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Cornerstones of Cost Management 2nd Edition Hansen Solutions Manual Download:http://testbanklive.com/download/cornerstones-of-costmanagement-2nd-edition-hansen-solutions-manual/ Cornerstones of Cost Management 2nd Edition Hansen Test Bank Download:http://testbanklive.com/download/cornerstones-of-costmanagement-2nd-edition-hansen-test-bank/

CHAP T ER 2 BASI C CO ST MANAG EMENT CO NCE PT S DISCUSSION QUESTIONS 1. An ac c ounting inf or m ation s ys tem is a s ystem c ons is ting of inter r elated m anual and c om puter par ts , us ing pr oc es s es s uc h as c ollec ting, r ec or ding, c las s if ying, s um m ar iz- ing, analyzing, and m anaging data to pr ovide output inf or m ation to us er s . 2. T he f inanc ial ac c ounting inf or m ation s ys tem is pr im ar ily c onc er ned with pr oduc ing out- puts f or ex ter nal us er s us ing well- s pec if ied ec onom ic events as inputs and pr oc es s es that m eet c er tain r ules . T he c os t m anage- m ent s ys tem , on the other hand, pr oduc es outputs f or inter nal us er s , and the c r iter ia that gover n inputs and pr oc es s es ar e dir ec tly r elated to m anagem ent obj ec tives . As a r e- s ult, the c os t m anagem ent s ys tem is m or e f lex ible than the f inanc ial s ys tem . 3. T he thr ee br oad obj ec tives of a c os t m anagem ent inf or m ation s ys tem ar e: ( 1) to c os t out pr oduc ts , s er vic es , and other c os t ob- j ec ts ; ( 2) to pr ovide inf or m ation f or planning and c ontr ol; and ( 3) to pr ovide inf or m ation f or dec is ion m ak ing. 4. T he c os t ac c ounting inf or m ation s ys tem is a c os t m anagem ent s ubs ys tem des igned to as s ign c os ts to pr oduc ts , s er vic es , and other obj ec ts as m anagem ent needs s pec if y. T he oper ational c ontr ol inf or m ation s ys tem is a c os t m anagem ent inf or m ation s ubs ys tem des igned to pr

ovide ac c ur ate and tim ely f eedbac k c onc er ning the per f or m anc e of m anager s and other s r elative to their plan- ning and c on tr ol of ac tivities . 5. A c os t obj ec t is anything f or whic h c os ts ar e m eas ur ed and as s igned. Ex am ples inc lude: ac tivities , pr oduc ts , plants , and pr oj ec ts . 6. An ac tivity is a bas ic unit of wor k per f or m ed within an or ganization. Ex am ples inc lude m ater ials handling, ins pec tion, pur c has ing, billing, and m aintenanc e. 7. A dir ect cost is a c os t that c an be eas ily and ac c ur ately tr ac ed to a c os t obj ec t. An indir ec t c os t is a c os t that c annot be eas ily and ac c u- r ately tr ac ed to c os t obj ec ts . 8. T r ac eability is the ability to as s ign a c os t dir ec tly to a c os t obj ec t in an ec onom ic ally


f eas ible way us ing phys ic al obs er vation or a c aus al r elations hip. 9. Alloc ation is the as s ignm ent of indir ec t c os ts to c os t obj ec ts bas ed on c onvenienc e or as- s um ed link ages . 10. Driver tracing uses drivers based on a causal relationship to trace costs to cost objects. Often, this m eans that costs are first traced to activities using resource drivers and then to cost objects using activity drivers. 11. Tangible products are goods that are made by converting raw materials into a final product through the use of labor and capital inputs. 12. A service is a task or activity perform ed for a custom er or an activity perform ed by a custom er using an organization’s products or f acilities. Services differ from tangible products on three im portant dim ensions: intangibility, perishability, and inseparability. Intangibility m eans that buyers of services cannot see, feel, taste, or hear a service before it is bought. Perishability m eans that services cannot be stored. Inseparability m eans that producers of services and buyers of services m ust be in direct contact (not true for tangible products). 13. T hree exam ples of product cost definitions are value-chain, operating, and traditional definitions. T he value-chain definition includes cost assignm ents for research and developm ent, production, m ark eting, and custom er service (all value-chain activities). Operational product costs include all costs except for re- search and developm ent. T raditional product costs include only production costs. Different costs are needed because they serve differ- ent m anagerial objectives. 14. T he thr ee c os t elem ents ar e dir ec t m ater ials , dir ec t labor , and over head. 15. T he inc om e s tatem ent f or a s er vic e f ir m does not need a s uppor ting c os t of goods m anuf ac tur ed s c hedule. Sinc e s er vic es c an- not be s tor ed, the c os t of s er vic es pr oduc ed equals the c os t of s er vic es s old ( not nec es- s ar ily tr ue f or a m anuf ac tur ing f ir m ) .


CORNERSTONE EXERCISES Cornerstone Exercise 2.1 1. Uni t pr i m e c os t = (Di r ect m ater i al s + Di r ect l abor )/ Uni ts = ($ 120 , 000 + $ 6 0, 000 )/ 50, 000 = $ 3. 60 2. Uni t c onve r s i on c os t = (Di r ect l abor + V ar i abl e ove r he a d + Fi x e d ove r he a d)/ Uni ts = ($ 6 0, 000 + $ 25 , 000 + $ 220 , 000)/ 50, 000 = $ 6. 10 3. Uni t va r i a bl e pr oduc t c os t = (Di r ect m ater i al s + Di r ect l abor + V ar i abl e over head)/ Uni ts = ($ 120 , 000 + $ 6 0, 000 + $ 25 , 000)/ 50, 000 = $ 4. 10 4. Uni t pr oduc t c os t = (Di r e c t m ater i al s + Di r ect l abor + V ar i abl e over head + Fi xed ove r he a d)/ Uni ts = ($ 120 , 000 + $ 6 0, 000 + $ 25 , 000 + $ 220 , 000)/ 50, 000 = $ 8. 50 5. Total direct materials, total direct labor, and total variable overhead w ould all increaseby10percentsincetheunits increased by 10 percent and these are strictly variable costs. Total fixed overhead w ould remain the same. Unit prime cost w ould increase by 10 percent since both directmaterialsanddirectlabor are strictly variable, and 10 percent more units w ould require 10 percent more variable cost. How ever, unit conversion cost w ould increase by less than 10 percent because of the presence of fixed costs. Ne w uni t pr oduc t c os t = [($ 120 , 000 + $ 6 0, 000 + $ 25 , 000)(1. 10) + $ 220 , 000)]/ 55 , 000 = $ 8. 10


Cornerstone Exercise 2.2 1 . P i e tr o Fr oz e n Foods , Inc . S ta te m e nt of Cos t of G oods Ma nufa c tur e d For the Com i ng Ye ar Di r ect m ater i al s Be gi nni ng i nve ntor y ................................ Add: P ur c ha s e s ................................ .................. ......................... Mater i al s avai l abl e ................................

$ 5, 600 119, 300 $ 124, 900 4, 900

..................... Le s s : E ndi ng i nve ntor y Di r................................ ect m ater i al s us ............. e d i n pr oduc ti on $ 120 , 0 .............................. 00 6 0, 000 Di r ect l abor ................................ ................................ ...... Ma nufa c tur i ng (Fa c tor y) ove r he a d 245 , 000 ................................ Tota l m a nufa c tur i ng c os ts a dde d $ 425 , 0 ................................ . 00 12, 500 Add: Be gi nni ng w or k i n pr oc e s s ................................ ... k i n pr oc e s s Le s s : E ndi ng w or 14, 600 ................................ ....... Cos t of goods m a nufa c tur e d ................................ $ 422, 900 ......... 2. I f the endi ng i nventor y of di r ect m ater i al s w er e $2, 000 hi gher , then the di r ect m ater i al s used i n pr oducti on w oul d be $2, 000 sm al l er , the total m anufactur- i ng c os ts a dde d w oul d be $ 2 , 0 0 0 l ow e r , a nd the c os t of goods m a nufactured wouldbe$2,000lower.Noother l i ne i tem s w oul d be a ffected.

