Solution manual managerial accounting by cabrera 2010 chapter 08 answer

MANAGEMENT ACCOUNTING (VOLUME I) - Solutions Manual CHAPTER COST CONCEPTS AND CLASSIFICATIONS I Questions The phrase “different costs for different purposes” refers to the fact that the word “cost” can have different meanings depending on the context in which it is used Cost data that are classified and recorded in a particular way for one purpose may be inappropriate for another use Fixed costs remain constant in total across changes in activity, whereas variable costs change in proportion to the level of activity Examples of direct costs of the food and beverage department in a hotel include the money spent on the food and beverages served, the wages of table service personnel, and the costs of entertainment in the dining room and lounge Examples of indirect costs of the food and beverage department include allocations of the costs of advertising for the entire hotel, of the costs of the grounds and maintenance department, and of the hotel general manager’s salary The cost of idle time is treated as manufacturing overhead because it is a normal cost of the manufacturing operation that should be spread out among all of the manufactured products The alternative to this treatment would be to charge the cost of idle time to a particular job that happens to be in process when the idle time occurs Idle time often results from a random event, such as a power outage Charging the cost of the idle time resulting from such a random event to only the job that happened to be in process at the time would overstate the cost of that job a Uncontrollable cost b Controllable cost c Uncontrollable cost Product costs are costs that are associated with manufactured goods until the time period during which the products are sold, when the product costs become expenses Period costs are expensed during the time period in which they are incurred 8-1 Chapter Cost Concepts and Classifications The most important difference between a manufacturing firm and a service industry firm, with regard to the classification of costs, is that the goods produced by a manufacturing firm are inventoried, whereas the services produced by a service industry firm are consumed as they are produced Thus, the costs incurred in manufacturing products are treated as product costs until the period during which the goods are sold Most of the costs incurred in a service industry firm to produce services are operating expenses that are treated as period costs Product costs are also called inventoriable costs because they are assigned to manufactured goods that are inventoried until a later period, when the products are sold The product costs remain in the finished goods inventory account until the time period when the goods are sold A sunk cost is a cost that was incurred in the past and cannot be altered by any current or future decision A differential cost is the difference in a cost item under two decision alternatives 10 a b c d Direct cost Direct cost Indirect cost Indirect cost 11 The two properties of a relevant cost are: it differs between the decision options it will be incurred in the future 12 The three types of product costs are: direct materials – the materials used in manufacturing the product, which become a physical part of the finished product direct labor – the labor used in manufacturing the product factory overhead – the indirect costs for materials, labor, and facilities used to support the manufacturing process, but not used directly in manufacturing the product 13 The three types of manufacturing inventories are: materials inventory – the store of materials used in the manufacturing process or in providing the service 8-2 Cost Concepts and Classifications Chapter work in process inventory – accounts for all costs put into the manufacturing of products that are started but not complete at the financial statement date finished goods inventory – the cost of goods that are ready for sale 14 Direct materials include the materials in the product and a reasonable allowance for scrap and defective units, while indirect materials are materials used in manufacturing that are not physically part of the finished product II Exercises Exercise (Schedule of Cost of Goods Manufactured and Sold; Income Statement) Requirement Amazing Aluminum Company Schedule of Cost of Goods Manufactured For the Year Ended December 31, 2005 Direct material: Raw-material inventory, January Add: Purchases of raw material Raw material available for use Deduct: Raw-material inventory, December 31 P 60,000 250,000 P310,000 70,000 Raw material used P240,000 Direct labor Manufacturing overhead: Indirect material 400,000 P 10,000 Indirect labor 25,000 Depreciation on plant and equipment 100,000 Utilities 25,000 Other 30,000 8-3 Chapter Cost Concepts and Classifications Total manufacturing overhead 190,000 Total manufacturing costs Add: Work-in-process inventory, January Subtotal Deduct: Work-in-process inventory, December Cost of goods manufactured P830,000 120,000 P950,000 115,000 P835,000 Requirement Amazing Aluminum Company Schedule of Cost of Goods Sold For the Year Ended December 31, 2005 Finished goods inventory, January Add: Cost of goods manufactured Cost of goods available for sale Deduct: Finished goods inventory, December 31 Cost of goods sold P150,000 835,000 P985,000 165,000 P820,000 Requirement Amazing Aluminum Company Income Statement For the Year Ended December 31, 2005 Sales revenue Less: Cost of goods sold Gross margin Selling and administrative expenses Income before taxes Income tax expense Net income P1,105,000 820,000 P 285,000 110,000 P 175,000 70,000 P 105,000 Exercise Cost Item a Transportation-in costs on materials 8-4 Fixed (F) Variable (V) Period (P) Product (R) Cost Concepts and Classifications Chapter purchased b Assembly-line workers’ wages c Property taxes on work in process inventories d Salaries of top executives