Cost Accounting

Assignment – Model Answers

Exercise (01):
Costs involved in the process are listed below. For each cost below, indicate whether
it is a direct variable, direct fixed, indirect variable or indirect fixed cost, assuming
“units of production of each kind of figurine” is the cost object.

No. Item Direct / Indirect Variable / Fixed

A Clay Direct variable
B Paint direct variable
direct (or could be
indirect if small and
C Packaging materials variable
not traced to each
unit)
fixed (unless “units
Depreciation on of output”
D machinery and indirect depreciation, which
molds then would be
variable)
E Rent on factory indirect fixed
F Insurance on factory indirect fixed
probably some
variable and some
fixed (e.g. electricity
G Factory utilities indirect
may be variable but
heating costs may be
fixed)
H Painters direct variable
Painting Department
I indirect fixed
manager
Baking Department
J indirect fixed
manager
depends on how
K Materials handlers – they are paid. Most fixed if salaried
likely indirect
 L Custodian indirect fixed
M Night guard indirect fixed
depends on how
Machinist (running
N they are paid. Most fixed, if salaried
the baking machine)
likely indirect
probably fixed, if
salaried, but may be
Machine variable if paid only
O maintenance indirect for time worked and
personnel maintenance
increases with
increased production
Maintenance
P indirect variable
supplies
most likely fixed
since the custodians
Q Cleaning supplies indirect probably do the
same amount of
cleaning every night

Exercise (02):

Consider the following account balances (in thousands) for the Canseco Company:
Beginning End of
Canseco Company
of 2020 2020
Direct materials inventory $22,000 $26,000
Work-in-process inventory 21,000 20,000
Finished goods inventory 18,000 23,000
Purchases of direct materials 75,000
Direct manufacturing labor 25,000
Indirect manufacturing labor 15,000
Plant insurance 9,000
Depreciation—plant, building, and equipment 11,000
Repairs and maintenance—plant 4,000
Marketing, distribution, and customer-service costs 93,000
General and administrative costs 29,000
Required:
1. Prepare a schedule for the cost of goods manufactured for 2020. Required
2. Revenues for 2020 were $300 million. Prepare the income statement for 2020.
Answer:
1. Canseco Company
Schedule of Cost of Goods Manufactured
Year Ended December 31, 2020
Direct materials cost
Beginning inventory, January 1, 2020 $ 22,000
Purchases of direct materials 75,000
Cost of direct materials available for use 97,000
Ending inventory, December 31, 2020 (26,000)
Direct materials used $ 71,000
Direct manufacturing labor costs 25,000
Indirect manufacturing costs
Indirect manufacturing labor 15,000
Plant insurance 9,000
Depreciation—plant building & equipment 11,000
Repairs and maintenance—plant 4,000
Total indirect manufacturing costs 39,000
Manufacturing costs incurred during 2011 135,000
Add beginning work-in-process inventory, January 1, 2011 21,000
Total manufacturing costs to account for 156,000
Deduct ending work-in-process inventory, December 31, 2011 (20,000)
Cost of goods manufactured (to Income Statement) $136,000

2. Canseco Company
Income Statement
Year Ended December 31, 2011
Revenues $300,000
Cost of goods sold:
Beginning finished goods, January 1, 2020 $ 18,000
Cost of goods manufactured 136,000
Cost of goods available for sale 154,000
Ending finished goods, December 31, 2020 (23,000)
Cost of goods sold (131,000)
Gross margin 169,000
Operating costs:
Marketing, distribution, and customer-service costs 93,000
General and administrative costs 29,000
Total operating costs (122,000)
Operating income $ 47,000
Exercise (03):

The Howell Corporation has the following account balances (in millions):

For Specific Date For Year 2020

Direct materials inventory, Purchases of direct materials $325
Jan. 1, 2020 $15
Work-in-process inventory, Direct manufacturing labor 100
Jan. 1, 2020 10
Finished goods inventory, Depreciation — plant and equipment 80
Jan. 1, 2020 70
Direct materials inventory, Plant supervisory salaries 5
Dec. 31, 2020 20
Work-in-process inventory, Miscellaneous plant overhead 35
Dec. 31, 2020 5
Finished goods inventory, Revenues 950
Dec. 31, 2020 55
Marketing, distribution, and customer
- service costs 240
Plant supplies used 10
Plant utilities 30
Indirect manufacturing labor 60

Required:
Prepare an income statement and a supporting schedule of cost of goods
manufactured for the year ended December 31, 2020.
Answer:
Howell Corporation
Income Statement for the Year Ended December 31, 2020
(in millions)
Revenues $950
Cost of goods sold
Beginning finished goods, Jan. 1, 2020 $ 70
Cost of goods manufactured (below) 645
Cost of goods available for sale 715
Ending finished goods, Dec. 31, 2020 (55) (660)
Gross margin 290
Marketing, distribution, and customer-service costs (240)
Operating income $ 50
Howell Corporation
Schedule of Cost of Goods Manufactured
for the Year Ended December 31, 2020
(in millions)
Direct materials costs:
Beginning inventory, Jan. 1, 2020 $ 15
Purchases of direct materials 325
Cost of direct materials available for use 340
Ending inventory, Dec. 31, 2020 (20)
Direct materials used $320
Direct manufacturing labor costs 100
Indirect manufacturing costs:
Indirect manufacturing labor 60
Plant supplies used 10
Plant utilities 30
Depreciation––plant and equipment 80
Plant supervisory salaries 5
Miscellaneous plant overhead 35 220
Manufacturing costs incurred during 2020 640
Add beginning work-in-process inventory, Jan. 1, 2020 10
Total manufacturing costs to account for 650
Deduct ending work-in-process, Dec. 31, 2020 (5)
Cost of goods manufactured $645
Exercise (04):
Shown below are terms or phrases preceded by letters a through j followed by a list
of definitions. Match the terms or phrases 1 through 9 with the correct definitions by
placing the letter of the term or phrase in the answer space provided at the beginning
of each definition.