Cornerstone Exercise 2.3 1 . P i e tr o Ma nufa c tur i ng, I nc . S ta te m e nt of Cos t of G oods S ol d For the Com i ng Ye ar Cos t of goods m a nufa c tur e d ................................ ............................... $ 422, 900 Add: Be gi nni ng fi ni s he d goods ................................ ........................... 42, 500 Cos t of goods a vai l abl e for sal e ................................ .......................... $ 465, 400 Le s s : E ndi ng fi ni s he d goods ................................ 3 4, 000 ............................... Cos t of goods s ol d ................................ ................................ ............... $ 431, 400


2. I f be gi nni ng fi ni s he d goods w e r e $ 5 , 0 0 0 l ow e r , the n the c os t of goods s ol d w oul d be $5, 000 l ow er .


Cornerstone Exercise 2.4 P i e tr o Ma nufa c tur i ng, I nc . I nc om e S tatem ent For the Com i ng Ye ar P er cent S al es ($ 12. 5 0 Ă— 49, 3 00 ) .............................. Cos t of goods s ol d ................................ .... G ros s ma rgi n ................................ ............. Less oper ati ng expenses: S el l i ng expenses ................................ $ 26 , .. 000 Adm i ni str ati ve expenses 1 34 , ..................... O pe r a ti ng i nc om e ................................ 000 ......

$ 6 16, 250 431, $ 1 400 84, 850

1 60 , 000 $ 24, 850

100. 00 70. 00 3 0. 00

2 5. 96 4. 03

2. I f the c os t of goods s ol d ha s be e n 6 5 per cent of sal es for the past few year s, m a na ge r s w oul d pr oba bl y be c onc e r ne d. Cos t of goods s ol d ha s r i s e n by 5 %, a nd pr ofi t ha s pr oba bl y de c l i ne d. Ma na ge r s s houl d i nve s ti gate to seewhy theincreaseoccurred,andtake steps to decr ease pr oduct costs or i ncr ease pr i c e , i f pos s i ble , i n the c om i ng ye a r .

Cornerstone Exercise 2.5 1. Uni t pr i m e c os t = (Di r ect m ater i al s + Di r ect l abor )/ Uni ts = ($27, 000 + $ 472, 500)/ 15, 000 = $ 3 3. 30 2. Uni t c onve r s i on c os t = (Di r ect l abor + V ar i a bl e ove r he a d + Fi x e d ove r he a d)/ Uni ts = ($472, 500 + $15, 000 + $18 , 000)/ 15, 000 = $33. 70 3. Uni t var i abl e ser vi ces pr oducti on cost = (Di r ect m ater i al s + Di r ect l abor + V ar i abl e over head)/ Uni ts = ($ 2 7, 000 + $472, 500 + $15, 000)/ 15, 000 = $34. 30


Cornerstone Exercise 2.4 4. Uni t s e r vi c e s pr oduc ti on c os t = (Di r ect m ater i al s + Di r ect l abor + V ar i abl e over head + Fi xed ove r he a d)/ Uni ts = ($27, 000 + $472, 500 + $15, 000 + $ 18 , 000)/ 15, 000 = $35. 50


5. S i nce offi ce r ent i s a fi xed cost, no var i abl e cost w oul d be affected, a nd pri me cost and total var i abl e cost stay the sam e . S i nce conver si on cost i ncl udes the ne w hi ghe r fi x e d ove r he a d, i t w ould inc r e a s e . S im ila r ly, totalunitservice costwouldincreaseas show n bel ow . Uni t ser vi ces pr oduc ti on c os t = ($27, 000 + $472, 500 + $15, 000 + $19, 500)/ 15, 000 = $35. 60

Cornerstone Exercise 2.6 1 . Happy Hom e Hel per s, I nc. S ta te m e nt of Cos t of S er vi ces P r oduced For the Com i ng Ye ar Di r ect m ater i al s $ 4 , 0 00 Be gi nni ng i nve ntor y ................................ Add: P ur c ha s e s ................................ ......................... 2 5 , 6 00 .................. Mater i al s avai l abl e ................................ $ 29 , 6 00 ..................... Le s s : E ndi ng i nve ntor y 2 ,6 00 Di r................................ ect m ater i al s used i n pr oduc ti on ............. .............................. Di r ect l abor ................................ ................................ ...... Cl e a ni ng over head ................................ .......................... Tota l ser vi ces pr oduc ti on costs added ........................ Add: Be gi nni ng w or k i n pr oc e s s * ................................ . k i n pr oc e s s ................................ Le s s : E ndi ng w or ....... Cos t of ser vi ces pr oduced ................................ .............

$ 27 , 000 472 , 5 00 3 3 , 000 $ 53 2 ,5 00 0 0 $ 53 2 ,5 0 0 * The beginning and ending w ork-in-process amounts could clearly be eliminated. They are show n here to reinforce the concept that forthisfirm,withnoworkin process,total services production cost equals cost of services produced. 2. I f pur chases of di r ect m ater i al s i ncr eased to$30,000,andmaterialsinventoriesre m a i ne d unc ha nge d, the n the di r e c t m a te r i a l susedinproduction,the totalservicespr oduc ti on c os ts a dde d, a nd the cost of ser vi ces pr oduced w oul d a l l i ncr ease by $ 4, 400 ($30, 000 – $25, 600).


Cornerstone Exercise 2.7 1. Ha ppy Hom e He l pe r s , Inc . S ta te m e nt of Cos t of S er vi ces S ol d For the Com i ng Ye ar Cos t of ser vi ces pr oduced ................................ ................................ ... $ 53 2 ,5 Add: Be gi nni ng fi ni s he d goods * ................................ ......................... 00 0 Le s s : E ndi ng fi ni s he d goods ................................ 0 ............................... Cos t of ser vi ces s ol d ................................ ................................ ........... $ 53 2 ,5 00 * The be gi nni ng a nd e ndi ng fi ni s he d goods a m ountscouldclearlybeeliminated. Theyares how n he r e to r e i nfor c e the c onc e pt tha t for thi sfirm,withnofinished goodsinventory, tota l cost of ser vi ces pr oduced equal s the cost of ser vi ces sol d. 2. Unl i ke a ser vi ce fi r m , w e w oul d expect a m anufactur i ng fi r m to have begi n- ni ng a nd e ndi ng fi ni s he d goods i nve ntor y.

Cornerstone Exercise 2.8 1 . Ha ppy Hom e He l pe r s , Inc . I ncom e S tatem ent For the Com i ng Ye ar S al es ($ 4 5 Ă— 1 5 , 000) ................................ ......................... Cos t of ser vi ces s ol d ................................ ...................... G ros s ma rgi n ................................ ................................ ... Less oper ati ng expenses: S el l i ng expenses ................................ ........................ $ 2 2 , Adm i ni str ati ve expenses ................................ ........... 000 53, 000 O pe r a ti ng i nc om e ................................ ............................

$ 675 , 000 53 2 ,5 00 $ 14 2 ,5 00 75 , 000 $67,5 00

2. I f the pr i ce i ncr ea sed to $50, sal es w oul d be $750, 00 0 , a $75, 000 i ncr ease. Thi s w oul d i nc r e a s e gr os s m a r gi n a nd ope r a ti ng i nc om e by $ 7 5 , 0 0 0 . The ne w oper ati ng i ncom e w oul d be $142, 500 .


