Problems

PROBLEM 1-14A Classification of Salary Cost (LO2)

You have just been hired by Luxmor Corporation to fill a new position that was created in response to the upcoming launch of a newly developed product. It is your responsibility to design an advertising campaign for this product’s debut in Mexico and Central America.

The company is unsure how to classify your annual salary in its cost records. The company’s cost analyst says that your salary should be classified as a manufacturing (product) cost; the controller says that it should be classified as a selling expense; and the president says that it doesn’t matter which way your salary cost is classified.

Required:

Which viewpoint is correct? Why?
From the point of view of the reported net operating income for the year, is the president correct in his statement that it doesn’t matter which way your salary cost is classified? Explain.

PROBLEM 1-15A Working with Incomplete Data from the Income Statement and Schedule of Cost of Goods Manufactured (LO3, LO4)

Data are provided below for four cases. Each case is independent of the others.

Required:

Supply the missing data in the following cases.

CHECK FIGURE
Case 1: Goods available for sale: $59,500

PROBLEM 1-16A Classification of Various Costs (LO1, LO2, LO5, LO7)

Yuko Makiyama began growing miniature bonsai trees several years ago as a hobby. Her work is quite creative, and it has been so popular with friends and others that she has decided to quit her job in the food industry and grow bonsai trees full time. The salary from Yuko’s food industry job is $3,000 per month.

Yuko will rent an airy, brightly lit loft near her home to use as a place for growing the bonsai trees. The rent will be $400 per month. She estimates that the cost of seeds, earth, fertilizers, and pots will be $7 for each finished bonsai tree. She will hire an experienced gardener to plant and water the bonsai trees at a labor rate of $12 per hour. To sell her bonsai trees, Yuko feels that she must launch an advertising campaign that focuses on hard-core gardeners. An advertising agency states that it will handle all advertising for a fee of $550 per month.

Nurseries will sell the bonsai trees on consignment and will be paid a commission of $8 for each tree sold. Production equipment will be rented at a cost of $250 per month. Yuko has already paid the legal and filing fees associated with incorporating her business in the state. These fees amounted to $300. A small room has been located in the area that Yuko will use as a sales office. The rent will be $200 per month. A phone installed in the room for taking orders will cost $30 per month.

Yuko has some money in savings that is earning interest of $3,000 per year. These savings will be withdrawn and used to get the business going. For the time being, Yuko does not intend to draw any salary from the new company.

Required:

Prepare an answer sheet with the following column headings:

CHECK FIGURE
Seeds, earth, pots and fertilizer: variable, direct materials

List the different costs associated with the new company 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. (That is, a cost may be a fixed cost, a period cost, and a sunk cost; thus you would place an X under each of these column headings opposite the cost.)

Under the Variable Cost column, list only those costs that would be variable with respect to the number of bonsai trees that are produced and sold.

All of the costs you have listed above, except one, would be differential costs between the alternatives of Yuko producing bonsai trees or staying with the food industry. Which cost is not differential? Explain.

PROBLEM 1-17A Cost Classification and Cost Behavior (LO2, LO5, LO6)

The Sloane Company specializes in producing a set of wood patio furniture consisting of a table and four chairs. The set enjoys great popularity, and the company has ample orders to keep production going at its full capacity of 3,000 patio sets per year. Annual cost data at full capacity follow:

Required:

Prepare an answer sheet with the column headings shown below. Enter each cost item on your answer sheet, placing the dollar amount under the appropriate headings. As examples, this has been done already for the first two items in the list above. Note that each cost item is classified in two ways: first, as variable or fixed with respect to the number of units produced and sold; and second, as a selling and administrative cost or a product cost. (If the item is a product cost, it should also be classified as either direct or indirect with respect to units of product.
Total the dollar amounts in each of the columns in (1) above. Compute the average product cost per patio set.
Assume that production drops to 2,800 sets annually. Would you expect the average product cost per patio set to increase, decrease, or remain unchanged? Explain. No computations are necessary.
Refer to the original data. The president’s brother-in-law has considered making himself a patio set and has priced the necessary materials at a building supply store. The brother-in-law has asked the president if he could purchase a patio set from the Sloane Company “at cost,” and the president agreed to let him do so.
1. Would you expect any disagreement between the two men over the price the brother-in-law should pay? Explain. What price does the president probably have in mind? The brother-in-law?
2. Since the company is operating at full capacity, what cost term used in the chapter might be justification for the president to charge the full, regular price to the brother-in-law and still be selling “at cost”?

CHECK FIGURE
(1) Total variable cost: $383,000

PROBLEM 1-18A Cost Classification (LO2, LO5, LO6)

Listed below are a number of costs found in organizations.

