Cost Accounting Answer Brief Exercise

CHAPTER 2 BASIC COST MANAGEMENT CONCEPTS BRIEF EXERCISES Brief Exercise 2-1 1. Unit prime cost = (Direct materials + Direct labor)/Units = ($200,000 + $100,000)/50,000 = $6.00 2. Unit conversion cost = (Direct labor + Variable overhead + Fixed overhead)/Units = ($100,000 + $60,000 + $260,000)/50,000 = $8.40 3. Unit variable product cost = (Direct materials + Direct labor + Variable overhead)/Units = ($200,000 + $100,000 + $60,000)/50,000 = $7.20 4. Unit product cost = (Direct materials + Direct labor + Variable overhead + Fixed overhead)/Units = ($200,000 + $100,000 + $60,000 + $260,000)/50,000 = $12.40 5. Total direct materials, total direct labor, and total variable overhead would all decrease by 20 percent since the units decreased by 20 percent, and these are strictly variable costs. Thus, these three variable costs in total would be only 80 percent of what they were at the original volume of 50,000. Total fixed overhead would remain the same. Unit prime cost would decrease by 20 percent since both direct materials and direct labor are strictly variable, and 20 percent fewer units would require 20 percent less in variable cost. However, unit conversion cost would decrease by less than 20 percent because of the presence of fixed costs. New unit product cost = [($200,000 + $100,000 + $60,000)(0.80) + $260,000]/40,000 = $13.70 10 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Brief Exercise 2-2 1. Bob’s Bistro Statement of Cost of Goods Manufactured for the Coming Year Direct materials Beginning inventory .................................................. Add: Purchases ......................................................... Materials available ..................................................... Less: Ending inventory ............................................. Direct materials used in production .............................. Direct labor ...................................................................... Manufacturing (Factory) overhead ................................ Total manufacturing costs added.................................. Add: Beginning work in process ................................... Less: Ending work in process ....................................... Cost of goods manufactured ......................................... 2. $ 9,500 195,500 $ 205,000 5,000 $ 200,000 100,000 320,000 $ 620,000 4,500 2,500 $ 622,000 If the ending inventory of direct materials were $3,000 lower, then the direct materials used in production would be $3,000 higher, the total manufacturing costs added would be $3,000 higher, and the cost of goods manufactured would be $3,000 higher. No other line items would be affected. Brief Exercise 2-3 1. Bob’s Bistro Statement of Cost of Goods Sold for the Coming Year Cost of goods manufactured ............................................................... Add: Beginning finished goods ........................................................... Cost of goods available for sale .......................................................... Less: Ending finished goods ............................................................... Cost of goods sold ............................................................................... 2. $622,000 13,000 $635,000 10,000 $625,000 If beginning finished goods were $4,000 higher, then the cost of goods sold would be $4,000 higher. 11 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Brief Exercise 2-4 Bob’s Bistro Income Statement for the Coming Year Percent Sales ($20.00 × 50,500) .............................. Cost of goods sold .................................... Gross margin ............................................. Less: Operating expenses Selling expenses .................................. Administrative expenses ..................... Operating income ...................................... 2. $130,000 154,000 $1,010,000 625,000 $385,000 100.00 61.88 38.12 284,000 $101,000 28.12 10.00 If the operating expense has been 20 percent of sales for the past few years, managers probably would be concerned. Operating expense has risen by approximately 8 percent, and profit has probably declined. For example, managers might investigate to see why the increase occurred and take steps to decrease administrative costs (e.g., advertising, building lease, equipment rental, and delivery) or increase price, if possible, in the coming year. Brief Exercise 2-5 1. Unit prime cost = (Direct materials + Direct labor)/Units = ($27,000 + $472,500)/15,000 = $33.30 2. Unit conversion cost = (Direct labor + Variable overhead + Fixed overhead)/Units = ($472,500 + $15,000 + $18,000)/15,000 = $33.70 3. Unit variable services production cost = (Direct materials + Direct labor + Variable overhead)/Units = ($27,000 + $472,500 + $15,000)/15,000 = $34.30 4. Unit services production cost = (Direct materials + Direct labor + Variable overhead + Fixed overhead)/Units = ($27,000 + $472,500 + $15,000 + $18,000)/15,000 = $35.50 12 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Brief Exercise 2-5 (Concluded) 5. Since office rent is a fixed cost, no variable cost would be affected, and prime cost and total variable cost stay the same. Since conversion cost includes the new higher fixed overhead, it would increase. Similarly, total unit service cost would increase as shown below. Unit services production cost = ($27,000 + $472,500 + $15,000 + $19,500)/15,000 = $35.60 Brief Exercise 2-6 1. Happy Home Helpers, Inc. Statement of Cost of Services Produced for the Coming Year Direct materials Beginning inventory .................................................. Add: Purchases ......................................................... Materials available ..................................................... Less: Ending inventory ............................................. Direct materials used in production .............................. Direct labor ...................................................................... Cleaning overhead .......................................................... Total services production costs added ........................ Add: Beginning work in process*.................................. Less: Ending work in process ....................................... Cost of services produced ............................................. $ 4,000 25,600 $ 29,600 2,600 $ 27,000 472,500 33,000 $532,500 0 0 $532,500 *The beginning and ending work-in-process amounts could clearly be eliminated. They are shown here to reinforce the concept that for this firm, with no work in process, total services production cost equals cost of services produced. 