MidTerm StudyGuide Chapter 1

Product Costs

1.3 All costs that are involved in acquiring or making a product. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. Also see inventorial costs.

product costs

Direct materials + Direct labor + Manufacturing Overhead = ?

period cost

Selling expenses + Administrative expenses = ?

activity base or cost drivers

Unit produced, machine hours, miles driven, and labor hours causes the incurrence of variable cost. What are these?

y = a + bx

What is the linear equation?

discretionary fixed cost

What type of fixed cost are these? Advertising and research and development.

committed fixed cost (Long-term cannot be significantly reduced in the short-term.)

What type of fixed cost are these? Depreciation on building equipments and real state taxes.

Nonmanufacturing

____ costs are often divided into two categories: (1) selling costs and (2) administrative costs.

Period costs

1.3 Costs that are taken directly to the income statements as expenses in the period in which they are incurred or accrued.

Conversion cost

1.3 Direct labor cost plus manufacturing overhead cost.

Prime cost

1.3 Direct materials cost plus direct labor cost.

direct materials, direct labor, and manufacturing overhead (Product costs "attach" to units of product as the goods are purchased or manufactured, and they remain attached as the goods go into inventory waiting sales.)

1.3 What goes to product cost?

inventory account on the balance sheet

1.3 Where do we record product cost?

Variable cost (high-low method. The denominator chooses the numbers)

? = (cost at the high level of activity - cost at the low level of activity)/(high activity level - low activity level)

fixed cost element

? = total cost - variable cost element

Activity base (Therefore, the number of X-rays is the activity base that explains the total cost of X-ray film.)

A measure of whatever causes the incurrence of a variable cost. For example, the total cost of X-ray film in a hospital will increase as the number of X-ray taken increases.

Selling costs

All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer.

Administrative costs

All executive organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling.

Manufacturing overhead

All manufacturing costs except direct materials and direct labor.

Raw materials (it refers to any materials that are used in the final product; and the finished product of one company can become the raw materials of another company)

Any materials that go into the final product.

$69,000 ( Total period costs = Selling expenses + Administrative expenses Total period costs = 28,000 + 41,000 = 69,000 )

Arden Company reported the following costs and expenses for the most recent month: Direct materials... $86,000 Direct labor... $48,000 Manufacturing overhead... $25,000 Selling expenses... $28,000 Administrative expenses... $41,000 What is the total amount of period costs?

$159,000 ( Total product cost = Direct materials + Direct labor + Manufacturing Overhead Total product cost = 86,000 + 48,000 + 25,000 = 159,000 )

Arden Company reported the following costs and expenses for the most recent month: Direct materials... $86,000 Direct labor... $48,000 Manufacturing overhead... $25,000 Selling expenses... $28,000 Administrative expenses... $41,000 What is the total amount of product costs?

Sales... $787,500 Variable expenses... 360,000 Contribution margin... 427,500 Fixed expense... 300,000 Net operating income... 127,500

Assume that the company produces and sells 90,000 units during the year at a selling price of $8.75 per unit. Prepare a contribution format income statement for the year. Variable expense = 4 Fixed expense = 300,000

manufacturing costs (samething as product costs?)

Direct materials + Direct labor + Manufacturing overhead = ?

Direct labor

Factory labor costs that can be easily traced to individual units of product. Also called touch labor.

60,000 units 4 5 9 80,000 units 320,000 300,000 620,000 4 3.75 7.75 100,000 units 400,000 300,000 700,000 4 3 7

Harris Company manufactures and sells a single product. A partially completed schedule of the company's total and per unit costs over the relevant range of 60,000 to 100,000 units produced and sold annually is given below: Complete the schedule of the company's total and unit costs. (Round the variable cost and fixed cost to 2 decimal places.) 60,000 units 80,000 units 100,000 units Total costs: Variable costs..... $240,000 __________ ___________ Fixed costs.......... 300,000 ___________ ___________ Total costs................. $540,000 ___________ ___________ Cost per unit: Variable cost....... ______ _____ ______ Fixed cost............. ______ ______ ______ Total cost per unit... ______ ______ ______

Committed fixed costs

Investments in facilities, equipment, and basic organizational structure that can't be significantly reduced even for short periods of time without making fundamental changes.