Wood used in producing furniture.
Insurance, finished goods warehouses.
Ink used in book production.
Advertising costs.
Property taxes, factory.
Thread in a garment factory.
Wage of receptionist, executive offices.
Salespersons’ commissions.
Shipping costs on merchandise sold.
Depreciation, executive autos.
Magazine subscriptions, factory lunchroom.
Wages of workers assembling computers.
Executive life insurance.
Boxes used for packaging television sets.
Zippers used in jeans production.
Fringe benefits, assembly-line workers.
Supervisor’s salary, factory.
Billing costs.
Packing supplies for international shipments.
Lubricants for production equipment.

Required:

Prepare an answer sheet with column headings as shown below. For each cost item, indicate whether it would be variable or fixed with respect to the number of units produced and sold; and then whether it would be a selling cost, an administrative cost, or a manufacturing cost. If it is a manufacturing cost, indicate whether it would typically be treated as a direct cost or an indirect cost with respect to units of product. Three sample answers are provided for illustration.

CHECK FIGURE
Insurance, finished goods warehouses: fixed, selling cost

PROBLEM 1-19A Schedule of Cost of Goods Manufactured; Income Statement; Cost Behavior (LO1, LO2, LO3, LO4, LO5)

Selected account balances for the year ended December 31 are provided below for Rolling Company:

Inventory balances at the beginning and end of the year were as follows:

The total manufacturing costs for the year were $242,000; the goods available for sale totaled $269,000; and the cost of goods sold totaled $229,000.

Required:

Prepare a schedule of cost of goods manufactured and the cost of goods sold section of the company’s income statement for the year.
The company produced the equivalent of 7,000 units during the year. Compute the average cost per unit for direct materials used and the average cost per unit for rent on the factory building.
In the following year the company expects to produce 5,000 units. What average cost per unit and total cost would you expect to be incurred for direct materials? For rent on the factory building? (Assume that direct materials is a variable cost and that rent is a fixed cost.)
Explain to the president the reason for any difference in the average cost per unit between (2) and (3) above.

CHECK FIGURE
(1) Cost of goods manufactured: $244,000

PROBLEM 1-20A Schedule of Cost of Goods Manufactured; Income Statement; Cost Behavior (LO3, LO4, LO5)

Various cost and sales data for Jaskot Company for the just completed year follow:

Required:

Prepare a schedule of cost of goods manufactured.
Prepare an income statement.
The company produced the equivalent of 12,000 units of product during the year just completed. What was the average cost per unit for direct materials? What was the average cost per unit for factory depreciation?
The company expects to produce 10,000 units of product during the coming year. What average cost per unit and what total cost would you expect the company to incur for direct materials at this level of activity? For factory depreciation? (In preparing your answer, assume that direct materials is a variable cost and that depreciation is a fixed cost that is computed on a straight-line basis.)
Explain to the president any difference in the average cost per unit between (3) and (4) above.

CHECK FIGURE
(1) Cost of goods manufactured: $233,000

PROBLEM 1-21A Schedule of Cost of Goods Manufactured; Income Statement (LO3, LO4)

Madlinx Company was organized on April 1 of the current year. After five months of start-up losses, management had expected to earn a profit during September. Management was disappointed, however, when the income statement for September also showed a loss. September’s income statement follows:

After seeing the $4,200 loss for September, Madlinx’s president stated, “I was sure we’d be profitable within six months, but our six months are up and this loss for September is even worse than August’s. I think it’s time to start looking for someone to buy out the company’s assets—if we don’t, within a few months there won’t be any assets to sell. By the way, I don’t see any reason to look for a new controller. We’ll just limp along with Harry for the time being.”

The company’s controller resigned a month ago. Harry, a new inexperienced assistant in the controller’s office, prepared the income statement above. Additional information about the company follows:

Some 65% of the utilities cost and 70% of the insurance apply to factory operations. The remaining amounts apply to selling and administrative activities.
Inventory balances at the beginning and end of September were:
Only 90% of the rent on facilities applies to factory operations; the remainder applies to selling and administrative activities.

The president has asked you to check over the income statement and make a recommendation as to whether the company should look for a buyer for its assets.

Required:

As one step in gathering data for a recommendation to the president, prepare a schedule of cost of goods manufactured for September.
As a second step, prepare a new income statement for September.
Based on your statements prepared in (1) and (2) above, would you recommend that the company look for a buyer?

CHECK FIGURE
(1) Cost of goods manufactured: $185,765

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		Ch. 4 FIFO Supplement Video Library Bonus Variable Costing...

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	Quizzes
		Practice Quiz
	More Resources
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	eBook
		Chapter Opener ftnote Comparison of Financia... The Work of Management... Cost Classifications f... Cost Classifications O... Cost Classifications f... Cost Classifications f... General Cost Classific... Product Costs Versus P... Product Cost Flows Summary Guidance Answer to You... Guidance Answers to Co... Review Problem 1: Cost... Review Problem 2: Sche... Glossary Questions Brief Exercises Exercises Problems Building Your Skills