and residential customers, including installation and repair of several different brands of heating and air conditioning systems. Gilman has a fleet of 28 trucks, each operated by one or more service technicians, depending on the size of a job. A recurrent problem for Gilman has been coordinating the service teams during the day to determine the status of a job and the need for parts not kept in the service vehicle as well as to identify which team to send on emergency calls. Gilmans service area is spread over an urban/rural area of approximately 20 square miles. The company has developed cost and price sheets so that the service technicians accurately and consistently price the service work they perform.

Required For each case, identify the important structural cost drivers for the company and the related strategic issues that it should address to be competitive.

MBD0108B18D.docGalletas Americans is a cookie company in Guadalajara, Mexico, that produces and sells high-quality American-style cookies. The owner wants to identify the various costs incurred each year to be able to plan and control the business costs. Galletas Americanass costs are the following (in thousands of pesos):

MBD005ABB84.docAssume that you are a consultant for a start-up Internet retailer, Bikes.com, which provides a variety of bicycle parts and accessories in a convenient and effective customer service approach. The firm operates from an office building and nearby warehouse located in Danville, Virginia. Currently, the firm has 10 permanent administrative staff, 6 customer service representatives who respond to customer inquiries, and 12 employees who pick, pack, and ship customer orders. All orders are placed over the firms website. An 800 telephone number is available for customer service. The firms sales increased at about 20 percent per year in the last two years, a decline from the 50 percent rate in its first three years of operation. Management is concerned that the decline will delay the firms first expected profit, which had been projected to occur in the next two years. The firm is privately held and has been financed with a combination of bank loans, personal investments of top managers, and venture capital funding.

Required What specific executional cost drivers are important in this business? How should the firm use them to improve its sales rate?

MBD005964AD.docThe increase in fuel economy required by higher CAFE standards would require automakers to use conventional technology to improve engines and transmissions. The hybrid vehicles require newer technology and electric motors.

Required Give a brief critical review of the ACEEEs research results. What questions would you have for the researchers who presented these results?

MBD0059C41A.docRecently the American Institute of CPAs (AICPA) and the Hackett Group, a consulting firm, partnered to study the trends in the nature and amount spent on the accounting function in corporations. A key finding was that the worlds best accounting departments were able to function effectively at relatively low cost; these departments total costs were only about 1 percent of their firms total revenues. In contrast, less efficient accounting departments required on the average 1.4 percent of total revenue, 40 percent higher. The world-class accounting departments were also faster in preparing regular financial reports (less than two days for the best departments, compared to five to eight days for the others). The study also found that larger firms spent less on accounting:

MBD00590A89.docConcern for gas emissions and depletion of nonrenewable resources has caused environmentalists and others to push for higher fuel-efficiency standards for new cars. The current corporate automotive fuel efficiency (CAFE) standards require automakers to produce an overall fuel efficiency of 26.2 miles per gallon for all autos produced. Currently the U.S. government supports the development of hybrid autos that combine gas and electric power as the solution to the problem. Others propose simply raising the CAFE standards for auto manufacturers. To study the issue, the American Council for an Energy-Efficient Economy (ACEEE) conducted research to determine the cost for raising fuel efficiency for the different proposals. Their findings are as follows:

MBD0006D441.docCase A: A key structural issue for Food Fare is complexity. As the menu has changed, so will costs and service. More complexity means higher food purchasing costs, higher operating costs, and more complex operations. This will require new types of training for employees and perhaps additional employees. Moreover, it will be a challenge for Food Fare to continue to provide the speed of service that was possible with the shorter menu. The change will require careful attention to operations and to cost management issues for the firm to continue to be profitable. Employee training and new uses of technology to streamline the process of order taking and order filling are likely to be necessary. Scale might also be an important issue in this casehow large must each restaurant become, and how many restaurants must the chain have in order to justify the increased purchasing and stocking costs, and the new training and technology costs?