2. If purchases of direct materials increased to $30,000, and materials inventories remained unchanged, then the direct materials used in production, the total services production costs added, and the cost of services produced would all increase by $4,400 ($30,000 − $25,600). Materials available would also increase by $4,400. 13 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Brief Exercise 2-7 1. Happy Home Helpers, Inc. Statement of Cost of Services Sold for the Coming Year Cost of services produced................................................................... Add: Beginning finished goods* ......................................................... Less: Ending finished goods ............................................................... Cost of services sold............................................................................ $532,500 0 0 $532,500 *The beginning and ending finished goods amounts could clearly be eliminated. They are shown here to reinforce the concept that for this firm, with no finished goods inventory, total cost of services produced equals the cost of services sold. 2. Unlike a service firm, we would expect a manufacturing firm to have beginning and ending finished goods inventory. Brief Exercise 2-8 1. Happy Home Helpers, Inc. Income Statement for the Coming Year Sales ($45 × 15,000) ......................................................... Cost of services sold....................................................... Gross margin ................................................................... Less operating expenses: Selling expenses ........................................................ Administrative expenses ........................................... Operating income ............................................................ 2. $ 675,000 532,500 $142,500 $ 22,000 53,000 75,000 $ 67,500 If the price increased to $50, sales would be $750,000, a $75,000 increase. This would increase gross margin and operating income by $75,000. The new operating income would be $142,500. 14 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. EXERCISES Exercise 2-9 1. The objective of the dishwashing system is to provide clean, germ-free dishes, glasses, and silverware. Processes include: scraping uneaten food off dishes into disposal, loading the racks, washing the dishes, and unloading the racks. 2. The items are classified as follows: a. Automatic dishwasher—interrelated part b. Racks to hold the dirty glasses, silverware, and dishes—interrelated part c. Electricity—input d. Water—input e. Waste disposal—interrelated part f. Sinks and sprayers—interrelated parts g. Dish detergent—input h. Gas heater to heat water to 180 degrees Fahrenheit—interrelated part i. Conveyor belt—interrelated part j. Persons 1, 2, 3, and 4—interrelated parts k. Clean, germ-free dishes—outputs l. Dirty dishes—inputs m. Half-eaten dinner—inputs n. Aprons—interrelated parts 3. Operational Model: Dishwashing System Inputs Dish detergent Water Electricity Dirty dishes Half-eaten dinner 4. Processes Scraping off food Loading racks Washing Unloading Output Clean dishes The cost management information system is similar in that it has interrelated parts: processes, objectives, inputs, and outputs. The differences are: inputs are economic events and there are users of information. The output of the cost management system produces user actions. Output can act as the basis for action or can confirm that actions already taken had the intended effects. 15 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-10 1. a. b. c. d. Interrelated parts: Processes: Objectives: Inputs: e. Outputs: f. User actions: 2. Operational Model: Cost Accounting System Inputs Direct materials Direct labor Depreciation Power Materials handling 3. Cost accounting personnel, computer, printer Cost assignment: Materials, labor, and overhead Costing out of products Direct materials, direct labor, depreciation, power and materials handling Product cost report Submission of a bid, make-or-buy decision Processes Cost assignment: Direct materials Direct labor Overhead Output Product cost Bidding decision Make-or-buy decision The inputs consist of only production costs suggesting a traditional product cost definition. Exercise 2-11 a. b. c. d. e. f. Diagnostic Predictive Prescriptive Descriptive Predictive Diagnostic Exercise 2-12 a. b. c. d. e. f. g. Direct tracing Allocation Direct tracing Direct tracing Driver tracing; potential driver—machine hours or maintenance hours Direct tracing Direct tracing 16 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-12 (Concluded) h. i. j. k. l. m. n. Allocation Driver tracing; potential driver—number of orders Driver tracing; potential driver—number of engineering hours Allocation Driver tracing; potential driver—number of employees or direct labor hours Allocation Allocation Exercise 2-13 a. Value-chain. This is a strategic decision and involves activities and costs throughout the entire value chain. b. Operating. At this point, the costs of design and development are sunk costs; the decision to produce should consider the costs of production, marketing, and servicing the product. c. Value-chain. The price needs to cover all product costs, including the costs of developing, selling, and servicing. d. Product. This approach is mandated for external reporting. e. Value-chain. Product mix decisions should consider all costs, and the mix that is the most profitable in the long run should be selected. f. Operating. The designs should be driven by the effect they have on production, marketing, and servicing costs. Thus, the operating cost definition is the most relevant. g. Product. This approach is mandated for external reporting. h. Operating. Research and design costs are not relevant for a price decision involving an existing product. Production, marketing, and servicing costs are relevant, however. i. Operating. Any special order should cover its costs, which potentially include production, marketing, and servicing costs. 17 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-14 1. Direct materials used = $150,500 + $184,800 − $145,300 = $190,000 2. Direct materials .............................................................................. Direct labor ..................................................................................... Overhead ........................................................................................ Total manufacturing cost .............................................................. Add: Beginning WIP ...................................................................... Less: Ending WIP........................................................................... Cost of goods manufactured ........................................................ $190,000 149,100 228,800 $567,900 95,300 (91,400) $571,800 Unit cost of goods manufactured = $571,800/20,000 = $28.59 3. Direct labor = Product cost − Direct materials − Overhead = $28.59 − $9.50 − $11.44 = $7.65 Prime cost = Direct materials + Direct labor = $9.50 + $7.65 = $17.15 Conversion cost = Direct labor + Overhead = $7.65 + $11.44 = $19.09 Exercise 2-15 1. Beginning inventory + Purchases − Ending inventory = Direct materials used $2,500 + $78,300 − Ending inventory = $73,500 Ending inventory = $7,300 2. Units in beginning finished goods inventory = $3,422/$5.90 = 580 Since 14,000 units were manufactured and 580 were in beginning finished goods inventory, 14,580 units were available for sale. But 14,120 units were sold, so ending finished goods inventory is 460. 3. Cost of goods manufactured = $349,000 + $116,000 − $117,300 = $347,700 18 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-15 (Concluded) 4. Prime cost = $55 = Direct materials + Direct labor Direct materials = $55 − Direct labor Conversion cost = $84 = Direct labor + Overhead Overhead = $84 − Direct labor Product cost = ($55 − Direct labor) + Direct labor + ($84 − Direct labor) = $105 Direct labor = $34 Direct materials + Direct labor = $55 Direct materials + $34 = $55 Direct materials = $21 5. Total manufacturing costs + BWIP − EWIP = COGM $412,000 + $76,000 − EWIP = $434,000 EWIP = $54,000 Prime cost + Overhead = Total manufacturing costs $64,000 + Overhead = $412,000 Overhead = $348,000 Exercise 2-16 1. LeMans Company Statement of Cost of Goods Manufactured for the Month of June Direct materials: Beginning inventory .................................................. Add: Purchases ......................................................... Materials available ..................................................... Less: Ending inventory ............................................. Direct materials used in production .............................. Direct labor ...................................................................... Manufacturing overhead ................................................ Total manufacturing costs added.................................. Add: Beginning work in process ................................... Less: Ending work in process ....................................... Cost of goods manufactured ......................................... 19 $ 62,400 346,000 $408,400 63,000 $345,400 143,000 375,800 $864,200 33,900 (37,500) $860,600 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-16 (Concluded) 2. LeMans Company Statement of Cost of Goods Sold for the Month of June Cost of goods manufactured ............................................................... Add: Beginning finished goods inventory ......................................... Cost of goods available for sale .......................................................... Less: Ending finished goods inventory.............................................. Cost of goods sold ............................................................................... $860,600 55,600 $916,200 50,800 $865,400 Exercise 2-17 1. Units ending finished goods = 3,400 + 30,000 − 31,000 = 2,400 Finished goods ending inventory = 2,400 × $39* = $93,600 *Since the unit cost of beginning finished goods and the unit cost of current production both equal $39, the unit cost of ending finished goods must also equal $39. 2. Kildeer Company Statement of Cost of Goods Sold for the Year Ended December 31 Cost of goods manufactured ($39 × 30,000)....................................... Add: Beginning finished goods inventory ......................................... Cost of goods available for sale .......................................................... Less: Ending finished goods inventory.............................................. Cost of goods sold ............................................................................... 20 $1,170,000 132,600 $1,302,600 93,600 $1,209,000 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-17 (Concluded) 3. Kildeer Company Income Statement: Absorption Costing for the Year Ended December 31 Percent $1,612,000 100.00 1,209,000 75.00 $ 403,000 25.00 Sales (31,000 × $52) .................................................. Cost of goods sold ................................................... Gross margin............................................................. Less operating expenses: Commissions (31,000 × $1.30)............................ $ 40,300 Advertising co-pays ............................................ 95,000 Administrative expenses .................................... 183,000 318,300 Operating income ..................................................... $ 84,700 4. 19.75 5.25 Kildeer’s accountants might utilize various data analytic types to improve its decisions. For example, descriptive data analytics would inform accountants as to any historic trends in the easels’ sales revenues, cost of goods sold, and profitability. Diagnostic data analytics, such as an analysis of the easel’s significant cost drivers, would inform accountants as to why the easels incur their current costs given existing production technologies and so forth. Predictive data analytics, such as sales or cost of goods sold forecasting models, would help accountants better predict future trends in the easels’ sales, costs, and profitability. Finally, prescriptive analytics, such as Monte Carlo simulations, should help accountants to more effectively reduce the future product cost of manufacturing easels, as well as full cost across the value chain of designing, delivering, and servicing easels. 21 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-18 1. Anglin Company Statement of Cost of Goods Manufactured for the Year Ended December 31 Direct materials: Beginning inventory................................................... Add: Purchases .......................................................... Freight-in on materials ...................................... Materials available...................................................... Less: Ending inventory.............................................. Direct materials used in production .............................. Direct labor....................................................................... Manufacturing overhead: Factory supplies ......................................................... Factory utilities ........................................................... Factory supervision and indirect labor .................... Materials handling ...................................................... Total overhead costs ................................................. Total manufacturing costs added .................................. Add: Beginning work in process .................................... Less: Ending work in process ........................................ Cost of goods manufactured .......................................... 2. $ 37,200 378,890 7,500 $423,590 34,600 $ 388,990 495,900 $ 18,500 54,000 165,000 16,900 254,400 $1,139,290 201,000 (117,400) $1,222,890 Anglin Company Statement of Cost of Goods Sold for the Year Ended December 31 Cost of goods manufactured ............................................................... Add: Beginning finished goods inventory ......................................... Cost of goods available for sale .......................................................... Less: Ending finished goods inventory.............................................. Cost of goods sold ............................................................................... 22 $1,222,890 59,200 $1,282,090 62,700 $1,219,390 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-19 1. Beginning inventory, materials ..................................................... + Purchases.................................................................................. − Ending inventory, materials ..................................................... Materials used in service provision .............................................. 2. Prime cost = $11,550 + $25,570 = $37,120 3. Conversion cost = $25,570 + $18,130 = $43,700 4. Direct materials .............................................................................. Direct labor ..................................................................................... Overhead......................................................................................... Cost of services ............................................................................. 5. $ 11,550 25,570 18,130 $ 55,250 Send It Packing Income Statement For the Month Ended May 31 Sales revenues ...................................................................................... Cost of services sold ............................................................................ Gross margin......................................................................................... Operating expenses: Advertising ....................................................................................... Franchise fee (0.05 × $102,100) ...................................................... Other administrative expenses ...................................................... Operating income ................................................................................. 6. $ 1,050 11,450 (950) $ 11,550 $102,100 55,250 $ 46,850 (2,750) (5,105) (3,650) $ 35,345 Clearly, the rent, insurance, and utilities are indirect costs. No matter how many packages Lakeesha and her workers package and send off for delivery, the rent, utilities, and insurance will be the same. The amount paid to UPS and FedEx, however, for the package delivery is a direct cost. This amount, which is collected by Send It Packing, is a direct cost of each package. It will change from month to month according to the number and type of packages that customers drop off. 23 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-20 1. Shelly is interested in the manufacturing costs of Glaxane. In particular, the costs of direct materials, direct labor, and overhead will be calculated to budget for Glaxane production. 2. Leslie will be concerned with all costs along the value chain. Clearly, the aftersale costs will be an important factor in pricing since the potential for fatal side effects will lead to both lawsuits and the withdrawal of Glaxane from the market. However, Leslie must also be concerned with the costs of research, development, and production since pharmaceutical companies attempt to link all of these costs to a drug to justify their pricing strategies. 3. Dante will be primarily concerned with the overall research and development costs and the eventual revenue from the successful drugs. Any individual potential drug can turn out to have no value as long as some drug projects are successful and can justify the total efforts. Exercise 2-21 1. Given the description provided, it appears that Jazon uses a traditional cost management system. First, product costs are determined only by production costs. Apparently, the financial accounting system is driving the type of product cost information being produced. Second, only direct labor hours, a unit-based driver, are used to assign overhead costs. Since many overhead costs are likely to be caused by non-unit drivers, this suggests a strong reliance on allocation for cost assignment. Third, the company’s control system focuses on departmental, rather than firm-wide, performance and relies on financial measures. 2. Product costing accuracy can be improved by placing more emphasis on tracing and less on allocation. There is enough information provided to reveal that the two products make quite different demands on certain activities. Setup, receiving, and purchasing resources are consumed differently by the two products, and it is doubtful that direct labor hours would have anything to do with the two products’ patterns of resource consumption for these three activities. Thus, using activity drivers that better reflect the differential resource consumption would improve the cost assignments. Jazon would need to assign costs to the activities using direct tracing and resource drivers and then assign the cost of the activities to the two products using activity drivers. Jazon also should consider the possibility of computing different— more managerially relevant—product costs such as value-chain costs and operational costs. 24 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-21 (Concluded) 3. Jazon would need to change its control focus from managing costs to managing activities. This would entail shifting emphasis from departmental performance maximization to system-wide performance maximization. To bring about this change, Jazon will need to provide detailed information concerning activities. Since activities cause costs, managing activities is a more logical approach to controlling costs. 