EXERCISES E xer c ise 2.9 1. The obje c ti ve of the di s hw a s hi ng s ys te m i s toprovideclean,germ-freedishes,gl asses, and si l ver w ar e. P r ocesses i ncl ude: scrapinguneatenfoodoff dishesintodis pos a l , l oa di ng the r a c k s , w a s hi ng the di s he s , a nd unl oa di ng the r acks. 2. The i tem s ar e cl assi fi ed as fol l ow s: a. Autom a ti c di s hw a s he r —i nter r el ated par t b. Racks to hol d the di r ty gl asses, si l ver w ar e , a nd di s he s —i nter r el ated par t c. E le c tr ic ity—i nput d. W a te r —i nput e. W aste di sposa l —i nter r el ated par t f. S i nks and spr ayer s —i nter r el ated par ts g. Di sh deter gent—i nput h. G as heater to heat w ater to 18 0 degr ee s Fa hr e nhe i t—i nter r el ated par t i. Conve yor be l t—i nter r el ated par t j. P er sons 1, 2, 3, and 4 —i nter r el ated par ts k. Cl ean, ger m -fr ee di she s —outputs l. Di r ty di s he s —i nputs m. Ha lf-e a te n di nne r —i nputs n. Apr ons —i nter r el ated par ts 3. O pe r a ti ona l Mode l : Di s hw a s hi ng S ystem I nputs : P r ocesses: O utput: Di s h deter gent S c r a pi ng off food Cl ean di shes W ater Loa di ng r a c k s E le c tr ic ity W a s hi ng Di r ty di s he s Unl oa di ng Ha l f-e a te n di nne r 4. The cost m anagem ent i nfor m ati on system i s si m i l ar i n that i t has i nte r r e

l

ated

par

ts:

pr

ocesses,

objecti

ves,

i

nputs,

and


outputs.Thedifferencesare:inputs aree c onom i c e ve nts a nd the r e a r e us e r s of i nfor m ation.Theoutputofthe costmanagement system pr oduces user acti ons. O utput can actasthebasis foractionorcanconfirm that acti ons al r eady taken had the i ntended effects.


Exe r c i s e 2.10 1. a. I nter r el ated par ts: Cos t a c c ounti ng pe r s onne l , c om pute r , pr i nte r b. P r ocesses: Cost assi gnm ent: m ater i al s, l abor , and over head c. O bjecti ves: Cos ti ng out of pr oduc ts d. I nputs : Di r ect m ater i al s, di r ect l abor , depr eci ati on, pow er and m ater i al s ha ndl i ng e. O utputs : P r oduc t c os t r e por t f. User acti ons: S ubm i s s i on of a bi d, m a k e -or -buy de c i s i on 2. O pe r a ti ona l Mode l : Cos t Ac c ounti ng S ys te m I nputs : Di r e ct m ater i al s Di r ect l abor Depr eci ati on P ow e r

P r ocesses: Cost assi gnm ent: Di r ect m ater i al s Di r ect l abor O ver head

O utput: P r oduc t c os t Bi ddi ng de c i s i on Make -or -buy de c i s i on

Mater i al s ha ndl i ng 3. The i nputs c ons i s t of onl y pr oduc ti on c os ts s ugge s ti ng a tr a di ti ona l pr oduc t c os t de fi ni ti on.

Exe r c i s e 2.11 a. Di r ect tr aci ng b. Al l oc a ti on c. Di r ect tr aci ng d. Di r ect tr aci ng e. Dr i ve r tr a c i ng; pote nti a l dr i ve r —m a c hi ne hour s or m a i nte na nc e hour s f. Di r ect tr aci ng g. Di r ect tr aci ng h. Alloc a tion i. Dr i ve r tr a c i ng; pote nti a l dr i ve r —num be r of or de r s j. Dr i ve r tr aci ng; pote nti a l dr i ve r —num be r of e ngi ne e r i ng hour s k. Alloc a tion


l. Dr i ve r tr a c i ng; pote nti a l dr i ve r —num be r of e m pl oye e s or di r e c t l a bor hour s m. Alloc a tion n. Al l oc a ti on


E xer c ise 2.12 a. V a l ue -c ha i n. Thi s is a str ategi c deci si on andinvolvesactivitiesandcosts thr oughout the e nti r e va l ue c ha i n. b. O pe r a ti ng. At thi s poi nt, the c os ts of de s i gnanddevelopmentaresunkcosts; thedeci s i on to pr oduc e s houl d c ons i de r the c os ts of production,marketing, andservicingthe pr oduc t. c . V a l ue -chai n. The pr i c e ne e ds to c ove r a l l pr oductcosts,includingthecosts ofdevel opi ng, s e l l i ng, a nd s e r vi c i ng. d. P r oduc t. Thi s a ppr oa c h i s m a nda te d for e x te r na l r e por ti ng. e . V a l ue -chai n. P r oduc t m i x de c i s i ons s houl d considerallcostsandthemix thatisthem os t pr ofi ta bl e i n the l ong r un s houl d be s e l e c te d. f. O pe r a ti ng. The de s i gns s houl d be dr i ve n by the e ffe c t the y ha ve on pr oduc- ti on, m a r k e ti ng, a nd s e r vi c i ng c os ts . Thus , the ope r a ti ng c os t de fi ni ti on i s the m ost r el evant. g. P r oduc t. Thi s a ppr oa c h i s m a nda te d for e x te r na l r e por ti ng. h. O pe r a ti ng. Resear ch and desi gn costs ar e notrelevantforapricedecision involvi ng a n e x i s ti ng pr oduc t. P r oduc ti on, m a r k e ting,andservicingcostsare relevant, how ever . i . O pe r a ti ng. Any s pe c i a l or de r s houl d c ove r i tscostswhichpotentiallyinclude produc ti on, m a r k e ti ng, a nd s e r vi c i ng c os ts .

E xer c ise 2.13 1. 2.

Di r ect m ater i al s used = $ 25, 900 + $ 256, 900 – $ 18 , 000 = $ 264, 800 Di r ect m ater i al s ................................ ................................ .............. Di r ect l abor ................................ ................................ ..................... O ver head ................................ ................................ ......................... Tota l m a nufa c tur i ng c os t ................................ .............................. Add: Be gi nni ng W I P ................................ ................................ ....... Le s s : E ndi ng W I P ................................ ................................ ........... Cos t of goods m a nufa c tur e d ................................ ........................

$ 264, 800 176, 000 3 08 , 40 0 49, $7 200 4 4 ,7 002 , 7 (2 ) $700 71, 200


E xer c ise 2.12Uni t c os t of goods m a nufa c tur e d = $ 7 71, 200 / 4 0, 000 = $ 19. 28


Exe r c i s e 2.13 (Concluded) 3. Di r ect l abor = P r oduc t c os t – Di r ect m ater i al s – O ver head = $ 19. 28 – $ 6. 62 – $ 7. 71 = $ 4. 95 P r i m e cost = Di r ect m ater i al s + Di r ect l abor = $ 6. 62 + $ 4. 95 = $ 11. 57 Conve r s i on c os t = Di r ect l abor + O ver head = $ 4. 95 + $ 7. 71 = $ 12. 66

Exe r c i s e 2.14 1. Be gi nni ng i nve ntor y + P ur c ha s e s – E ndi ng i nve ntor y = Di r ect m ater i al s used $ 2, 500 + $ 78, 300 – E ndi ng i nve ntor y = $ 73, 500 E ndi ng i nve ntor y = $ 7, 300 2. Uni ts i n be gi nni ng fi ni s he d goods i nve ntor y = $ 3 , 422 / $ 5. 90 = 580 S i nce 14 , 000 uni ts w er e m anufactur ed and 580wereinbeginningfinished goodsinve ntor y, 14, 580 uni ts w er e avai l abl e for sal e.But14,120unitswere sold,soendingfi ni s he d goods i nve ntor y i s 460 . 3. Cos t of goods m a nufa c tur e d = $ 349, 000 + $ 116 , 000 – $ 117, 300 = $ 347, 700 4. P r i m e cost = $ 55 = Di r ect m ater i al s + Di r ect l abor Di r ect m ater i al s = $ 55 – Di r ect l abor Conve r s i on c os t = $ 84 = Di r ect l abor + O ver head O ver head = $ 84 – Di r ect l abor