Case B: A key issue in this case is the speed with which Gilman can provide customer service. The speed of service provides value to the customer and also increases profitability. In order to increase the speed of service, Gilman needs effective communication and coordination among the service teams. This is probably being accomplished now by cell phone or CB radio. Gilman can research new and more effective ways to accomplish this, perhaps using hand-held internet access devices or modem-equipped notebook computers. The advantage of computer-based access is that computer based tools can be used in the scheduling and assignment of the service teams. Additionally, the computer can be used by each service team to quickly determine the availability of parts in the firms warehouse or in other service vehicles, thereby allowing faster service time. Also, the computer can be used to develop real time analyses of customer demand and profitabilityin order to better understand which services and which types of customers are most profitable. Is it in installation or service, Brand X or Brand Y, residential or commercial, etc.? Scale is also an important cost driver for Gilman. To serve the large area it now serves, there should be a careful strategic analysis to get the right balance between order getting costs (advertising and promotion to obtain new customers) plus the costs of maintaining the truck fleet and service teams versus the opportunity to provide additional services to existing customers.

MBD0016EC0D.docFran McPhair Dance Studios is a chain of 45 wholly owned dance studios that offer private lessons in ballroom dancing. The studios are located in various cities throughout the southern and southeastern states. McPhair offers a set of 12 private lessons; students may pay for the lessons one at a time, but each student is required to enroll for at least a 12-lesson plan. The 20-, 40-, and 100-lesson plans offer savings. Each dance instructor is paid a small salary plus a commission based on the number of dance lessons provided.

Required

1. McPhairs owner is interested in a strategic analysis of the business. The owner wants to understand why overall profitability has declined slightly in the most recent year while other studios in the area seem to be doing well. What is the proper cost object to begin this analysis? Explain your choice.

2. For each of the cost elements determine the cost classification from the following list for the cost object you chose in requirement 1. (In some cases, two or more classifications apply.)

Cost Elements

1. Each dancing instructors salary.2. Managers salary.3. Music tapes used in instruction.4. Utilities for the studio.5. Part-time studio receptionist.6. Planning and development materials sent from the home office.7. Free lessons given by each studio as a promotion.8. Regional TV and radio advertisements placed several times a year.

Cost Classifications

a. Directb. Indirectc. Variabled. Fixede. Controllable by studio managerf. Uncontrollable by studio manager

MBD00174813.docAdams Manufacturings five manufacturing departments had the following operating and cost information for the two most recent months of activity:

MBD0018285E.docRequired Identify whether the cost in each department is fixed, variable, or mixed.

MBD001728A3.docGreenbelt Hospital has the following activities in its value chain of providing service to each inpatient admission:

1. Schedule patient.2. Verify insurance.3. Admit patient.4. Prepare patients room.5. Review doctors report.6. Feed patient.7. Order tests.8. Move to/from laboratory.9. Administer lab tests.10. Order pharmaceuticals.11. Complete patient report.12. Check patients vital signs.13. Prepare patient for operation.14. Move to/from operating room.15. Operate.16. Collect charges.17. Discharge patient.18. Bill insurance.

Required Assume that the cost object is the individual patient. Determine the appropriate cost driver(s) for each activity.

MBD000E7020.docHabib Manufacturing has five manufacturing departments and operating and cost information for the most recent two year of activity.

2007

2008

Units produced

4,000

6,000

Costs in each department:

Department 1

$11,000

$12,000

Department 2

10,000

15,000

Department 3

20,000

25,000

Department 4

33,000

33,000

Department 5

16,000

24,000

Required: Identify whether the cost in each department is fixed, variable, or mixed.

MBD001630DF.docTartan Manufacturing Company produces four lines of high-quality lighting fixtures in a single manufacturing plant. Products are built to specific customer specifications. All products are made-to-order. Management of the plant lists the following as the key activities at the plant:

a. Product designb. Production schedulingc. Cost of purchasing departmentd. Receipt and inspection of materialse. Machine set-upsf. Product inspection, done for each productg. Plant securityh. Customer credit checki. Machine operationj. Machine maintenance

Required Identify a cost object and a cost driver for each activity.

MBD00169E3A.docThe Accounting Students Association wants to have a Christmas dance for its members. The cost of renting a nightclub is $1500, and the cost of refreshments will be $12 per person.

Required

1. What is the total cost if 100 people attend? What is the average cost?2. What is the total cost if 200 people attend? What is the average cost?3. Explain why average total cost differs with changes in total attendance.

