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EXERCISE 1-8   Preparation of a Schedule of Cost of Goods Manufactured and Cost of Goods Sold   (LO3, LO4)

The following cost and inventory data are taken from the accounting records of Eccles Company for the year just completed:

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Required:

1. Prepare a schedule of cost of goods manufactured.
2. Prepare the cost of goods sold section of Eccles Company’s income statement for the year.

EXERCISE 1-9   Product Cost Flows; Product versus Period Costs   (LO2, LO3)

Ryser Company was organized on May 1. On that date the company purchased 35,000 plastic emblems, each with a peel-off adhesive backing. The front of the emblems contained the company’s name, accompanied by an attractive logo. Each emblem cost Ryser Company $2.

During May, 31,000 emblems were drawn from the Raw Materials inventory account. Of these, 1,000 were taken by the sales manager to an important sales meeting with prospective customers and handed out as an advertising gimmick. The remaining emblems drawn from inventory were affixed to units of the company’s product that were being manufactured during May. Of the units of product having emblems affixed during May, 90% were completed and transferred from Work in Process to Finished Goods. Of the units completed during the month, 75% were sold and shipped to customers.

Required:

1. Determine the cost of emblems that would appear in each of the following accounts at May 31:
   1. Raw Materials.
   2. Work in Process.
   3. Finished Goods.
   4. Cost of Goods Sold.
   5. Advertising Expense.
2. Specify whether each of the above accounts would appear on the balance sheet or on the income statement at May 31.

EXERCISE 1-10   Using Cost Terms   (LO2, LO5, LO7)

Following are a number of cost terms introduced in the chapter:

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Choose the term or terms above that most appropriately describe the cost identified in each of the following situations. A cost term can be used more than once.

1. Crestline Books, Inc., prints a small book titled The Pocket Speller. The paper used to the manufacture the book would be called direct materials and classified as a __________. In terms of cost behavior, the paper could also be described as a __________ with respect to the number of books printed.
2. Instead of compiling the words in the book, the author hired by the company could have earned considerable fees consulting with business organizations. The consulting fees forgone by the author would be called __________.
3. The paper and other materials used in the manufacture of the book, combined with the direct labor cost involved, would be called __________.
4. The salary of Crestline Books’ president would be classified as a __________.
5. Depreciation on the equipment used to print the book would be classified by Crestline Books as a __________. However, depreciation on any equipment used by the company in selling and administrative activities would be classified as a __________. In terms of cost behavior, depreciation would probably be classified as a __________ with respect to the number of books printed.
6. A __________ is also known as an inventoriable cost, since such costs go into the Work in Process inventory account and then into the Finished Goods inventory account before appearing on the income statement as part of cost of goods sold.
7. Taken together, the direct labor cost and manufacturing overhead cost involved in producing books would be called __________.
8. Crestline Books sells the book through agents who are paid a commission on each book sold. The company would classify these commissions as a __________. In terms of cost behavior, commissions would be classified as a __________.
9. Several hundred copies of the book were left over from the previous edition and are stored in a warehouse. The amount invested in these books would be called a __________.
10. Costs are often classified in several ways. For example, Crestline Books pays $4,000 rent each month on the building that houses its printing press. The rent would be part of manufacturing overhead. In terms of cost behavior, it would be classified as a __________. The rent can also be classified as a __________ and as part of __________.

EXERCISE 1-11   Cost Classification   (LO5, LO6)

Various costs associated with manufacturing operations are given below:

1. Plastic washers used in assembling autos.
2. Production superintendent’s salary.
3. Wages of workers who assemble a product.
4. Electricity to run production equipment.
5. Janitorial salaries.
6. Clay used to make bricks.
7. Rent on a factory building.
8. Wood used to make skis.
9. Screws used to make furniture.
10. A supervisor’s salary.
11. Cloth used to make shirts.
12. Depreciation of cafeteria equipment.
13. Glue used to make textbooks.
14. Lubricants for production equipment.
15. Paper used to make textbooks.

Required:

Classify each cost as either variable or fixed with respect to the number of units produced and sold. Also indicate whether each cost would typically be treated as a direct cost or an indirect cost with respect to units of product. Prepare your answer sheet as shown below:

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EXERCISE 1-12   Classification of Costs as Variable or Fixed and as Selling and Administrative or Product   (LO2, LO5)

Below are listed various costs that are found in organizations.

1. The costs of turn signal switches used at a General Motors plant. These are one of the parts installed in the steering columns assembled at the plant.
2. Interest expense on CBS’s long-term debt.
3. Salespersons’ commissions at Avon Products, a company that sells cosmetics door to door.
4. Insurance on one of Cincinnati Milacron’s factory buildings.
5. The costs of shipping brass fittings from Graham Manufacturing’s plant in New Hampshire to customers in California.
6. Depreciation on the bookshelves at Reston Bookstore.
7. The costs of X-ray film at the Mayo Clinic’s radiology lab.
8. The cost of leasing an 800 telephone number at L. L. Bean. The monthly charge for the 800 number is independent of the number of calls taken.
9. The depreciation on the playground equipment at a McDonald’s outlet.
10. The cost of mozzarella cheese used at a Pizza Hut outlet.

Required:

Classify each cost as either variable or fixed with respect to the number of units produced and sold. Also classify each cost as either a selling and administrative cost or a product cost. Prepare your answer sheet as shown below, placing Xs in the appropriate columns.

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EXERCISE 1-13   Classification of Costs   (LO1, LO2, LO5, LO7)

Several years ago Medex Company purchased a small building adjacent to its manufacturing plant in order to have room for expansion when needed. Since the company had no immediate need for the extra space, the building was rented out to another company for a rental revenue of $40,000 per year. The renter’s lease will expire next month, and rather than renew the lease, Medex Company has decided to use the building itself to manufacture a new product.

Direct materials cost for the new product will total $40 per unit. It will be necessary to hire a supervisor to oversee production. Her salary will be $2,500 per month. Workers will be hired to manufacture the new product, with direct labor cost amounting to $18 per unit. Manufacturing operations will occupy all of the building space, so it will be necessary to rent space in a warehouse nearby in order to store finished units of product. The rental cost will be $1,000 per month. In addition, the company will need to rent equipment for use in producing the new product; the rental cost will be $3,000 per month. The company will continue to depreciate the building on a straight-line basis, as in past years. Depreciation on the building is $10,000 per year.

Advertising costs for the new product will total $50,000 per year. Costs of shipping the new product to customers will be $10 per unit. Electrical costs of operating machines will be $2 per unit.

To provide funds to purchase materials, meet payrolls, and so forth, the company will have to liquidate some temporary investments. These investments are presently yielding a return of $6,000 per year.

Required:

Prepare an answer sheet with the following column headings:

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List the different costs associated with the new product decision down the extreme left column (under Name of the Cost). Then place an X under each heading that helps to describe the type of cost involved. There may be X’s under several column headings for a single cost. (For example, a cost may be a fixed cost, a period cost, and a sunk cost; you would place an X under each of these column headings opposite the cost.)