P r oduc t c os t = ($ 55 – Di r ect l abor ) + Di r ect l abor + ($ 84 – Di r ect l abor ) = $ 105 Di r ect l abor = $ 34 Di r ect m ater i al s + Di r ect l abor = $ 55 Di r ect m ater i al s + $ 34 = $ 55 Di r ect m ater i al s = $ 21 5. Tota l m a nufa c tur i ng c os ts + BW I P – E W IP = COGM $ 412, 000 + $ 76, 000 – EW I P = $ 434, 000 EW I P = $ 54, 000 P r i m e cost + O ver head = Total m anufactur i ng costs $ 64, 000 + O ver head = $ 412, 000 O ver hea d = $ 348, 000


Exe r cE ixer s ec ise 2.11 2.11 1. Le Ma ns Com pa ny S ta te m e nt of Cos t of G oods Ma nufa c tur e d For the Month of J une Di r ect m ater i al s: Be gi nni ng i nve ntor y ................................ Add: P ur c ha s e s ................................ .................. ......................... Mater i al s avai l abl e ................................ ..................... Le s s : E ndi ng i nve ntor y Di r................................ ect m a te r i a l s us e d i n pr oduc ti on ............. .............................. Di r ect l abor ................................ ................................ ...... Ma nufa c tur i ng ove r he a d ................................ ................ Tota l m a nufa c tur i ng c os ts a dde d ................................ Add: Be gi nni ng w. or k i n pr oc e s s ................................ ... k i n pr oc e s s ................................ Le s s : E ndi ng w or ....... Cos t of goods m a nufa c tur e d ................................ .........

$ 62, 400 346 , 000 $ 408, 400 63 , 0 00 $ 3 45, 4 00 143 , 000 3 75, 800 $ 864, 200 33, 9 00 (3 7 , 500 $ )860, 6 00

2. Le Ma ns Com pa ny S ta te m e nt of Cos t of G oods S ol d For the Month of J une Cos t of goods m a nufa c tur e d ................................ ............................... $ 860 ,6 00 Add: Be gi nni ng fi ni s he d goods i nve ntor y ................................ 55, 6 00 .......... Cos t of goods a va i l a bl e for s a l e ................................ $ 916, 200 .......................... Le s s : E ndi ng fi ni s he d goods i nve ntor y ................................ 50, 800 .............. Cos t of goods s ol d ................................ ................................ ............... $ 865, 400


Exe r cE ixer s ec ise 2.12 2.12 1. Uni ts e ndi ng fi ni s he d goods = 3, 400 + 3 0, 000 – 31 , 000 = 2, 400 Fi ni s he d goods e ndi ng i nve ntor y = 2, 400 × $ 39 * = $ 93, 600 * S i nc e the uni t c os t of be gi nni ng fi ni s he d goodsandtheunitcostofcurrent producti on both e qua l $ 39 , the uni t c os t of e ndi ng fi ni s he d goods m us t a l s o e qua l $ 39 . 2. Kilde e r Com pa ny S ta te m e nt of Cos t of G oods S ol d For the Year E nded Decem ber 31 Cos t of goods m a nufa c tur e d ($ 39 × 3 0 , 000) ................................ $ 1, 170, 000 ...... Be gi nni ng fi ni s he d goods i nve ntor y................................ Add: 132, 600 .......... Cos t of goods avai l abl e for sal e ................................ $ 1, 302, 600 .......................... Le s s : E ndi ng fi ni s he d goods i nve ntor y................................ 93, 600 .............. Cos t of goods s ol d ................................ ................................ ............... $ 1, 209, 000 3. Kilde e r Com pa ny I nc om e S ta te m e nt: Abs or pti on Cos ti ng For the Year E nded Decem ber 31

P er cent

S al es (31 , 000 × $ 5 2 ) ................................ .................. $ 1, 612 ,0 0 0 100. 00 Cos t of goods s ol d ................................ ................... 1, 209, 000 75. 00 G ros s ma rgi n ................................ ............................ $ 403, 000 25. 00 Less oper ati ng expenses: Com m i s s i ons (31 , 000 × $ 1. 30 ) ........................... $ 40, 300 Adver ti si ng co-pa ys ................................ ............ 95, 000 Adm i ni str ati ve expenses ................................ .... 183 , 000 3 18, 300 19, 75 O pe r a ti ng i nc om e ................................ ..................... $ 84, 700 5. 25


Exe r cE ixer s ec ise 2.13 2.13 1. Angl i n Com pa ny S ta te m e nt of Cos t of G oods Ma nufa c tur e d For the Year E nded Decem ber 31 Di r ect m ater i al s: Be gi nni ng i nve ntor y ................................ Add: P ur c ha s e s ................................ .................. ......................... Fr e i ght-i n on m a te r i a l s ..... Mater................................ i al s avai l abl e ................................ ..................... Le s s : E ndi ng i nve ntor y Di r................................ ect m ater i al s used i n pr oduc ti on ............. .............................. Di r ect l abor ................................ Ma nufa c tur i ng ove ................................ ......r he a d: Fa c tor y s uppl i e s ................................ ........................

Fa

c

tor

y

utilitie

s

................................ .......................... Fa c tor y s upe r vi s i on a nd i ndi r e c t l a bor ................... Mater Tota l ove r he a d c os ts ................................ i al s handl ..................... ................. Tota lm a nufai cng tur................................ i ng c os ts a dde d ................................ Add: Be gi nni ng w. or k i n pr oc e s s ................................ ... k i n pr oc e s s Le s s : E ndi ng w or ................................ Cos t of goods m a ....... nufa c tur e d ................................ .........

$ 37, 200 378, 890 7, 500 $ 423, 590 34, 600 $ 388, 990 495, 900 $ 18, 500 54, 000 165, 000 16, 900 254, 400 $ 1, 139, 290 201, 000 (117, 4 00 ) 222, 890 $ 1,

2. Angl i n Com pa ny S ta te m e nt of Cos t of G oods S ol d For the Year E nded Decem ber 31 Cos t of goods m a nufa c tur e d ................................ $ 1, 222, 890 ............................... Add: Be gi nni ng fi ni s he d goods i nve ntor y ................................ 59, 200 .......... Cos t of goods a va i l a bl e for s a l e ................................ $ 1, 282, 090 .......................... Le s s : E ndi ng fi ni s he d goods i nve ntor y ................................ 62, 700 .............. Cos t of goods s ol d ................................ ................................ ............... $ 1, 219, 390


Exe r cE ixer s ec ise 2.14 2.14 1.

2.

Be gi nni ng i nve ntor y, m a te r i a l s ................................ $ 1, 050 ..................... 11 , 4 +E P ndi ur chases ................................ ................. 50 – ng i nve ntor y, m a te r i a ................................ l s ................................ (9 50 ..................... Mater i al s used i n ser vi ce pr ovi si on ................................ ............. $ 11,) 55 0 P r i m e cost = $ 11, 550 + $ 2 5, 57 0 = $ 3 7, 120

3. Conve r s i on c os t = $ 2 5, 57 0 + $ 1 8, 13 0 = $ 4 3, 70 0 4. Di r ect m ater i al s ................................ ................................ .............. $ 11 , 5 502 5 , 57 Di r ect l abor ................................ ................................ ..................... 0 8, 13 O ver head ................................ ................................ ........................ 1 Cost of ser vi ces ................................ ................................ ............. $ 05 5, 250 5. S end i t P acki ng I ncom e S tatem ent For the Month E nde d Ma y 3 1 S al es r evenues ................................ ................................ ..................... $ 102 ,1 00 Cost of ser vi ces sol d ................................ ................................ ........... 5 5, 25 0 G ros s ma rgi n ................................ ................................ ........................ $ 46 ,8 5 0 O per ati ng expenses: Adve r ti s i ng ................................ ................................ ....................... (2, 750 )(5, 105 Fr anchi se fee (0. 05 Ă— $ 102, 100) ................................ ) (3 , ...................... O the r a dm i ni str ati ve expense s 65 345 0) O pe r a ti ng i nc om e...................... ................................ ................................ $ 35, ................................ ................. 6 . Cl ear l y, the r ent, i nsur ance, and uti l i ti esareindirectcosts.Nomatterhow many packages Lakeesha and her w or ker s package andsendofffordelivery, therent, utilitie s , a nd i nsur ance w i l l be the s a m e . TheamountpaidtoUPS andFedEx,however, for the package del i ver y i s a di r ect cost. Thisamount, whichiscollectedbySenditP acki ng, i s a di r ect cost of each package. I t w ill changefrommonthtomonthaccordingto thatcustom e r s dr op off.