MBD0013BBCC.docFollowing is a list of costs from Oakland Company, a furniture manufacturer:

1. Wood used in chairs2. Salaries of inspectors3. Lubricant used in machinery4. Factory rent5. Wages of assembly workers6. Workers compensation insurance7. Sandpaper

8. Fabric used for upholstery9. Property taxes10. Depreciation on machinery

Required Classify each cost as direct or indirect assuming that the cost object is each item manufactured. Also indicate whether each cost is a variable or fixed cost.

MBD00140D54.docThe following is a list of costs from the accounting records of Sun-shine Pool Management, Inc. Each of Sunshines 77 customers owns a pool. Sunshine maintains each customers pool by providing supplies, cleaning, and repairs.

1. Lifesaving supplies2. Salaries of Sunshines managers3. Pool chemicals4. Sunshines office rental expense5. Wages of lifeguards6. Workers compensation insurance7. Training for lifeguards8. pH testing supplies9. Office expense, including bookkeeping and clerical10. Depreciation on cleaning and testing equipment

Required Classify each item as direct or indirect assuming that the cost objects are each of 77 pools.

MBD00132A92.docThe following costs were taken from the accounting records of the Barnwell Manufacturing Company:

1. State income taxes2. Insurance on the manufacturing facilities3. Supplies used in manufacturing4. Wages for employees in the assembly department5. Wages for employees who deliver the product6. Interest on notes payable7. Materials used in the production process8. Rent for the sales outlet in Sacramento9. Electricity for manufacturing equipment10. Depreciation expense on delivery trucks11. Wages for the sales staff12. Factory supervisors salaries13. Company presidents salary14. Advertising expense

Required Classify each item as either a product cost or a period cost. Classify all product costs as direct or indirect, assuming that the cost object is each unit of product manufactured.

MBD000D8B61.docIn the mid-1990s, a large consumer goods manufacturer moved its customer based from department and specialty stores to mass merchandising in a a variety of retail stores, large and small. The strategic change required it to increased significantly the complexity of its operations the number of products, prices, discounts, patterns, colors, and sizes. After noticing the firms expense beginning to rise, the company hard to consultant to study the firms cost structure. The findings:

as many as 10 different vendors provided certain purchased items

of the firms customers after the strategic shift, 98 percent were responsible for only 7% of total sales volume

the wide variety of prices and discounts and promotional programs added complexity to the accounts receivable collection process because of increased disputes over pricing and customer balances

75% of the company sales involved products with five or more color combinations

customer demands form fast delivery of new orders had caused a shift in manufacturing to smaller batch sizes and more frequent equipment setups. Thus, total setup-related costs increased

Required

What would you advise the company to do?

MBD000DED79.docThe observations made by the consultant show that the manufacturer was incurring large costs in operations, distribution, and administration due to the high level of complexity in its products. Maintaining relationships with 10 vendors for a single item contributed to high purchasing and stocking costs. Similarly, most of the firms volume was made up of products with five color combinations, with the result that manufacturing, warehousing, shipping and selling costs were high relative to fewer color combinations. Also, the high product variety required smaller batch production and more frequent set-ups, which caused increased manufacturing costs. And the variety of different customers, prices, and promotional programs created increased manufacturing, shipping and customer service costs as well as increased costs in accounting for the customers invoices and account balances.

The solution? Reduce complexity. This was done by reducing the number of customers; the low value customers were reviewed and some were not continued. Also, a process of review was developed for the introduction of new products or new variations on existing products, to ensure the likely profitability of the new product. Further, the complexity of equipment set-ups was reduced so that the firm could meet the customers demands for smaller batch sizes without increasing overall costs. The result of the program was that overall profit margins improved. The firm had found a way to deal with the cost consequences of its strategic initiative.

Also, the firm adopted new cost management practices that included new non-financial measures such as set-up time and frequency, percent of orders shipped on time, percent of orders on just-in-time, and number of vendors for the top 20 commodity raw materials items. In addition, the firm began to calculate and regularly review customer profitability, by type of market and customer size.

Based on information in: Managing Complexity Through Performance Measurement, by Frank A. J. Gonsalves and Robert G. Eiler, Management Accounting, August 1996, pp 34-39.

MBD000D8A7D.docJane Wilson is the production manager for a company that produces high-fashion designer clothing for women. The product is made in small batches, which are pre-sold to high-end retailers, based on specific orders. The product is completed in batches, which consist of a single item of clothing being made for a single or small number of retail customers. In effect, Jane manages the flow of small batches of product through the companys design/production shop in New York. The materials and labor for each batch are purchased and scheduled well in advance of the time of production. The materials are unique to the job, and the employees assigned to the job will work on it till the job is done. The company has found that dedicating specific employees to each batch improves employee satisfaction, and most importantly, product quality.

