SS Chapter 2 a te ee en ge ea Costs - CONCEPTS AND CLASSIFICATIONS LEARNING OBJECTIVES Upon completion ofthis chapter, you should be able to Distinguish between cost, expenses, and losses. inguish between direct and indirect costs. Define the three integral components of a product. Define prime costs and conversion costs. Define variable, fixed, and mixed costs and discuss the effects of changes in volume on these costs. + Distinguish between common costs and joint costs ‘+ Distinguish between capital expenditures and revenue | expenditures ‘Identify the costs for planning, control and analytical processes Costs are associated with all types of organizations ~ business, non-business, service, retail, and manufacturing. Generally, the kinds of costs that are incurred and the way in which these costs are classified will depend on the type of organization involved Our initial focus will be on a manufacturing, but in our discussion we should be aware that, ina conceptual sense, manufacturing encompasses much more than just firms in the industrial eestor of our cconomy. Jt also encompasses tiny ‘organizations that are typically. viewed as being service in nature, sich as movie studios and fast-food outlets. Organizations such as these are involved in ‘manufacturing in the sense that they create a distinet product for customers or Patrons. As we proceed with our discussion, therefore, we should keep in mind that ‘manufacturing is a broad term, and that the costs included under the manufacturing heading. have application to a wide range of organizations - many of which may be involved in service-type activities, An understanding of the cost structure of a ‘manufacturing company therefore provides a broad, gencral understanding of costing that can be very helpful in understanding the cost structures of other types of ‘organizations.20 Cost Accounting Before cost terminology can be discussed the term cost itself must be defined Cost is the cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future benefit to the organization. We say cash equivalent because non-cash assets can be exchanged for the desired goods or services For example, it may be possible to exchange land for some needed ‘equipment Costs are incurred to produce future benefits in a profit making firm, future benefits usually mean revenue. As costs are used up in the production of revenues. they are said to expire. Expired costs are called expenses. In cach period, expenses ‘are deducted from revenues in the income statement to determine the period’s profit. A loss is a cost that expires without producing any revenue benefit. The focus of ‘cost accounting is on costs, not expenses. OF Costs 1. Costs classified as to relation to » product ‘A. Manufacturing costs/product costs 1. Direct materials 2. Direct labor 3. Factory overhead B. Non-manufacturing costs/period costs 1. Marketing or selling expense 2. General or administrative expense Il. Costs classified as to v: A. Variable costs B. Fixed costs C. Mixed costs IIL. Costs classified as to relation to manufacturing departments A. Direct departmental charges B. Indirect departmental charges 1V. Costs classified to their nature as common or joint ‘A. Common costs B. Joint costChapter 2 - Cost Concepts and Classifications 21 V__ Costs classified as to relation to an accounting period A. Capital expenditures B. Revenue expenditures VI. Costs for planning, control, and analytical processes Standard costs Opportunity costs Differential cost Relevant cost ‘Out of pocket coat Sunk cost ‘Controllable cast ommoam> MANUFACTURIN¢ ODI Direct materials All manufactured products are made from basic direct materials. The basic material may be iron ore for steel, sheet steel for automobiles, or flour for bread. ‘These examples show the link between a basic raw material and a final product. ‘The way a company buys, stores, and uses materials is important. Timely purchasing is important because if the company runs out of materials, the ‘manufacturing process will be forced to shut down. (Shutting down production results in no products, unhappy customers and loss of sales and profits) Buying too ‘many direct materials, on the other hand, can lead to high storage costs. Proper storage of materials will avoid waste and spoilage. Large enough storage space and orderly storage procedures are essential, Materials must be handled and stored properly to guarantee their satisfactory use in production. Proper records, the materials stockcars, make it possible to find goods easily. Such records reduce problems caused by lost or misplaced items. Direct materials are materials that become part of a finished