thenumberandtypeofpackages


Exe r cE ixer s ec ise 2.15 2.15 1. S hel l y i s i nter ested i n the m anufactur i ng costsofGlaxane.Inparticular,the costs of di r ect m ater i al s, di r ect l abor , and over headwillbecalculatedto budgetforGlaxa ne pr oduc ti on. 2. Lesl i e w i l l be concer ned w i th al l costs al ong the val ue chai n. Cl ear l y, the a fte r -sal e costs w i l l be an i m por tant factor i n pr icingsincethepotentialfor fatalside effects w i l l l ead to both l aw sui ts and the w i thdrawalofGlaxane fromthemarket.How ever , Lesl i e m ust al so be concer ned w i th the costsof research,development,andpr oducti on si nce phar m aceuti cal com pani es a tte m pt to l i nk a l l of these costs to a dr ug to justi fy thei r pr i ci ng str ategi es. 3. Dante w i l l be pr i m ar i l y concer ned w i th the overallresearchanddevelopment costsa nd the e ve ntua l r e ve nue fr om the s uc c e s s ful drugs.Anyindividualpo- tentialdrugcan tur n out to ha ve no va l ue a s l ong as som e dr ug pr ojects ar e successful and can justi fy the total effor ts.

E xer c ise 2.20 1. G i ve n the de s c r i pti on pr ovi de d, i t appear s that Jazon uses a tr a di ti ona l cost m anagem ent system . Fi r st, pr oduct costs ar e deter m inedonlybyproduction costs.Apparentl y, the fi na nc i a l a c c ounti ng s ys te m i s dr i vi ngthetypeof productcostinformationbei ng pr oduc e d. S e c ond, onl y di r e c t l a bor hour s,a unit-baseddriver,areusedtoassign over head costs. S i nce m any over head costs ar e l i kel y to be caused by nonuni t dr i ver s, thissuggestsastrong relianceonalloca ti on for c os t a s s i gnm e nt. Thi r d, the c om pa ny’scontrol systemfocusesondepartm ental , r ather than fi r m -w i de , pe r for m a nc e a nd r el i es on fi nanci al m easur es. 2. P r oduc t c os ti ng a c c ur a c y c a n be i m pr ove d by placingmoreemphasison tracingandless on a l l oc a ti on. The r e i s e nough i nfor m a ti on providedtoreveal thatthetwoproductsm ake qui te di ffer ent dem ands on cer tai n acti vi ti es. S etup, r ecei vi ng, and pur chasi ng r esour ces ar e consum ed di ffe r e ntl y by the tw o pr oduc ts , a nd i t i s doubtful tha t di r e c t laborhourswouldhaveanything todowith the tw o pr oduc ts ’ pa tte r ns of r e s our c e c ons umptionforthese threeactivities.Thus, usi ng acti vi ty dr i ver s that better r efl ect the di ffer enti al r e s our c e c ons um pti on w oul d i m pr


Exe r cE ixer s ec ise 2.16 2.16 ove the c os t a s s i gnm e nts . J a zon w ould needtoassigncoststotheactivities usi ng di r ect tr aci ng and r esour ce dr i ve r s a nd the n a s s i gn the c os t of the a c ti vi ti e s to thetwoproductsusing activitydrivers.J a zon a l s o s houl d c ons i de r the pos s i bi l i ty ofcomputing different—moremanageriall y r el evant—pr oduct costs such as val ue -c ha i n costs and oper ati onal costs.


3. J a zon w oul d ne e d to c ha nge i ts c ontr ol foc us frommanagingcoststomanagingactiviti e s . Thi s w oul d e nta i l s hi fti ng em phasi s fr om depar tm ental pe r- for m ance m axi m i zati on to system -w i de pe r for m a nc e m a x i m i za ti on.Tobring aboutthischange,Jazonwill ne e d to pr ovi de de ta i l e d i nfor m a ti on c onc e rning activities.Sinceactivitiescause costs, m anagi ng acti vi ti es i s a m or e l ogi cal a ppr oa c h to c ontr ol l i ng costs.

Exe r c i s e 2.21 1. 2.

3.

Di r ect m ater i al s used = $ 68 ,0 00 + $ 278 , 000 – $ 70, 400 = $ 275, 600 Di r ect m ater i al s ................................ ................................ .............. Di r ect l abor ................................ ................................ ..................... O ver head ................................ ................................ ........................ Tota l m a nufa c tur i ng c os t ................................ .............................. Add: Be gi nni ng w or k i n pr oc e s s ................................ .................. Le s s : E ndi ng w or k i n pr oc e s s ................................ ...................... Cos t of goods m a nufa c tur e d ................................ ........................ Uni t c os t of goods m a nufa c tur e d = $ 977, 000 / 10 0 , 000 = $ 9. 77 Di r ect l abor pe r uni t = $ 9. 77 – $ 2. 70 – $ 5. 30 = $ 1. 77 P r i m e cost = $ 2. 70 + $ 1. 77 = $ 4. 47 Conve r s i on c os t = $ 1. 77 + $ 5. 30 = $ 7 .0 7

$ 275, 600 189 , 000 523 , $000 987, 600 29, 400 (40, 000 $ )977, 000

Exe r c i s e 2.22 1.

2.

Cos t of goods m a nufa c tur e d ................................ ........................ Add: Be gi nni ng fi ni s he d goods i nve ntor y ................................ ...s he d goods i nve ntor y ................................ Le s s : E ndi ng fi ni ....... Cos t of goods s ol d ................................ ................................ ........

$ 9 77 , 000 43, 200 42, 100 $ 9 78, 100

E lle r s on Com pa ny I ncom e S tatem ent S al es ................................ ................................ ................................ ...... $1, 312 , 000 For the Year E nded Decem ber Cos t of goods s ol d ................................31 ................................ ............... 9 78, 100 G ros s ma rgi n ................................ ................................ ........................ $ 333, 900 Less: S el l i ng and adm i ni str ati ve expense s ................................ 2 04, 6 00 .......


O pe r a ti ng i nc om e ................................ ................................ .................

$ 1 29, 300


CPA-TYPE EXERCISES

E xer c ise 2.23 b.

E xer c ise 2.24 b.

E xer c ise 2.25 d.

E xer c ise 2.26 b.

E xer c ise 2.27 c. Di r ect m ater i al s $ 80, 000 Di r ect l abor Fa c tor y ove r he a d Tota l m a nufa c tur i ng c os ts

40, 000 74, 000 $194, 000 Cos t of goods m a nufa c tur e d e qua l s $ 1 9 4 , 0 0 0 s i nc e be gi nni ng a nd e ndi ng i nve n- tor i e s of w or k i n pr ocess w er e zer o. E ndi ng fi ni s he d goods i nventor y = $194, 000 + $9, 650 - $174, 600 = $29, 050


PROBLEM S Problem 2.28 1. Di r ect m ater i al s = $124, 000 + $250, 000 – $102, 000 = $272, 000 2. P r i m e cost = $272, 000 + $140, 000 = $412, 000 3.