1. Estimated line of The amount that the sale of one unit contributes toward
cost behavior recovering fixed costs and earning profit. 4

A cost that changes in proportion to changes in volume of

2. Step- cost activity. 3

3. Variable cost A cost that includes both fixed and variable costs. 8
4. Contribution A line drawn on a graph to fit the past relation between cost
margin per unit and sales. 1

A statistical method for deriving an estimated line of cost

behavior that is more precise than the high-low method and
5. Fixed cost a scatter diagram. 9
6. Relevant range A company's normal operating range; excludes extremely
of operations high and low volumes that are not likely to be encountered. 6

A cost that remains constant over limited ranges of volumes

7. Cost-volume- of activity but changes by a lump sum when volume
profit analysis changes occur outside these limited ranges. 2

Useful in business planning; includes predicting the

volume of activity, the costs incurred, sales earned, and
8. Mixed cost profits received. 7

9. Least-squares A cost that remains unchanged in total amount even when

regression the volume of activity varies. 5
Exercise (05):
Omar operates a car wash. Incoming cars are put on an automatic conveyor belt.
Cars are washed as the conveyor belt carries them from the start station to the finish
station. After a car moves off the conveyor belt, it is dried manually. Workers then
clean and vacuum the inside of the car. Omar serviced 80,000 cars in 2019. Omar
reports the following costs for 2019:
Account Description Costs
Car wash labor L.E. 260,000
Soap, cloth, and supplies 42,000
Water 38,000
Electric power to move conveyor belt 72,000
Depreciation 64,000
Salaries 46,000
Required:
1- According to account analysis method, classify each account as variable or
fixed with respect to the number of cars washed. Explain.
2- Suppose Omar washed 90,000 cars in 2019. Use the cost classification you
developed in requirement 1 to estimate Omar’s total costs in 2019.
Depreciation is computed on a straight line basis.
Answer:
1. Variable costs:
Car wash labor $260,000
Soap, cloth, and supplies 42,000
Water 38,000
Electric power to move conveyor belt 72,000
Total variable costs $412,000
Fixed costs:
Depreciation $ 64,000
Salaries 46,000
Total fixed costs $110,000
Some costs are classified as variable because the total costs in these categories
change in proportion to the number of cars washed in Lorenzo’s operation. Some
costs are classified as fixed because the total costs in these categories do not vary
with the number of cars washed. If the conveyor belt moves regardless of the number
of cars on it, the electricity costs to power the conveyor belt would be a fixed cost.

2. Variable costs per car = = $5.15 per car ($412,000 / 80,000)

Total costs estimated for 90,000 cars = $110,000 + ($5.15 × 90,000) = $573,500
Exercise (06):
Omar Manufacturing Company produces inventory in a highly automated assembly
plant in Cairo, Fayoum. The automated system is in its first year of operation and
management is still unsure of the best way to estimate the overhead costs of
operations for budgetary purposes. For the first six months of operations, the
following data were collected:
Machine - Kilowatt - Total Overhead
Month hours hours Costs
January 3,800 4,520,000 L.E.338,000
February 3,650 4,340,000 L.E.336,800
March 3,900 4,500,000 L.E.339,200
April 3,300 4,290,000 L.E.336,800
May 3,250 4,200,000 L.E.326,000
June 3,100 4,120,000 L.E.320,000
Required:
a) Use the high-low method to determine the estimating cost function with
machine-hours as the cost driver.
b) Use the high-low method to determine the estimating cost function with
kilowatt-hours as the cost driver.
c) For July, the company ran the machines for 3,000 hours and used 4,000,000
kilowatt-hours of power. The overhead costs totaled L.E.314,000. Which cost
driver was the best predictor for July?
Answer:
a. Machine-hours:
Slope coefficient = (L.E.339,200 - L.E.320,000) / (3,900 - 3,100)
= L.E.24.00 per machine-hour
Constant = L.E.339,200 - (L.E.24 × 3,900) = L.E.245,600
Machine-hour estimating equation = L.E.245,600 + L.E.24X
b. Kilowatt-hours:
Slope coefficient = (L.E.338,000 - L.E.320,000) / (4,520,000 - 4,120,000)
= L.E.0.045 per kilowatt-hour
Constant = L.E.338,000 - (L.E.0.045 × 4,520,000) = L.E.134,600
Kilowatt-hour estimating equation = L.E.134,600 + L.E.0.045KWH
c. July's estimated costs:
with machine-hours = L.E.245,600 + L.E.24 × 3,000 = L.E.317,600
with kilowatt-hours = L.E.134,600 + L.E.0.045 × 4,000,000 = L.E.314,600
The best estimator for July was the kilowatt-hour cost driver.

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