product and can be ‘conveniently and economically traced to specific product units. The costs of these materials are direct costs. In some cases, however, even though a material becomes part of a finished product, the expense of actually tracing the cost of a specific ‘material is too great. Some examples of this include nails in furniture, bolts in automobiles, and rivets im airplanes. These minor materials and other production2 Cost Accounting ‘supplies that cannot be conveniently or economically traced to specific products are accounted for as indirect materials. Indirect materials costs are part of factory overhead costs. Direct labor Labor services are, in essence, purchased from employees working in the factory. In addition, other types of labor are purchased from people and organizations outside the company. The labor costs usually associated with manufacturing inclide machine operators; maintenance workers; managers and supervisors; support personnel; and people who handle, inspect, and store materials. Because these people are all connected in some way with the production process, their wages and salaries must be accounted for as production costs and, finally, as costs of products. However, tracing many of these costs directly 10 individual products is difficult To help overcome this problem, the wages of machine operators and other workers involved in actually shaping the product are classified as direct labor costs Direct labor costs include all labor costs for specific work performed on products that can be conveniently and economically traced to end products. Labor costs for production retated activities that cannot be conveniently and economically traced to ‘end products are called indirect labor costs. These costs include the wages and salaries of such workers as machine helpers, supervisors, and other support personnel Like indirect materials casts, indirert labor caste are accounted for a8 factory overhead costs. Payroll related costs, such as payroll taxes, group insurance, sick pay, vacation and holiday pay, and other fringe benefits can be considered as part of direct labor costs, but are usually included as factory overhead Direct labor plus direct materials = prime costs, while direct labor plus factory overhead = conversion costs. Prime costs and conversion costs may be diagrammed as shown below. Prime Costs Direct . Direct Factory Materials Labor Overhead Conversion CostsChapter 2 Cost — Concepts and Classification 23 Factory Overhead ‘The third manufacturing cost element is a catchall for manufacturing costs that cannot be classified as direct materials or direct labor costs. Factory overhead costs are a varied collection of production-related costs that cannot be practically or conveniently traced directly to end products. This collection of costs is also called manufacturing overhead, factory burden, and indirect manufacturing costs. Examples of the major classifications of factory overhead costs are: Indirect materials and supplies: nails, rivets lubricants, and small tools Indirect labor costs: lift-truck driver's wages, maintenance and inspection labor, ‘engineering labor, machine helpers, and supervisors. Other indirect factory costs: building maintenance, machinery and tool ‘maintenance, property taxes, property insurance, pension costs, depreciation on plant and equipment, rent expense, and utility expense. NON-MANUFACTURING COSTS/PERIOD COSTS Marketing or selling expenses Marketing or selling expenses include all costs necessary’ to secure customer orders and get the finished product or service into the hands of the customer. Since marketing expenses relate to contacting customers and providing for their needs, these expenses are offen referred to as order-getting and order-filling costs Examples of marketing expenses include advertising, shipping, sales travel; sales commissivus, sales salaries, axl expenses associated with finshed goods warehouses, All organizations have marketing costs, regardless of whether the organizations are manufacturing, merchandising, or service in nature. Administrative or general expenses Administrative expenses include all executive, organizational, and clerical expenses that cannot logically be included under either production or marketing Examples of such expenses include executive compensation, general accounting, . public relations, and similar expenses having to do with the overall, {sneral administration of me organization asa whole. AS with marketing expenses, all organizations have administrative expenses24 Cost Accounting COSTS CLASSIFIED AS TO VARIABILITY Fixed, Variable, and mixed One of the most important