Fi r st, cal cul ate total over head cost: $ 45, 000 Depr ec i a ti on on fa c tor y e qui pm e nt ................................ .......... De pr e c i a ti on on fa c tor y bui 30, 000 Fa tor................................ y i ns ur a nc e ................................ ................................ 15, 000 l dicng .............. ...... Factor y pr oper ty taxes ................................ .............................. 20, 000 Fa c tor y utilitie s ................................ ................................ .......... 34, 000 I ndi r ect l abor sal ar i es ................................ 156, 000 ................................ Tota l ove r he a d ................................ ................................ ........... $300, 000 Conver si on cost = $140, 000 + $300, 000 = $44 0, 000

4.

Br ody Com pa ny S ta te m e nt of Cos t of G oods Ma nufa c tur e d Di r ect m ater i al s ................................ ................................ For Last Year .............. Di r ect l abor ................................ ................................

$ 272, 000 140, 000 ..................... O ver head ................................ ................................ ........................ 300, 000 Tota l m a nufa c tur i ng c os t ................................ $ 712, 000 .............................. Add: Be gi nni ng w or k i n pr oc e s s ................................ 124, 000 .................. Less: E ndi ng w or k i n pr ocess ................................ ...................... (130, 000 Cos t of goods m a nufa c tur e d ................................ ........................ $)706, 000 Uni t pr oduct cost = $706, 000/ 100, 000 uni ts = $7. 06 5.

Br ody Com pa ny S ta te m e nt of Cos t of G oods S ol d For Last Year Cos t of goods m a nufa c tur e d ................................ ........................ Add: Be gi nni ng i nve ntor y, Fi ni s he d goods Less: E................................ ndi ng i nve ntor y,. Fi ni s he d goods ................................ ..... Cos t of goods s ol d ................................ ................................ ........

$706, 000 84, 000 (82, 000 ) $708, 000


Problem 2.28 (Concluded ) 6.

Fi r st, com pute sel l i ng expense and adm i ni str ati ve $ 1, 800 expense: Utilitie s , s a le s offic e ................................ ................................ ... S al es offi ce sal ar i es 90, 000 Sa l es com m i ssi ................................ ons ($1, 200, 000 Ă— 0. 60, ................................ ... 05) ................................ ... 000 S el l i ng expense ................................ ................................ .......... $ 151, 800 Depr eci a ti on on he a dqua r te r s bui l di ng $ 50, 000 ................................ ... P r oper ty taxes, headquar ter s ................................ .................... 18, 000 Adm i ni str ati ve sal ar i es ................................ 150, .............................. 000 Adm i ni str ati ve expense ................................ ............................. $218, 000 Br ody Com pa ny I nc om e S ta te m e nt For Last Year

S al es ................................ .............................. Cos t of goods s ol d G ros s ma rgi n ................................ ................................ ....... ................ Less: O per ati ng expenses S el l i ng expense s ................................ ..... Adm i ni str ati ve expense s ........................ O pe r a ti ng i nc om e ................................ .........

$ 151, 800 218, 000

$ 1, 200, 000708, 000 000 $ 492,

P er cent 100. 00 59. 00 41. 00

369, 800 200 $ 122,

12. 65 18. 17 10. 18


Problem 2.29 1. The decision to add plastic cups w as made assumingthatthefixedcostpool would remain unchanged. How ever, management failed to realize that additional demands on activities w ould be made by the new productline.Their failuretorecognize this w as due to the fact that they did not understandthat costscanbedrivenby factors that are unrelated to the number of units produced.Forexample,materials handling costs are apparently driven by the number of moves, inspection costs by the number of batches, purchasing costs by the number of orders, and accounting costs by the number of transactions. Demand

for

these

activities

increased

and

so

supply

of

the

activitieshadtobeincreased;each activity evidently did not have enough idle capacity to handle the increased demands. 2. An activity-based cost management system provides information about both unitbased and non-unit-based drivers and is concerned w ith tracing these costs to the individual product lines. Using this system, the need for additional resources w ould have been revealed, leading to a better decision. Because previously, the factory had made only one type of product, it surely did not have an ABC system, and did not need one. Now , it is unlikely that the significant cost of installing such a system w ould be w orth it. Instead, the company’s accountant could use his/her knowledgeofABCconceptstowork withall departments to figure out w hich activities and costs w ould increase due to the addition of the plastic cups line. This w ay, the heads of production, the materials storeroom, purchasing, inspection,

and

accountingcouldhave

suggestedtheneed

for

additional

resources. These resource costs could then have been incorporated into the planning for the additional product, leading to a better decision.


Problem 2.30 1. Tr a di ti ona l Cost S ystem : a. I nter r el ated par ts: Cos t a c c ounti ng s ta ff, c om pute r , pr i nte r b. P r ocesses: Cost assi gnm ent: Di r ect tr aci ng: Mater i al s, l abor Dr i ve r tr a c i ng: None Al l oc a ti on (us i ng di r e c t l a bor hour s for a s s i gn- m ent): S etup costs, pur chasi ng costs, m ater i al s ha ndl i ng c os ts , pl a nt de pr eci ati on c. O bjecti ves: Cos ti ng out of pr oduc ts d. I nputs : Di r ect m ater i al s cost, di r ect laborcost,setupcost, pur chasi ng cost, m ater i al s ha ndl i ng c os t, pl a nt de- pr eci a ti on e. O utputs : P r oduc t c os t r e por t f. User acti ons: S ubm i s s i on of a bi d, m a k e -or -buy de c i s i on Note : A tr a di ti ona l s ys te m w oul d not us e non-uni t-dr i ver s such as num be r of setups, m oves, and or der s to assi gn over head costs to pr oducts. Thi s l eaves di r e c t l a bor hour s , a uni t-based dr i ver , as the onl y possi bi l i ty. S i nce di r ect l a- bor hour s i s not a good dr i ve r for the ove r he a d a c ti vi ti e s l i s te d, the n a l l oc a- ti on i s the pr i nc i pa l m e a ns of c os t a s s i gnm e nt. Fur the r m or e , a tr aditional costsystemwouldnotassignsal es or ser vi ce costs to pr oducts, so these tw o i te m s c a nnot be i nputs for the s ys te m . Ac ti vi ty-Based Cost S ystem : a. I nter r el ated par ts: Cos t a c c ounti ng s ta ff, c om pute r , pr i nte r b. P r ocesses: Cost assi gnm ent: Di r ect tr aci ng: m ater i al s, l abor

c. O bjecti ves: d. I nputs :

Dr i ve r tr a c i ng: S e tup c os ts (num be r of s e tups ), pur c ha s i ng c os ts (num be r of or de r s ), m a te r i a l s ha ndl i ng c os ts (num be r of (uni ts ssol ser m ove ), cd), om mvii sces costs i ons (num ber of com pl ai nts) Al l oc a ti on: P l a nt de pr e c i a ti on (di r e c t l a hour s ) Cos ng out pr oduc Dibor r ect m ater i al sti cost, di of r ect l abortscost, setup cost, pur chasi ng cost, m ater i al s ha ndl i ng c


si ons, custom er se r vi ce cost, pl ant depr eci ati on


Problem 2.30 (Continued) 2. The differences betw een the tw o systems are foundintheprocesses.TheABC systemis driver-intensive; non-unit drivers are used to trace costs to products, w hereas this is not part of the traditional system (w hichisallocation-intensive). TheABC system also assigns marketing and customer service costs to products, giving a more comprehensive view of product costs. Thus, althoughboth systemsprovideproduct cost reports, the content of the reports w ill differ. The increased accuracy of cost assignments because of driver tracing and the additional marketing and customer service cost information provided by the ABC systemshouldincreasethequalityof the bidding and make-or-buy decisions (i.e., reduce the error in decisions of this type). 3 . O pe r a ti ona l Mode l : Tr a di ti ona l Cos t Ac c ounti ng S ys te m I nputs P r ocesses O utput Cos ts of: Di r ect m ater i al s Di r ect l abor Di r ect tr aci ng: S e tups Di r ect m ater i al s P ur c ha s i ng Di r ect l abor Mater i al s ha ndl i ng Al l oc a ti on: P l ant depr eci ati on O ver head Cos ti ng out pr oduc t Feedback Ac ti ons E va l ua ti on User s Bi ddi ng de c i s i on, Make -or -buy de c i s i on