4. Answers to this requirement will vary. However, many answers are likely to include the perspective that the implementation of an activity-based operational control system requires Jazon to collect considerable new data involving various activities performed across the value chain for the company’s two camera models. As a result of these new activity data, Jazon should be able to conduct analyses to better understand why each model’s cost behaves accordingly (e.g., diagnostic data analytics). Furthermore, Jazon could use its activity data to better forecast future sales of each model, thereby allowing it to more accurately budget and schedule various activity capacities to meet expected production and delivery demands (e.g., predictive data analytics). Finally, Jazon could choose to use its activity cost rate insights to reengineer its relatively more costly value-chain activities in an attempt to lower the full cost of one or both of its camera models (e.g., prescriptive data analytics). Exercise 2-22 1. Direct materials used = $68,000 + $278,000 − $70,400 = $275,600 2. Direct materials .............................................................................. Direct labor ..................................................................................... Overhead......................................................................................... Total manufacturing cost .............................................................. Add: Beginning work in process .................................................. Less: Ending work in process ...................................................... Cost of goods manufactured ........................................................ $275,600 189,000 523,000 $987,600 29,400 (40,000) $977,000 Unit cost of goods manufactured = $977,000/100,000 = $9.77 3. Direct labor per unit = $9.77 − $2.70 − $5.30 = $1.77 Prime cost = $2.70 + $1.77 = $4.47 Conversion cost = $1.77 + $5.30 = $7.07 25 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Exercise 2-23 1. 2. Cost of goods manufactured ........................................................ Add: Beginning finished goods inventory ................................... Less: Ending finished goods inventory ....................................... Cost of goods sold ........................................................................ Ellerson Company Income Statement For the Year Ended December 31 Sales ...................................................................................................... Cost of goods sold ............................................................................... Gross margin ........................................................................................ Less: Selling and administrative expenses ........................................ Operating income ................................................................................. 3. $977,000 43,200 42,100 $978,100 $1,312,000 978,100 $ 333,900 204,600 $ 129,300 These trend analyses represent descriptive data analytics because they provide patterns in the company’s financial performance. Several important decisions might be informed by a better understanding of Ellerson’s historic cost and profitability performance. For example, accountants might establish how the rate of change in cost of goods sold compares to the rate of change in net income. If net income is increasing over time, but cost of goods sold is increasing at a considerably faster rate, the company might need to examine ways to curb the rate of increase in cost of goods sold, among other expense line items. 26 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROBLEMS Problem 2-24 1. Direct materials = $124,000 + $250,000 − $102,000 = $272,000 2. Prime cost = $272,000 + $140,000 = $412,000 3. First, calculate total overhead cost: Depreciation on factory equipment .......................................... Depreciation on factory building .............................................. Factory insurance ...................................................................... Factory property taxes .............................................................. Factory utilities ........................................................................... Indirect labor salaries ................................................................ Total overhead ............................................................................ $ 45,000 30,000 15,000 20,000 34,000 156,000 $300,000 Conversion cost = $140,000 + $300,000 = $440,000 4. Brody Company Statement of Cost of Goods Manufactured for Last Year Direct materials .............................................................................. Direct labor ..................................................................................... Overhead......................................................................................... Total manufacturing cost .............................................................. Add: Beginning work in process .................................................. Less: Ending work in process ...................................................... Cost of goods manufactured ........................................................ $ 272,000 140,000 300,000 $ 712,000 124,000 (130,000) $ 706,000 Unit product cost = $706,000/100,000 units = $7.06 5. Brody Company Statement of Cost of Goods Sold for Last Year Cost of goods manufactured ........................................................ Add: Beginning inventory, Finished goods ................................. Less: Ending inventory, Finished goods ..................................... Cost of goods sold ......................................................................... 27 $706,000 84,000 (82,000) $708,000 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-24 (Concluded) 6. First, compute selling expense and administrative expense: Utilities, sales office .................................................................. Sales office salaries................................................................... Sales commissions ($1,200,000 × 0.05) ................................... Selling expense .......................................................................... Depreciation on headquarters building ................................... Property taxes, headquarters ................................................... Administrative salaries.............................................................. Administrative expense............................................................. $ 1,800 90,000 60,000 $151,800 $ 50,000 18,000 150,000 $218,000 Brody Company Income Statement for Last Year Sales .............................................................. Cost of goods sold ....................................... Gross margin ................................................ Less: Operating expenses Selling expenses ..................................... Administrative expenses ........................ Operating income ......................................... $ 1,200,000 708,000 $ 492,000 Percent 100.00 59.00 41.00 $ 151,800 218,000 $ 122,200 12.65 18.17 10.18 Problem 2-25 1. The decision to add plastic cups was made assuming that the fixed cost pool would remain unchanged. However, management failed to realize that additional demands on activities would be made by the new product line. Their failure to recognize this was due to the fact that they did not understand that costs can be driven by factors that are unrelated to the number of units produced. For example, materials handling costs are apparently driven by the number of moves, inspection costs by the number of batches, purchasing costs by the number of orders, and accounting costs by the number of transactions. Demand for these activities increased and so supply of the activities had to be increased; each activity evidently did not have enough idle capacity to handle the increased demands. 28 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-25 (Concluded) 2. An activity-based cost management system provides information about both unit-based and non-unit-based drivers and is concerned with tracing these costs to the individual product lines. Using this system, the need for additional resources would have been revealed, leading to a better decision. Because previously, the factory had made only one type of product, it surely did not have an ABC system, and did not need one. Now, it is unlikely that the significant cost of installing such a system would be worth it. Instead, the company’s accountant could use his/her knowledge of ABC concepts to work with all departments to figure out which activities and costs would increase due to the addition of the plastic cups line. This way, the heads of production, the materials storeroom, purchasing, inspection, and accounting could have suggested the need for additional resources. These resource costs could then have been incorporated into the planning for the additional product, leading to a better decision. Problem 2-26 1. Traditional Cost System: a. Interrelated parts: Cost accounting staff, computer, printer b. Processes: Cost assignment:  Direct tracing: Materials, labor  Driver tracing: None  Allocation (using direct labor hours for assignment): Setup costs, purchasing costs, materials handling costs, plant depreciation c. Objectives: Costing out of products d. Inputs: Direct materials cost, direct labor cost, setup cost, purchasing cost, materials handling cost, plant depreciation e. Outputs: Product cost report f. User actions: Submission of a bid, make-or-buy decision Note: A traditional system would not use non-unit-drivers such as number of setups, moves, and orders to assign overhead costs to products. This leaves direct labor hours, a unit-based driver, as the only possibility. Since direct labor hours is not a good driver for the overhead activities listed, then allocation is the principal means of cost assignment. Furthermore, a traditional cost system would not assign sales or service costs to products, so these two items cannot be inputs for the system. 29 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-26 (Continued) Activity-Based Cost System: a. Interrelated parts: Cost accounting staff, computer, printer b. Processes: Cost assignment:  Direct tracing: Materials, labor  Driver tracing: Setup costs (number of setups), purchasing costs (number of orders), materials handling costs (number of moves), commissions (units sold), service costs (number of complaints)  Allocation: Plant depreciation (direct labor hours) c. Objectives: Costing out of products d. Inputs: Direct materials cost, direct labor cost, setup cost, purchasing cost, materials handling cost, commissions, customer service cost, plant depreciation e. Outputs: Product cost report f. User actions: Submission of a bid, make-or-buy decision 2. The differences between the two systems are found in the processes. The ABC system is driver-intensive; non-unit drivers are used to trace costs to products, whereas this is not part of the traditional system (which is allocation-intensive). The ABC system also assigns marketing and customer service costs to products, giving a more comprehensive view of product costs. Thus, although both systems provide product cost reports, the content of the reports will differ. The increased accuracy of cost assignments because of driver tracing and the additional marketing and customer service cost information provided by the ABC system should increase the quality of the bidding and make-or-buy decisions (i.e., reduce the error in decisions of this type). 3. Operational Model: Traditional Cost Accounting System Inputs Processes Output Costs of: Direct materials Direct labor Direct tracing: Setups Direct materials Purchasing Direct labor Materials handling Allocation: Plant depreciation Overhead Costing out product 30 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-26 (Concluded) Feedback Actions Evaluation Users Bidding decision, Make-or-buy decision Operational Model: ABC Cost Accounting System Inputs Processes Output Costs of: Direct tracing: Direct materials Direct materials Direct labor Direct labor Allocation: Plant depreciation Plant depreciation Driver tracing: Setups Setups Purchasing Purchasing Materials handling Materials handling Commissions Commissions Customer service Customer service Costing out product Feedback Actions Evaluation Users Bidding decision, Make-or-buy decision 4. The operational models reveal that the ABC cost system is more complex, requires more inputs, and uses more complicated processes to transform the inputs. Thus, we would expect this system to be more costly to operate. On the other hand, the increased complexity provides increased accuracy and a richer set of possible product cost definitions. The ABC system can provide both traditional and operating product cost information. Both these factors should provide an advantage when it comes to managerial decision making. (The cost of making bad decisions is reduced.) Choosing the ABC system depends on whether the benefits of improved decision making outweigh the increased measurement costs. 