cost classifications involves the way’a cost changes in relation to changes in the activity of the organization. Activity refers to ameasure of the organization's output of products or sorvices. In specifying cost behavior. the managerial accountant often limits the description to a specific range of activity. This is called the retevant range. xed cost + Items of cost which remain constant in total, irrespective of the volume of production. Fixed costs are not related to activity within the relevant range. If ‘activity inercases or decreases by 20 pereent, total fixed cost remains the same. Cost per unit decreases as volume increases, and increases as volume decreases. Fixed ‘costs are assignable to departments based on difference allocation methods. Examples are salaries of production executives, depreciation of equipment computed ona straight-line basis, periodic rent payments, and insurance Fixed costs may be classified into two categories, depending on the ability of ‘management to influence the levels of these costs in the short-term. 1) Committed fixed costs - costs that represent relatively long term commitments on the part of management as a result of a past decision Example — depreciation on equipment. 2) Managed fixed costs (also known as discretionary, programmed, or planned fixed costs) - costs that are incurred on a short-term basis and can be more easily modified in response to changes in management objectives. Examples — advertising, research and development and costs of employee training programs. Shown on the next page is a graph of fixed cost. It is clearly shown that total fixed cost remains unchanged as activity changes. When activity triples, from 10 to 30 units, total fixed cost remains constant at P 1,500. If activity level is only 1 unit, then the fixed cost per unit is P 1,500. If the activity level is 10 units, then the fixed ‘cost per unit declines to P 150 per unit, So we can conclude that fixed cost per unit will decrease as we increase the volume or units of production and fixed cost per unit will increase as we decrease the volume of production,Chapter 2 Cost — Concepts and Classification 25 Total fixed cost ise Gap am gee Ee ee 10 20 30 Activity Graph of total fixed cost Activity Fixed cost per unit Total Fixed Cost 1 P 1,500 1,500 2 750 1,500 : 300 1,500 10 150 1,300 20 8 1,500 30 50 1,500 Variable costs - Items of cost which vary directly, in total, in relation to volume of production. If activity increases by 20 percent, total variabie cost increases by 20 percent also. Cost per unit remains constant as volume changes within a relevant range. Examples are: direct materials, direct labor, royalties, and commission of salesmen. Shown below is a graph of total variable cost. As this graph shows total variable ‘cost increases proportionately with activity. When activity doubles from 10 to 20 ‘units, total variable cost doubles, from P 1,000 to P 2,000, However, the variable cost per unt remains the same as activity changes. The variable cost associated with cach unit of activity is P100, whether itis the first unit, the fourth, or the tenth. To summarize, as activity changes, total variable cost increases or decreases proportionately with the activity change, but unit variable cost remains the same.%6 Cost Accounting Total Variable Cost 3,000 2,000 1,000 10 20 30 Graph of total variable cost ‘TABULATION OF VARIABLE COST Activity Variable Cost per Unit Total Variable Cost 1 P 100 P 100 10 100 1,000 20 100 2,000 30 100 3.000 Mixed cost - Items of cost with fixed and variable components. Mixed costs vary with the Jevel of production, though not in direct relation to it, probably because part of the cost is fixed while the rest is variable. Two types of mixed costs exist ~ semi- variable costs and step costs Semi-variable cost. The fixed portion of a semi-variable cost usually represents a minimum fee for making a particular item or service available, The variable portion is the cost charged for actually using the service, The cost of electricity where there is a basic minimum charge plus a specified cost per kilowatt hhour above the minimum is an example of such a semi-variable cost. The cost ‘charged for using a cell phone under a plan is also an example of a semi-variable cost. The cost of the plan is fixed and it is for a specified time used, however if the user exceeds the time allowed. then charges will be made on a per minute basisChapter 2 Cost - Concepts and Classification 27 ‘Semi-variable cost 35,000 emi-variable costs 30,000 Variable 25,000 (15,000) 20,000 15,000 10,000 Fixed 5,000 (P 20,000) ° 5,000 1,000 Kilometer Assume that a company rents a delivery truck at a flat rate of P 20,000 per month plus P 1.50/km driven. The fixed portion is the P 20,000 monthly rental fees; the variable portion 1s the P1.50/km driven. If 10,000 km. are driven during the month, ‘the total monthly cost of the delivery truck is P 35,000, computed as follows: Flat fee (fixed portion) P 20,000 Variable portion - 10,000 km. x P 1.50, 5.00 Total cost 35,000 Step costs - the fixed part of step costs changes abruptly at various activity levels because these costs are acquired in indivisible portions. A step cost is similar toa fixed cost within a very small relevant range. 