Problem 2.30 (Concluded) O pe r a ti ona l IMode nputsl :

ABC Cos t Ac c ounti ng S ys te m P r ocesses

Di r ect tr aci ng: Di r ect m ater i al s Di r ect l abor Al l oc a ti on: P l ant depr eci ati P l ant depr eci ati on on Dri ve r tra c i ng: S e tups S e tups P ur chasi ng P ur c ha s i ng Mater i al s ha ndl i Mater i al s ha ndl i ng ng Com m i s s i ons Com m i s s i ons Custom er ser vi Custom er ser vi ce ce

O utput

Cos ts of: Di r ect m ater i al s Di r ect l abor

Feedback

Cos ti ng out pr oduc t

Ac ti E va l ua ti on User s ons Bi ddi ng de c i s i on, Make -or -buy de c i s i on

4 . The oper ati onal m odel s r eveal that the ABC cost system i s m or e com pl ex, r e qui r e s m or e i nputs , and uses m or e com pl i cate d pr ocesses totransformthe inputs.Thus,wewouldex pe c t thi s s ys te m to be m or e c os tl

y

to

ope

r

a

te

.On

theotherhand,theincreasedcomplexi

typrovidesincreasedaccuracyanda riche r s e t of pos s i bl e pr oduc t c os t de fi ni ti ons . TheABCsystemcanprovide bothtraditiona l a nd ope r a ti ng pr oduc t c os t i nfor m a ti on. Boththesefactors shouldprovideanadva nta ge w he n i t c om e s to m a na ge r i a l de c i s i on m aking. (Thecostofmakingbaddecisionsis reduced.)ChoosingtheABCsystem depends on w he the r the be ne fi ts of i m pr ove d de c i s i on m a k i ng outw e i gh the i ncr eased m easur e m ent costs.


Problem Problem 2.24 2.24

Tr a di ti ona l Contr ol S ys te m : Ac ti ons Justi fi cati on a P e r for m a nc e , or ga ni za ti ona l s ubuni t; m a na gi ng c os ts b Re w a r ds m a na ge r for s ubuni t pe r for m a nc e d E m phasi zes per for m ance of or ga ni za ti ona l s ubuni t g E m pha s i s on c ontr ol l i ng c os ts j Re w a r d ba s e d on c ontr ol l i ng c os ts (s ubuni t pe r for m a nc e ) l E m pha s i s on c ontr ol l i ng c os ts o E m pha s i s on s ubuni t pe r for m a nc e ; c ontr ol l i ng c os ts Ac ti vi ty-Based Contr ol S ystem : Ac ti ons J us ti fi c a ti on c Ac ti vi ty-ba s e d c os t us e d a s i nput for a c ti vi ty c ontr ol e E m phasi s on acti vi ty anal ysi s f E m phasi s on m anagi ng acti vi ti es (acti vi ty anal ysi s) h Managi ng acti vi ti es i Dr i ver anal ysi s k Dr i ver anal ysi s; acti vi ty m anagem ent m Nonfi nanci al m easur e of pe r for m a nc e n Dr i ver anal ysi s ; acti vi ty per for m ance


Problem Problem 2.25 2.25

S pencer Com pa ny S ta te m e nt of Cos t of G oods Ma nufa c tur e d 1. Di r ect m ater i al For the Year E nded Decem ber s: 31 Be gi nni ng i nve ntor y ................................ ............. $ 290, 000 Add: P ur c ha s e s ................................ .................... 2 , 35 0, 000 Mater i al s a va ila ble ................................ ............... $ 2 , 640 , 000 Le s s : E ndi ng i nve ntor y................................ ........ 112, 000 Di r ect m ater i al s used i n pr oduc ti on ........................ $ 2, 528 , 000 Di r ect l abor ................................ ................................ 1 , 1 00, 000 Ma nufa c tur i ng ove r he a d: I ndi r e c t l a bor ................................ ........................ $ 334 , 000 De pr e c i a ti on, fa c tor y bui l di ng ............................. 525 , 000 Depr eci ati on, factor y equi pm e nt ........................ 416 , 000 P r oper ty taxes on factor y ................................ .... 65, 000 Utilitie s , fa c tor y ................................ .................... 150, 000 I ns ur a nc e on fa c tor y ................................ ............ 200 , 000 1, 690 , 000 Tota l m a nufa c tur i ng c os ts a dde d ............................ $ 5, 318 , 000 Add: Be gi nni ng w or k i n pr oc e s s .............................. 450, 000 Le s s : E ndi ng w or k i n pr oc e s s ................................ .. (750, 000 ) Cos t of goods m a nufa c tur e d ................................ .... $ 5, 018, 000 2. Uni t c os t = $ 5, 018 , 000/ 20 0, 000 = $ 25. 09 3. S pe nc e r Com pa ny I ncom e S tatem ent: Abs or pti on Cos ti ng For the Year E nded Decem ber 31

P er cent

S al es (191, 000* Ă— $36)................................ .... $6, 876, 000 100. 00 Cos t of goods s ol d: Cos t of goods m a nufa c tur e d ................. $5, 018, 000 Add: Be g. fi ni s he d goods i nve ntor y ...... 107, 500 G oods avai l abl e for sal e ......................... $5, 125, 500 Le s s : E nd. fi ni s he d goods i nve ntor y..... 488, 750 4, 636, 750 67. 43 G ros s ma rgi n ................................ ................. $ 2, 239, 250 32. 57


Less: S al2.26 ar y, sal es super vi sor ..................... $ 85, 000 Problem Problem 2.26 Com m i ssi ons, sal esper sons .............. 216, 000 Adve r ti s i ng................................ ........... 500, 000 801, 000 11. 65 Adm i ni str ati ve expenses .................... 390, 000 5. 67 O pe r a ti ng i nc om e ................................ .......... $1, 048, 250 15. 25 * 2, 500 + 200, 000 – 11, 500 = 191, 000 uni ts sol d


Problem Problem 2.27 2.27

1. Mythic , Inc . S ta te m e nt of Cos t of G oods Ma nufa c tur e d For the P r e vi ous Ye ar Di r ect m ater i al s ................................ ................................ ............... $ 5, 000 Di r ect l abor ................................ ................................ ......................30,000a Manufac tur i ng ove r he a d ................................ ................................ . 110 , 000a Totalcurrentmanufacturingcosts ................................ ................ $ 145 , 000 Add: Be gi nni ng w or k i n pr oc e s s ................................ ................... 15, 000 b Le s s : E ndi ng w or k i n pr oc e ss ................................ ....................... (6, 000 )b Cos t of goods m a nufa c tur e d ................................ ......................... $ 154 , 000 a

Conve r s i on c os t = 4 × P r i m e cost $ 14 0, 000 = 4 (Di r ect m ater i al s + Di r ect l abor ) $ 1 4 0, 000 = 4 ($5, 000 + Di r ect l abor ) Di r ect l abor = $ 3 0 , 000 O ve r he a d = Conve r s i on c os t – Di r ect l abor O ver head = $ 1 4 0, 000 – $ 3 0 , 000 O ver head = $ 110 , 000

b

E ndi ng W I P = 0. 4 × Be gi nni ng W I P $ 14 5 , 000 + Begi nni ng W IP – (0. 4 × Be g. W I P ) = $ 154 , 000 Be gi nni ng W I P = $ 1 5, 000 ; E ndi ng W I P = 0. 4 × $ 1 5, 000 = $ 6, 000

2. Mythic , Inc . S ta te m e nt of Cos t of G oods Cos t of goods m a nufa c tur e d ................................ ......................... S ol d Add: Be gi nni ng fi ni s he d goods ................................ ..................... For the P r e vi ous Cos t of goods a va i l a bl e for s a lYear e ................................ .................... Le s s : E ndi ng fi ni s he d goods Cos t of goods s ol ......................... d ................................ ................................ .......... ................................ a b

E ndi ng fi ni s he d goods = $ 176, 400 – $ 169, 400 = $ 7, 000 Cos t of goods s ol d = 1. 10 × $ 154 , 000 = $ 169, 400

$ 154 , 000 22 , 400 $ 176, 400 7, 000 a $ 169, 400 b


Problem Problem 2.28 2.28

1. Ma s on, Dur a nt, a nd W e s tbr ook S tatem ent of Cost of S er vi ces S ol d For the Ye a r E nde d June 30 Di r ect m ater i al s used* ................................ ................................ .......... Di r ect l abor ................................ ................................ ............................ O ver head ................................ ................................ ............................... Total ser vi ce costs added ................................ ................................ .... Add: Be gi nni ng w or k i n pr oc e s s ................................ ......................... Le s s : E ndi ng w or k i n pr oc e s s ................................ ............................. Cost of ser vi ces sol d ................................ ................................ ............