31 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-27 Traditional Control System: Actions Justification a Performance, organizational subunit; managing costs b Rewards manager for subunit performance d Emphasizes performance of organizational subunit g Emphasis on controlling costs j Reward based on controlling costs (subunit performance) l Emphasis on controlling costs o Emphasis on subunit performance; controlling costs Activity-Based Control System: Actions Justification c Activity-based cost used as input for activity control e Emphasis on activity analysis f Emphasis on managing activities (activity analysis) h Managing activities i Driver analysis k Driver analysis; activity management m Nonfinancial measure of performance n Driver analysis; activity performance Problem 2-28 Spencer Company Statement of Cost of Goods Manufactured for the Year Ended December 31 1. Direct materials: Beginning inventory ............................................. $ 290,000 Add: Purchases..................................................... 2,350,000 Materials available ................................................ $2,640,000 Less: Ending inventory ........................................ 112,000 Direct materials used in production ......................... Direct labor ................................................................. Manufacturing overhead: Indirect labor ......................................................... $ 334,000 Depreciation, factory building ............................. 525,000 Depreciation, factory equipment ......................... 416,000 Property taxes on factory ..................................... 65,000 32 $2,528,000 1,100,000 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-28 (Concluded) Utilities, factory .................................................... Insurance on factory ............................................ Total manufacturing costs added ............................ Add: Beginning work in process.............................. Less: Ending work in process .................................. Cost of goods manufactured .................................... 150,000 200,000 1,690,000 $5,318,000 450,000 (750,000) $5,018,000 2. Unit cost = $5,018,000/200,000 = $25.09 3. Spencer Company Income Statement: Absorption Costing for the Year Ended December 31 Sales (191,000* × $36) .................................... Cost of goods sold: Cost of goods manufactured ................. Add: Beg. finished goods inventory ...... Goods available for sale ......................... Less: End. finished goods inventory .... Gross margin.................................................. Less: Salary, sales supervisor ..................... Commissions, salespersons .............. Advertising .......................................... Administrative expenses .................... Operating income .......................................... $5,018,000 107,500 $5,125,500 488,750 $ 85,000 216,000 500,000 $6,876,000 Percent 100.00 4,636,750 $2,239,250 67.43 32.57 801,000 390,000 $1,048,250 11.65 5.67 15.25 * 2,500 + 200,000 − 11,500 = 191,000 units sold 4. Given that the data analyses in the question involving Spencer’s cost of goods sold, the accountants should easily find the data needed to conduct the desired statistical analysis. Cost of goods sold, like any accounting data that must adhere to Generally Accepted Accounting Principles (GAAP) for public disclosure via the financial statements, should be readily available from the company’s tightly controlled and easily accessible general ledger or other internal financial accounting system. On the contrary, data involving most nonGAAP information, such as product quality, customer loyalty, or corporate reputation, is likely to be relatively more difficult to find for use in various analyses. 33 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-29 1. Mythic, Inc. Statement of Cost of Goods Manufactured for the Previous Year Direct materials ............................................................................... Direct labor ...................................................................................... Manufacturing overhead................................................................. Total current manufacturing costs ................................................ Add: Beginning work in process ................................................... Less: Ending work in process ....................................................... Cost of goods manufactured ......................................................... $ 5,000 30,000 a 110,000 a $145,000 15,000 b (6,000) b $154,000 a Conversion cost = 4 × Prime cost $140,000 = 4 (Direct materials + Direct labor) $140,000 = 4($5,000 + Direct labor) = $20,000 + 4(Direct labor) Direct labor = $30,000 Overhead = Conversion cost − Direct labor Overhead = $140,000 − $30,000 Overhead = $110,000 b Ending WIP = 0.4 × Beginning WIP ($5,000 + $30,000 + $110,000) + Beg. WIP − (0.4 × Beg. WIP) = $154,000 Beginning WIP = $15,000; Ending WIP = 0.4 × $15,000 = $6,000 2. Mythic, Inc. Statement of Cost of Goods Sold for the Previous Year Cost of goods manufactured ......................................................... Add: Beginning finished goods ..................................................... Cost of goods available for sale .................................................... Less: Ending finished goods ......................................................... Cost of goods sold .......................................................................... a b $154,000 22,400 $176,400 7,000 a $169,400 b Ending finished goods = $176,400 − $169,400 = $7,000 Cost of goods sold = 1.10 × $154,000 = $169,400 34 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-30 1. Mason, Durant, and Santos Statement of Cost of Services Sold for the Year Ended June 30 Direct materials used* .......................................................................... Direct labor ............................................................................................ Overhead ............................................................................................... Total service costs added .................................................................... Add: Beginning work in process ......................................................... Less: Ending work in process ............................................................. Cost of services sold ............................................................................ $ 46,500* 1,400,000 100,000 $1,546,500 44,000 (13,000) $1,577,500 * Because all other data for the statement are given, you can work backward from the cost of services sold to get the direct materials used. In this type of firm, direct materials probably includes supplies such as paper, toner, file folders, envelopes, etc. 2. 3. The dominant cost is direct labor (for the 15 professionals). Although labor is the major cost of providing many services, it is not always the case. For example, the dominant cost for some medical services may be overhead (e.g., CAT scans). In some services, the dominant cost may be materials (e.g., funeral services). Mason, Durant, and Santos Income Statement for the Year Ended June 30 Sales (3,000 × $850) ........................................................ Cost of services sold ...................................................... Gross margin................................................................... Less operating expenses: Selling expenses ....................................................... Administrative expenses .......................................... Operating income ........................................................... 35 $2,550,000 1,577,500 $ 972,500 $ 65,000 257,000 $ 322,000 650,500 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-30 (Concluded) 4. Services have three attributes that are not possessed by tangible products: (1) intangibility, (2) perishability, and (3) inseparability. Intangibility means that the buyers of services cannot see, feel, hear, or taste a service before it is bought. Perishability means that services cannot be stored. Therefore, there will never be any finished goods inventories, making the cost of services produced equal to cost of services sold. Inseparability means that providers and buyers of services must be in direct contact for an exchange to take place. The average cost of preparing one tax return last year was $526 ($1,577,500/3,000 returns). However, it will be difficult for MDS to use this figure in budgeting. Some of its accountants are no doubt more experienced than others, capable of completing a return in less time and with less research. The returns themselves differ in complexity. In addition, the seemingly continual changes in the tax law may affect certain of its clients more than others, making those clients’ returns more difficult to prepare. Problem 2-31 1. Vasani House Company Statement of Cost of Goods Manufactured for Last Year Direct materials: Beginning inventory................................................... Add: Purchases .......................................................... Less: Ending inventory.............................................. Direct materials used in production .............................. Direct labor....................................................................... Manufacturing overhead: Plant depreciation ...................................................... Salary, production supervisor .................................. Indirect labor .............................................................. Utilities, factory .......................................................... Depreciation, factory equipment .............................. Supplies (0.7 × $80,000) ............................................. Total manufacturing costs added .................................. Add: Beginning work in process .................................... Less: Ending work in process ........................................ Cost of goods manufactured .......................................... 36 $ 12,050 241,000 (13,550) $239,500 485,000 $ 75,900 88,100 58,800 40,700 28,000 56,000 347,500 $1,072,000 28,750 (23,250) $1,077,500 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Problem 2-31 (Concluded) 2. Vasani House Company Income Statement: Absorption Costing for Last Year Sales (7,000 × $250) ........................................................ Cost of goods sold: Beginning finished goods inventory ....................... Add: Cost of goods manufactured ........................... Goods available for sale ........................................... Less: Ending finished goods inventory .................. Gross margin................................................................... Less operating expenses: Selling expenses* ...................................................... Administrative expenses .......................................... Operating income ........................................................... $1,750,000 46,500 1,077,500 1,124,000 49,000 $214,400 288,600 1,075,000 $ 675,000 503,000 $ 172,000 *$62,000 + (0.3 × $80,000) + $75,000 + $53,400 = $214,400 37 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2-32 PRODUCT COST DEFINITIONS: ETHICS CASE 1. The consumer groups are using a cost definition that relies on production (or manufacturing) costs. The pharmaceutical companies’ definition of cost is based on the value chain. They include the costs of research and development, and possibly the cost of selling and post-sales service. It seems quite reasonable to include the costs of research and development when discussing the cost of a drug. For the cost of a life-saving drug, such as Betaseron, the cost of marketing would not be relevant. Either a patient has a disease that would be helped by the drug or not. 2. As the accountant compiling costs for the drug, it is reasonable to include all costs related to research, development, and production of the drug. The relevant cost of selling and delivering the drug also would be included. Allocation of costs across the corporation would be less defensible. For example, the company no doubt has advertising expenditures that are more general and benefit the company as a whole. These costs would be difficult to trace to the drug under consideration. This situation supports the need for direct and driver tracing. As a result, the IMA Statement of Ethical Professional Practice (see Chapter 1) would come into play. In particular, competence and credibility would be important. Competence requires the accountant to continually develop knowledge and skills. Credibility requires the accountant to disclose all information that could affect the user’s understanding of the information and the ability to make decisions based on that information. 38 © 2022 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.