180,000 Waa 150,000 120,000 90,000 60,000 30,000 eel es Oe 0 a Oe Number of workers23 Cost Accounting ‘The enpervisor’s salary is an example of step cost. Assume that one supervisor with a salary of P 30,000 is needed for every 10 workers, then if 15 workers arc used, 2 supervisors (with salaries of P 60,000) will be needed. If 18 workers are used, still 2 supervisors would be needed. If the number of workers increases to 22, three supervisors would be needed. Ideally, for both planning purposes and for making certain types of decisions, all costs would be classified as either fixed or variable, with semi-variable costs bbeig separated into their fixed and variable components. One of the most important steps in estimating the variable and fixed components of a mixed cost is to examine the cause and effect relationship between activities that affect costs. There are different methode of separating mixed costs into fixed and variable components: (1) scatter graph, (2) high-low point, (3) and method of least square. We will illustrate the use of high-low point method and method of least square (1) HIGH-LOW POINT METHOD January 2B. P 625 February Ca 365 March 30 630 April 3. fF 640 May 38 a 685, June 4 640 July 35 fy 655 August 40 700 September 2 ns October 7 126 November 4B 700 December 2 630 Direct labor hrs. Cost Highest month (Oct) 47 P 726 Lowest month (Feb.) 24 — 565 Difference 23 P 161 Variable rate per direct labor hour = P_161 Bhours =P Tiivect labor hourChapter 2 Cost - Concepts and Classification 29 Fixed cost can be computed from either the high or low data. High Total cost of electricity P 726 ‘Less: variable proportion (7x47) 329 (P 7x 24) ‘Monthly fixed cost P37 y V =a tby e ‘The formula for projecting the total monthly cost of electricity based on these data would be P 397 plus P7 multiplied by the direct-labor hours expected to be worked during the period ( Y = FC + VC or Y = FC + VX) where Total cost VC = Total variable cost Variable cost per unit FC= Fixed cost Activity Ievel| (@) METHOD OF LEAST SQUARE The three formulas to be used in least-square method are: Equation 1 Y = athx Equation 2 EY = na+bEx Equation 3 XY = Exat bEx? x Vv x Using the same data as in the high-low method the following have been computed DLHrs. _ Electricity Cost x y epee seMe 28 625 784 4 56s 516 30 630 300 3 640 1,089 38 68s 1a Mu 640 1,156 35 65s ins 40 700 1,600 2 7s 1764 47 16 2,209 23 700 1849 _2 30 Low r= 46 Zant 15,62030 Cost Accounting By substitution: Equition2 = Sy = na +bEx (7,911 = 12a +b426) 35.5 (426/12) Equation 3 xy xa + bEx* 284,207 426a + b15,620 Equation!x35.5 280,840.55 = 426a +b15.123 33665 = 0 b 497 b = 3,366.5/497 b= 6.77 ‘Substituting the value for Equation 2, we can compute for a as follows 7911 = 12a+ (677) (426) 7911 12a + 2,884 12a =7,911-2,884 a =5,027/12 418.92 Formula using high-low method a +bx 30747 Formula using least square method Y=a +bx =419 +677 Common cost vs. Joint cost Common cost ~ Costs of facilities or services employed in two or more accounting, periods, operations. commodities, or services. Just like indirect costs, these costs are subject to allocation.Chapter 2 Cost - Concepts and Classification 31 Joint cost Costs of materials, labor, and overhead incurred in the manufacture of two or ‘more products at the same time. A major difficulty inherent to joint costs is that they are indivisible and they are not specifically identifiable with any of the products being simultaneously produced. ‘These costs are also subject to allocation. Cay iture vs. expert Capital expenditure Expenditure intended to benefit more than one accounting periods and is recorded as an asset. The allocation of the cost to the different periods is depreciation for fixed tangible assets, amortization for intangible assets and depletion for wasting assets, Revenue expenditure ~ Expenditure that will benofit current period only and is recorded as an expense, Direct vs. Indirect departmental charges Direct departmental charges Costs that are immediately charged to the particular