Required: Evaluate the role of the direct cost concept in this unique company.

MBD0006110B.doc3-38 Cost Classification for Dance Studio (15 min)

1. While a variety of possible cost objects are possible for the dance studio, the most reasonable choice is the studio since managements goal is to analyze the profitability of the studios.

2. Studios as the cost object

1. a,c,e

2. a,c,f

3. a,c,e

4. a,c,e

5. a,c,e

6. b,c,f

7. a,c,e

8. a,d,e

Or,

Lessons as the cost object

1. a,d,e

2. b,d,f

3. b,d,e

4. b,d,e

5. b,d,e

6. b,d,f

7. b,d,e

8. b,d,e

MBD000656A8.docIn recognition of this problem, and of the large number of contract appeals it has caused, the various federal boards of contract appeals have ruled in favor of treating certain indirect costs as direct costs in these situations:

1) In an appeal filed by Fiesta Leasing & Sales, Inc., the board allowed depreciation on buses purchased for a bus leasing contract when the Defense Department terminated the contract. The board allowed depreciation costs because the costs were incurred for the contract and because these costs could not be discontinued after the contract was terminated.

2) In an appeal brought by Essex Electric Engineers, Inc., the Department of Transportation (DOT) Contract Appeals Board allowed recovery of the full cost of equipment remaining at a plant when the contract was terminated for the convenience of the DOT. The reason for the ruling is that the equipment purchased by Essex for the DOT contract was far beyond its needs for its other business.

Source: Based on information from: Margaret M. Worthington, As Military Downsizes, Contract Termination Becomes a Challenge, Journal of Accountancy, March 1992, p 88-90.

MBD000686E8.docThis question is based upon an article in the January 1997, Journal of Accountancy, How Does Your Finance Department Measure Up? pp 50-51.

The main point of this exercise, as for 3-32 above, is to help the student understand the importance of taking activity levels into account when interpreting average cost information.

The Journal of Accountancy article shows, as represented by the information presented in the exercise, that average fixed costs decline with higher levels of activity. Larger companies, with higher levels of transaction volume, will have higher total fixed costs, but average fixed costs should be lower due to economies of scale (as noted in the article, p 50). Looked at another way, if a given firm were to grow, and its volume of transactions grew as well, then average fixed costs (or in this case the ratio of total accounting costs to total revenue) would have to fall. Average fixed cost would continue to fall with increasing numbers of transactions, until the firm felt it necessary to increase capacity in the accounting department, thereby increasing fixed costs. (Note there is a controversy in microeconomics about whether the long run average cost curve is flat or U-shaped. See Karl Case and Ray Fair, Principles of Microeconomics, Fourth Ed, 1996, page 239.)

Thus, the data presented by the Journal is as we would expectlarger firms will have lower average costs. We would not expect otherwise. Average fixed costs should be lower for the larger firms.

MBD00062E95.docDepartment A fixed

Department B variable

Department C mixed

Department D mixed

Department E variable

MBD0004BCC5.doc1. direct and variable

2. indirect and fixed

3. indirect and variable

4. indirect and fixed

5. direct and variable

6. indirect and fixed

7. indirect and variable

8. direct and variable

9. indirect and fixed

10. indirect and fixed

MBD0005FFD4.doc3-37 Average and Total Costs (15 min)

1. Total cost:

$ 250 (fixed cost of night club)

+ 100 (variable cost of refreshments = $1 x 100)

$ 350

Average cost: $350/100 people = $3.50 per person

2. Total cost:

$ 250 (fixed cost of night club)

+ 200 (variable cost of refreshments = $1 x 200)

$ 450

Average cost: $450/200 people = $2.25 per person

3. Average costs decrease as attendance increases because the fixed cost component to total costs is now spread over 100 extra people.

Fixed cost per person: $250/100 people = $2.50

$250/200 = $1.25

Decrease in fixed cost per person $1.25

Average cost for 100 people

$3.50

- Decrease per person in fixed costs

1.25

Average cost for 200 people $ 2.25