$150,000 ( Product cost = Direct materials + Direct labor + Manufacturing Overhead Direct materials per unit 6 x 10,000 units = 60,000 Direct labor per unit 3.5 x 10,000 units = 35,000 Variable manufacturing overhead per unit 1.5 x 10,000 units = 15,000 Fixed manufacturing overhead per unit 4 x 10,000 units = 40,000 Product cost = 60,000 + 35,000 + 15,000 + 40,000 = 150,000 )

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its unit costs are as follows: Direct materials...(amount per unit)$6 Direct labor... 3.50 Variable manufacturing overhead... 1.50 Fixed manufacturing overhead... 4 Fixed selling expense... 3 Fixed administrative expense... 2 Sales commissions... 1 Variable administrative expense... 0.50 For financial accounting purposes, what is the amount of product costs incurred to make 10,000 units?

$65,000 ( Period costs = selling expenses + administrative expenses Fixed selling expense per unit 3 x 10,000 units = 30,000 Fixed administrative expense per unit 2 x 10,000 units = 20,000 Sales commissions per unit 1 x 10,000 units = 10,000 Variable administrative expense per unit .50 x 10,000 units = 5,000 Period costs = 30,000 + 20,000 + 10,000 + 5,000 = 65,000 )

Martinez Company's relevant range of production is 7,500 units to 12,500 units. When it produces and sells 10,000 units, its unit costs are as follows: Direct materials...(amount per unit)$6 Direct labor... 3.50 Variable manufacturing overhead... 1.50 Fixed manufacturing overhead... 4 Fixed selling expense... 3 Fixed administrative expense... 2 Sales commissions... 1 Variable administrative expense... 0.50 For financial accounting purposes, what is the total amount of period costs incurred to sell 10,000 units?

Direct materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it.

the total fixed cost (the vertical intercept of the line)

On the equation y = a + bx. What does "a" stand for?

the variable cost per unit of activity (the slope of the line)

On the equation y = a + bx. What does "b" stand for?

the level of activity

On the equation y = a + bx. What does "x" stand for?

the total mixed cost

On the equation y = a + bx. What does "y" stand for?

Fixed cost (If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity.)

Prologue A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range.

Variable cost (A variable cost is constant per unit)

Prologue A cost that varies, in the total, in direct proportion to changes in the level of activity.

Indirect materials

Small items of material such as glue and nails that may be an integral part of a finished product, but whose costs cannot be easily or conveniently traced to it.

variable cost of electricity per occupancy per day $1.56 fixed cost per electricity per month $1,395 ( variable cost = (cost at the high activity level - cost at the low activity level)/(high activity level - low activity level) variable cost = (5,148 - 1,588)/(2,406 - 124) = 3,560/2,282 = 1.56 fixed cost element = total cost - variable cost element fixed cost element = 1,588 - (1.56 x 124) = 1,588 - 193.44 = 1,394.56 )

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer. month Occupancy-Days Electrical Costs January 1,736 $4,127 ------------------------------------------------------------------------ February 1,904 $4,207 ------------------------------------------------------------------------ March 2,356 $5,083 ------------------------------------------------------------------------ April 960 $2,857 ------------------------------------------------------------------------ May 360 $1,871 ------------------------------------------------------------------------ June 744 $2,696 ------------------------------------------------------------------------ July 2,108 $4,670 ------------------------------------------------------------------------ August 2,406 $5,148 ------------------------------------------------------------------------ September 840 $2,691 ------------------------------------------------------------------------ October 124 $1,588 ------------------------------------------------------------------------ November 720 $2,454 ------------------------------------------------------------------------ December 1,364 $3,529 Using the high-low method, estimate the fixed cost of electricity per month and the variable cost of electricity per occupancy-day. Round off the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent.

Indirect labor

The labor costs of janitors handlers, and other factory workers that cannot be conveniently traced to particular products.

Discretionary fixed costs

Those fixed costs that arise from annual decision by management to spend on certain fixed cost items, such as advertising and research.

c and d (The cost of ice cream and the cost of napkins for customers would be variable costs. As Baskins and Robbins sells more ice cream cones, we would expect the total cost of ice cream and napkins to increase.)

Which of the following costs would be variable with respect to the number of cones sold at a Baskins & Robbins shop? (There may be more than one correct answer.) A. The cost of lighting the store. B. The wages of the store manager. C. The cost of ice cream. D. The cost of napkins for customers.