manufacturing department(s) that incurred the costs since the costs can be conveniently identified or associated with the department(s) that benefited from said costs. Indirect departmental charges Costs that are originally charged to some other manufacturing department(s) or account(s) but are later allocated or transferred to another department(s) that indirectly benefited from said costs. Costs for Planning, control and analytical processes Standard costs Predetermined costs for direct materials, direct labor. and factory overhead ‘They are established by using information accumulated from past experience and data secured from research studics. In essence, a standard cost is a budget for the production of one unit of product or service. It is the cost chosen by the managerial Accountant ta serve as the henchmark in the budgetary control eyetem.32 Cost Accounting ‘Opportunity cost ~ The benefit given up when one alternative is chosen over another. Opportunity costs are not usually recorded in the accounting system. However, opportunity costs should be considcred when evaluating alternatives for decision-making. If an asset can be used to perform only one fianction and cannot be sold or used in other ways, the opportunity cost of that asset is zero. Example 1 Michelle has a part-time job that pays her P1, 000 per week She would like to spend a week in Bracey during summer vacation from school, but she has no vacation time available. If she takes the trip anyway, the P1, 000 in lost wages will be an opportunity cost of doing so. Example 2 Marco is employed with a company that pays him a salary of P20, 000 a month. He is thinking about leaving the company and returning to school. Since returning to school would require that he give up his P240, 000 salaries, the forgone salary would be an opportunity cost of seeking further education. Differential cost = Cost that is present under one alternative but is absent in whole or in part under another altemative. An inerease in cost from one alternative to another is known as Incremental cost, while a decrease in cost is known ae decremental cost. Differential cost is a broader term, encompassing both cost increases (incremental cost) and cost decreases (decremental costs) between alternatives. ‘The accountant’s differential cost concept is basically the same as the ‘economist’s marginal cost concept. In speaking of changes in cost and revenue, the ‘economist employs the terms marginal cost and marginal revenue. The revenue that can be obtained from selling one more unit of product is called marginal revenue, and the cost involved in producing one more unit of product is called marginal cost. Differential costs can be cither fixed or variable. To illustrate, assume that Avon Corp. is thinking about changing its marketing method from distribution through retailers to distribution by direct sale. Present costs and revenues are ‘compared to projected costs and revenues in the table below.Chapter 2 Cost — Concepts and Classification 33 Retailer Direct sale | Differential Distribution | Distribution | Cost and (present) (proposed) ‘Revenues j Revenues (V) P_ 900,000 P1,200,000 ‘P 300,000 Cost of goods sold (V) 50,000 660,000 150,000 ‘Advertising (F) 80,000 #5000 | (35,000) ‘Commission (V) = 40,000 40,000 Warehouse depreciation (FY 30.000 80,000 30,000 ‘Other expenses (F) — 60,000 — £0,000 hese: ‘Total 640,000 825,000 185,000 Net Income P115.000 “The differential revenue is P 300,000, and the differential costs total P 185,000, Ieaving a positive differential net income of P 115,000 under the proposed marketing plan. As noted earlier, those differential costs representing cost increases could have been referred to more specifically as incremental costs, and those representing cost decreases could have been referred to more specifically as decremental costs. Relevant cost ~ A future cost that change across the alternatives. in the example above, the relevant costs are cost of goods sold, advertising, commissions, ‘and ‘warehouse deprecation, Out-of-pocket cost ~ Cost that requires the payment of money (or other assets) as a result of their incurrence. ‘Sunk cost ~ A cost for which an outlay has already been made and it cannot be changed by present or future decision, Since sunk costs cannot be changed by any present or34 Cost Accounting future decision, they are not differential eosts, and therefore they should be used in analyzing future courses of action To illustrate the notion of a sunk cost, assume that a firm has just paid P 250,000 for a special purpose machine. Since the cost outlay has been mado, the P 250,000 investment in the machine is a sunk