in the company e Overtime premium for assembly workers f Sales commissions g Sales personnel office rental h Production supervisory salaries i Controller’s office supplies j Executive office heat and air conditioning k Executive office security personnel l Supplies used in assembly work m Factory heat and air conditioning n Power to operate factory equipment o Depreciation on furniture for sales staff p Varnish used for finishing product q Marketing personnel health insurance r Packaging materials for finished product s Salary of the quality control manager who checks work on the assembly line t Assembly-line workers’ dental insurance Exercise (Cost Classifications; Manufacturer) a, d, g, i a, d, g, j b, f b, d, g, k a, d, g, k a, d, g, j b, c, f b, d, g, k b, c and d*, e and f and g*, k* * The building is used for several purposes 10 b, c, f 8-5 V V R R V F R P V R V F F F F P P R P P F V F V F V F V P R R R P R P R F F R R Chapter Cost Concepts and Classifications 11 12 13 14 b, c, h b, c, f b, c, e b, c and d†, e and f and g†, k† † The building that the furnace heats is used for several purposes 15 b, d, g, k Exercise (Economic Characteristics of Costs) marginal cost sunk cost average cost opportunity cost differential cost out-of-pocket cost Exercise (Cost Classifications; Hotel) a, c, e, k b, d, e, k d, e, i d, e, i a, d, e, k a, d, e, k d, e, k b, d†, e, k † Unless the dishwasher has been used improperly h 10 a, d, e*, j * The hotel general manager may have some control over the total space allocated to the kitchen 11 12 13 14 i j a, c, e e, k 8-6 Cost Concepts and Classifications Chapter Exercise Pickup Truck Output 3,000 trucks P 29,640,000 39,200,000 4,500,000 13,660,000 P 87,000,000 6,000 trucks P 59,280,000 39,200,000 9,000,000 13,660,000 P121,140,000 9,000 trucks P 88,920,000 39,200,000 13,500,000 13,660,000 P155,280,000 Selling price per truck 46,000 40,100 35,900 Unit cost 29,000 20,190 17,253 Profit per truck 17,000 19,910 18,647 Variable production costs Fixed production costs Variable selling costs Fixed selling costs Total costs III Problems Problem The relevant costs for this decision are the differential costs These are: Opportunity cost or lost wages (take home) [P1,500 x 70% x 12 months] P12,600 Tuition 2,200 Books and supplies 300 Total differential costs P15,100 Room and board, clothing, car, and incidentals are not relevant because these are presumed to be the same whether or not Francis goes to school The possibility of part-time work, summer jobs, or scholarship assistance could be considered as reductions to the cost of school If students are familiar with the time value of money, then they should recognize that the analysis calls for a comparison of the present value of the differential aftertax cash inflows with the present value of differential costs of getting the education (including the opportunity costs of lost income) Problem 8-7 Chapter Cost Concepts and Classifications Requirement (a) Only the differential outlay costs need be considered The travel and other variable expenses of P22 per hour would be the relevant costs Any amount received in excess would be a differential, positive return to Pat Requirement (b) The opportunity cost of the hours given up would be considered in this situation Unless Pat receives more than the P100 normal consulting rate, the contract would not be beneficial Requirement (c) In this situation Pat would have to consider the present value of the contract and compare that to the present value of the existing consulting business The final rate may be more or less than the normal P100 rate depending on the outcome of Pat’s analysis Problem Utilities for the bakery Paper used in packaging product Salaries and wages in the bakery Cookie ingredients Bakery labor and fringe benefits Bakery equipment maintenance Depreciation of bakery plant and equipment Uniforms Insurance for the bakery Boxes, bags, and cups used in the bakery Bakery overtime premiums Bakery idle time Total product costs in pesos 2,100 90 19,500 35,000 1,300 800 2,000 400 900 1,100 2,600 500 66,290 Problem Administrative costs Rent for administration offices Advertising 8-8 1,000 17,200 1,900 Cost Concepts and Classifications Chapter Office manager’s salary Total period costs in pesos 13,000 33,100 Problem Requirement (a) Sunk costs not shown could include lost book value on traded assets, depreciation estimates for new investment, and interest costs on capital needed during facilities construction Requirement (b) The client might be used to differential cost as a decision tool, and believes (correctly) that use of differential analyses has several advantages - it is quicker, requires less data, and tends to give a better focus to the decision The banker might suspect the client of hiding some material data in order to make the proposal more acceptable to the financing agency IV Multiple Choice Questions B D B A C D 10 11 12 C D C C A C 13 D 14 D † 15 B † 16 A † 17 C † 18 C * 19 20 21 22 23 24 A A* B B C C 25 26 27 28 29 30 C B B A ** A B Controllable costs are those costs that can be influenced by a specified manager within a given time period ** The answer assumes absorption costing method is used † Supporting Computations 14 P60 + P10 + P18 + P4 = P92 16 P60 + P10 + P18 + P32 = P120 15 P32 + P16 = P48 17 P4 + P16 = P20 8-9 ... regard to the classification of costs, is that the goods produced by a manufacturing firm are inventoried, whereas the services produced by a service industry firm are consumed as they are produced... A ** A B Controllable costs are those costs that can be influenced by a specified manager within a given time period ** The answer assumes absorption costing method is used † Supporting Computations... when the goods are sold A sunk cost is a cost that was incurred in the past and cannot be altered by any current or future decision A differential cost is the difference in a cost item under two