$ 46, 5 00* 1 ,4 00, 100, 000000 $ 1, 546, 5 00 44 , 000 (13, 000 $ 1,)577, 5 00 * Because al l other data for the statem ent ar e given,youcanworkbackwardfrom thecostof ser vi ces sol d to get the di r ect m ater i al s used.Inthistypeoffirm, directmaterials pr obabl y i ncl udes suppl i es such as paper , toner , fi l e fol der s, envel opes, etc. 2. The dom i na nt c os t i s di r e c t l a bor (for the 15 professionals).Althoughlaboris thema jor c os t of pr ovi di ng m a ny ser vi ces, i t i s notalwaysthecase.For example,thedomi nant cost for som e m edi cal ser vi ces m ay be over head (e. g. , CAT scans). I n som e ser vi ces, the dom i nant cost m ay be m ater i al s (e. g. , funer al ser vi ces). 3. Ma s on, Dur a nt, a nd W e s tbr ook I ncom e S tatem e nt For the Ye a r E nde d June 30 S al es (3 , 000 Ă— $ 85 0) ................................ ........................ Cost of ser vi ces sol d ................................ ...................... G ros s ma rgi n ................................ ................................ .. Less oper ati ng expenses: S el l i ng expenses ................................ ....................... $ 65, 000 Adm i ni str ati ve expenses ................................ 25 7, .......... 000 O pe r a ti ng i nc om e ................................ ...........................

$ 2, 55 0, 000 1, 577, 5 00 $ 972, 5 00

3 22, 000 $ 650 , 5 00


Problem 2.34 (Concluded) 4. Services have three attributes that are not possessed by tangible products: (1) intangibility, (2) perishability, and (3) inseparability. Intangibility means that the buyers of services cannot see, feel, hear, or taste a service before it is bought. Perishability means that services cannotbestored.Therefore,there will never be any finished goods inventories, making the cost of services pro- duced equal to cost of services sold. Inseparability means that providers and buyers of services must be in direct contact for an exchange to take place. The average cost of preparing one tax return last year w as $526 ($1,577,500/3,000 returns). How ever, it w ill be difficult for MDW to use this figure in budgeting. Some of its accountants are no doubt more experiencedthan others,capableof completing a return in less time and w ith lessresearch.The returnsthemselves differ in complexity. In addition, the seeminglycontinual changesinthetaxlaw may affect certain of its clients more than others, mak- ing those clients’ returns more difficult to prepare.


Problem 2.35 1. O rma n Com pa ny S ta te m e nt of Cos t of G oods Ma nufa c tur e d For Last Year Di r ect m ater i al s: Be gi nni ng i nve ntor y ................................ .................. $ 3, 450 Add: P ur c ha s e s ................................ ......................... 183, 750 Le s s : E ndi ng i nve ntory ................................ ............. (2, 700 ) Di r ect m ater i al s used i n pr oduc ti on .............................. $ 184, 500 Di r ect l abor ................................ ................................ ...... 138 , 000 Ma nufa c tur i ng ove r he a d: P l ant depr eci ati on ................................ ..................... $ 1 9, 500 S a l a r y, pr oduc ti on s upe r vi s or ................................ .. 4 7 , 000 I ndi r e c t l a bor ................................ .............................. 68, 300 Utilitie s , fa c tor y ................................ .......................... 1 5, 700 Depr eci ati on, factor y e qui pm e nt .............................. 32 , 000 S uppl i e s (0 . 4 Ă— $ 1 8 , 000) ................................ ............ 7 , 2 00 189, 700 Tota l m a nufa c tur i ng c os ts a dde d ................................ . $ 512, 200 Add: Be gi nni ng w or k i n pr oc e s s ................................ ... 13, 250 Le s s : E ndi ng w or k i n pr oc e s s ................................ ....... (28 , 250 ) Cos t of goods m a nufa c tur e d ................................ ......... $ 497, 200

2. O rma n Com pa ny I nc om e S tatem ent: Abs or pti on Cos ti ng For Last Year S al es (90, 500 Ă— $ 10. 50 ) ................................

$ 950, 250

................... Cos t of goods s ol d: $113, 000 497 , y........................ Add: Cos t of goods m a nufa c tur 200, $ 610 G oods avai l abl e for sal e ................................ e d ........................... 200 ........... Le s s : E ndi ng fi ni s he d goods i nve 85, G ros s ma rgi n ................................ ................................ ntor y................... 000 .. Less oper ati ng expenses: S e lling expenses * ................................ ...................... $ 171, Adm inis tr a tive expenses ................................ .......... 400 168, 000 O pe r a ti ng i nc om e ................................ ........................... Be gi nni ng fi ni s he d goods i nve ntor

525 , 200 $ 425, 050

339, 400 $ 85, 650


Problem 2.35

*$ 4 2 , 000 +(0. 6 × $ 1 8, 000) + $75, 000 + $43, 600 = $ 171, 400


2.3 6 PRODUCT COST DEFINITIONS ETHICS CASE 1. The c ons um e r gr oups a r e us i ng a c os t de fi ni tionthatreliesonmanufacturing costs. The phar m aceuti cal com pani es’ defi ni ti on of cost i s based on the va l- ue c ha i n. The y i nc l ude the c os ts of r e s e a r c h a nd de ve l opm e nt, a nd pos s ibly the c os t of s e l l i ng a nd pos

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For the c os t of a l i fe -savi ng dr ug, such as Betaser on, the cost of m a r- k e ti ng w oul d not be r e l e va nt. E i ther a pati ent has a di sease that w oul d be he l pe d by the dr ug, or not. 2. As the a c c ounta nt c om pi l i ng c os ts for the dr ug,itisreasonabletoincludeall costsr el ated to r esear ch, devel opm ent, a nd m a nufactureofthedrug.The relevantcostof sel l i ng a nd de l i ve r i ng the dr ug w oul d a l s o beincluded.Allo- cationofcostsacross the cor por ati on w oul d be l ess defensi bl e. For exa m- pl e , the c om pa ny no doubt ha s a dve r tisingexpendituresthataremore general a nd be ne fi t the c om pa ny a s a w hol e . The s e w ouldbedifficulttotrace tothedrugunder c ons i de r a ti on. Thi s i s a case that suppor ts the need for di- r ect and dr i ver tr aci ng. As a r esul t, the CMA S tatem ent of P r ofessi onal P r a c- ti ce (see Chapter 1) w oul d com e i nto pl ay.Inparticular,competenceand cre dibili ty w oul d be i m por ta nt. Com pe te nc e r e quirestheaccountanttocon- tinuallyde ve l op k now l e dge a nd s k i l l s . Cr e di bi l i ty r e quirestheaccountantto disclosealli nfor m a ti on tha t c oul d a ffe c t the us e r ' s understandingofthein- formationandthe a bi l i ty to m a k e de c i s i ons ba s e d on tha t i nfor m a ti on.

CYBER RESEARCH CASE 2.37 Answ ers w ill vary.


The Collaborative Learning Exercises can be found on the product support site at w w w .cen gag eb rain.com


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