cost. Even though the purchase may have been unwise, no amount of regret can relieve the company of its decision, nor can any future decision cause the cost to be avoided. Controllable and Non-controllable Costs A cost is considered to be a controllable cost at a particular level of ‘management if that level has power to authorize the cost. For example, entertainment expense would be controllable by a sales manager if he or she had power to authorize the amount and type of entertainment for cusiomers. On the ‘other hand, depreciation of warehouse facilities would not be cortrollable by the sales manager, since he or she would have no power to authorize warehouse construction. In some situations, there is a time dimension to controllability. Costs that are controllable over the long run may not be controllable over the short run. A good example is advertising. Once an advertising program has been st: anid @ wontiact signed, management has no power to change the amount of spending. But the contract expires, advertising costs can be renegotiated. and thus management can exercise control over the long run, COST FLOW - MANUFACTURING FIRMS ‘Cost incurrence Expense Category Direct materials ——-—} Direct labor —— _. Finished __, Cost of goods sold } process goods Factory overhead — Operating expenses Selling and AdministrativeChapter 2 Cost — Concepts and Classification 35 ‘Work in process consists of goods that are started but not completed. Finished goods are goods that are complete and ready for sale. COST FLOW - MERCHANDISING FIRM Expense category. Cost of goods sold Finished goods Sclling and Administrative ————+ Operating expense )W - SERVICE FIRM Cost ineurrence Expense category Direct materials ——- } 3 Direct labor ———-—-—-—- } Cost of services } Factory overhead —~ Selling and Administrative __________, Operating expense ‘The essential purpose of any organization is to transform inputs into outputs. The activity for merchandising, manufacturing, and service organizations are shown, in the previous and current page. These organizations have many similarities, all require labor and capital as inputs, and all transform them into a product or service for the market. These organizations also differ from one another in many respects. ‘The differences between these organizations are reflected in their accounting, systems A merchandising organization starts with a finished product and markets it. Because inventory is acquired in finished form, its cost is easily ascertained. ‘The accounting system for a manufacturing organization is more complex because direct materials are first acquired and then converted to finished products. ‘A manufacturer's accounting sysiem focuses on work in process, which is the account that reflects the costs involved in transforming input materials into finished goods.36 Cost Accounting Service organizations are differcut from manufacturing and sncrchandising because they have no inventory of goods for sale. Costs are charged to responsibility conters for performance evaluation. In a public accounting firm, for ‘example, costs are charged to the audit department. the tax department, and so forth. Costs are also charged to jobs. The assignment of costs facilitates performance evaluation. The manager of each department is held responsible for the costs of the department, the manager of cach job is held responsible for the cost of that job. Of the three kinds of operations, manufacturers require the most complex and comprehensive cost accounting system. All three uses cost information for decision making and performance evaluation. But in addition, manufacturers need product costing for inventory valuation and to measure cost of goods sold reported on external financial statements. Many manufacturers also have service and merchandising activites, costs of which must be recorded.Chapter 2 Cost — Concepts and Classification 37 SSE As ee 1. In what way does a typical manufacturing business differ from a merchandising concem? In what ways are they similar? 2. What are the basic elements of production cost? 3. Define the following coete ‘A. direct materials B. indirect materials C. direct labor D. indirect labor E. factory overhead 4. Define prime cost and conversion cost. 5, Does prime cost plus conversion cost equal to the total manufacturing cost? 6. Inwhat way does the accounting treatment of tactory overhead differ from that of direct materials and direct labor costs? 7. Explain why the fixed cost per unit declines as volume increases. Give an example 8. Give examples of variable overhead costs and fixed overhead costs, 9. How would you classify the monthly bill (plan) for a Smart/Globe cellphone? 10. Consider education as a product. What are the direct costs and the indirect costs toa university in educating a student?38 ‘Cost Accounting Problem 1 Classify the following items as direct or indirect materials L. Gold to make jewelry 2 Sandpaper used in furniture making 3. Paper used in printing books 4, Milk to make ice cream 5. Water to make ice 6. Seats to be installed in a car 7. Leather to make gloves 8. Tape measure used by tailors 9 Flour used in making bread 10. Pineapple in a fruit cocktail 11. Nails and glue used in production 12. Carpeting for the recreational vehicles 13. Sugar used in making chocolate chip cookies 14. Chocolate chips used in making chocolate chip cookies 15. Adhesive for cookie boxes Problem 2 Classify the following as manufacturing (M), selling (S), or administrative (A) 1. Factory supplies ‘Advertising Rent on factory building Freight-out President's salary Cost of machine breakdown Legal expenses ‘Samples Bad debts 10. Travel expenses of salesmen OFA po ewChapter 2 Cost — Concepts and Classification 39 Problem 3 Classify the following selected costs by completing the table below.. (a) Variable or fixed (b) Product or Period costs (c) Direct or indirect in relation to units of product. 1. Wood is used in the manufacture of the tables, at a cost P 100 per table, 2. The tables are assembled by workers, ata cost of P 40 per table. 3. Workers assembling the tables are supervised by a factory supervisor who isP 25,000 per month, 4. Electrical costs of P 20 per machine hour are incurred in the factory in the manufacture of the tables. (4 machine hours per table) ‘The depreciation cost of the machines used in the manufacture of the tables iP 40,000 a year. 6. The salary of the president of the company is P 100,000 a month 7. The company spends P 250,000 per year to advertise its products. 8 9. Salespersons are paid a commission of P300 for each table sold Rent paid for the factory building is P 70.000 a month, 10. Insurance premiums paid for the general office is P 15,000 a year. fa) VorF (b) Product or Period (¢) Dor I 1. Wood 2, Salary - workers 3. Supervisor's salary 4. Electrical costs 5. Depreciation-machines 6, President’ salary 7. Advertising expense 8, Sales commission 9. Rent expense 10. Insurance premiums40 Cost Accounting Problem 4 Classify cach of the following costs of Bug Company in two ways: (a) as variable (V) fixed costs (F); (b) as inventoriable costs (I) or period costs (P): or. b)LorP Example: Direct labor I. Salary of company controller 2, Fire insurance on direct materials 3. Property taxes on finished goods held for sale 4. Direct materials used 5. Factory rent 6. Sales commission 7. Overtime premium of machine operators 8. Straight-line depreciation of factory equipt 9. Straight-line depreciation of trucks used for delivery of sales to customers 10, Salary of factory supervisor HT TTTTIT | I UNI] LE Problem 5 Mighty Muffler, Inc. operates an automobile service facility, which specializes in replacing muftlers on cars. The following table shows the costs incurred during a month when 750 mufflers were replaced. ‘Number of Muffler Replacements: 500. 750. 4,000 Total costs Fixed costs a 60,000 b Variable costs ¢ 37,500 d Total costs £ mt Cost per muffler replacement Fixed cost & Ree oes Variable cost. k Total cost per replacement m. se lr ae ‘Required: Fill in the missing amounts.Chapter 2 Cost — Concepts and Classification 41 Problem 6 Listed below are several costs incurred by the loan department of J P Morgan and Chase Bank. For each cost, indicate which of the following classification best describe the cost. More than one classification may apply to the same cost item, Cost classification ‘A. Controllable by the loan department B. Uncontrollable by the loan department C. Direct cost of the loan department D. Indirect cost ofthe loan department E. Differential cost F. Marginal cost G. Opportunity cost Hi Sunk cost 1 Out-of- pocket cost Cost items ‘Salary of the loan department manager Salary ofa loan department clerk Cost of office supplies used in the loan department Cost of the department's personal computer purchased by the department ‘manager last year. 5. Cost of gencral advertising by the bank, which ie allocated to the loan department ; 6. Revemnue that the foan department would have generated for the bank if a ranch loan office had been located downtown instead of in the next province 7. Difference in the cost incurred by the bank when one additional loan application is processed. 8. Cost of electricity allocated to the loan department 9. Price ofoffice supplies purchased and used by the loan department. 10. Depreciation of the office equipment used in the loan department. oN2 Cost Accounting Problem 7 ‘The financial statements of Mother Goose Company included these items: Marketing costs P 160,000 Direct labor cost 245,000 Administrative costs 145,000. Direct materials used (285,000 Fixed factory overhead costs 175,000 Vanable tactory overhead costs 155,000 Compute: 1, Prime cost 2. Conversion cost 3. Total inventoriablefproduet cost 4. Total period cost Problem 8 Apsil May Sales in units 3.200 4.500 Cost: Cost $ P 6,400 P-9,000 Cost T 5,600 5,600 Cost U . 7,100 7,100 Cost V 4,480 6,300 Cost W 3,950 5,250 a. Which of the following classifications describes Cost T? a. Variable «, Fixed . Curvilinear . Mixed b. Which of the following classifications describes Cost V? a. Variable . Fixed . Curvilinear . Mixed ©. Which of the following classification describes Cost W? a. Variable Fixed b Curvilinear d. MixedChapter 2. Cost - Concepts and Clas: Problem 9 Blanche Corporation estimated its unit costs of producing and selling 12,000 units per month as follows: Direct materials used P 32.00 Direct labor 20.00 ‘Variable manufacturing overhead 15.00 Fixed manufacturing overhead 600 Variable marketing costs 3.00 Fixed marketing costs 4.00 Estimated unit cost P_80,00 Compute: 1. Total variable costs per month. 2. Total fixed costs per month Problem 10 Given the following facts, complete the requirements below Sales price P 200 per unit ed costs: ‘Marketing and administrative 24,000 per period Manufacturing overhead 30,000 per period Variable costs: Marketing and administrative 6 per unit, Manufacturing overticad 9 per unit Direct labor 30 per unit Direct materials 60 per unit Units produced and sold 1,200 per period Required: Compute for the following Variable manufacturing cost per unit 2. Variable cost per unit 3. Full manufacturing cost per unit 4. Pull west to make and sell per unit4 Cost Accounting Problem 11 Johnson Corporation is preparing a flexible budget and desires to separate its electricity expense, which is semi-variable and fluctuates with total machine hours, into its fixed and variable components. Information for the first three months of 2009 is us follows. Machine Hours -—_Electricity Expense January 3,500 P 31,500 February 2,000 20,000 March 4,000 35,600 Requirements: 1, Compute the variable rate per machine hour. 2. Compute the fixed portion of Johnson's electricity expense. 3. Compute the total manufacturing costs if Johnson’s actual machine hours are 4,500. Problem 12 ‘Valdez Motors Co. makes motorcycles. Management wants to estimate ‘overhead costs to plan its operations. A recent trade publication revealed that ‘overhead costs tend to vary with machine hours. To check this, they collected the following data for the past 12 months. ‘Month no.. Machine Hours Overhead Costs 1 175 4,500 2 170 4,228 3 160 4,321 4 190 5,250 5 175 4,800 6 200 5,100 1 160 4,450 8 150 4200 9 210 SAIS 10 180 4,760 u 170 4,325 12 145 3,975Chapter 2, Cost - Concepts and Classification 45 Requirements for Problem 12: 1. Use the high-low method to estimate the fixed and variable portion of ‘overhead costs based on machine hours. 2. If the plant is planning to operate at a level of 200 machine hours next period, what would be the estimated overhead costs? 3. Use the ucthod of least square to estimate the fixed and vanable portion of overhead costs based on machine hours. Problem 13 ‘The total factory costs of Marco Company for the month of May showed the following among others: Deparment! Department 2 Direct materials P 400,000 700,000 Direct labor 350,000 £600,000 Depreciation for machinery and Equipment 100,000 180,000 Factory supplies 10,000 24,000 Allocated costs from corporate Headquarter 120,000 180,000 Supervisor's salary 45,000 55,000 Repairs and maintenance (allocated on the basis of number of hours spent to ‘maintain machines (50 hours for Dept. | and 100 hours for Dept. 2) P 120.000 Factory rent — buildings (allocated on the basis of floor space, 30% to Dept. 1 and 70% to Dept. 2) P 200,000 fe Plant executive's salaries (allocated on the basis of hours spent by cach department 40% to Dept. 1 and 60% to Dept, 2) P 350,000. In an event a department is discontinued. the supervisors assigned to the department shall be dismissed. The factory’ plant is covered by a 20-year lease agreement Required: Determine the following for each department 1. Direct variable costs. 2. Total controllable direct fixed costs 3. Total non-controllable direct fixed costs. 4. Total direct fixed costs. 5. Total direct costs 6. Total indirect costs 7. Total unavoidable costs in case of production stoppages