Managerial Accounting Chapter 2 Key Terms, Homework

[The following information applies to the questions displayed below.] 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:

Amount Per Unit Direct materials $6.00 Direct labor $3.50 Variable manufacturing overhead $1.50 Fixed manufacturing overhead $4.00 Fixed selling expense $3.00 Fixed administrative expense $2.00 Sales commissions $1.00 Variable administrative expense $0.50

Contribution approach

An income statement format that organizes costs by their behavior. Costs are separated into variable and fixed categories rather than being separated into product and period costs for external reporting purposes. (p. 45)

Incremental cost

An increase in cost between two alternative. Also see Differential cost. (p. 46)

Raw materials

Any materials that go into the final product. (p. 29)

Cost object

Anything for which cost data are desired. Examples of cost objects are products, customers, jobs, and parts of the organization such as departments, or divisions. (p. 28)

Prevention costs

Costs that are incurred to keep defects from occurring. (p. 73)

Inventoriable costs

Synonym for product costs. (p. 31)

Differential cost

A difference in cost between two alternatives. Also see Incremental cost. (p. 46)

14. Which of the following is an example of a period cost? 3. Radio advertising cost for a new product.

1. Manufacturing Overhead. 2. Plastic used to produce cell phones. 3. Radio advertising cost for a new product. 4. Factory worker's wages.

11. Which of the following would be classified as an internal failure cost on a quality cost report? 3. Net cost of scrap.

1. Supplies used in testing and inspection. 2. Final product testing and inspection. 3. Net cost of scrap. 4. Depreciation of test equipment.

20. The salary cost of a factory supervisor is considered a: 1. manufacturing overhead cost.

1. manufacturing overhead cost. 2. period cost. 3. prime cost 4. conversion cost

An analysis of a particular cost incurred in a factory revealed that the cost averages $0.40 per machine-hour at an activity level of 20,000 machine hours and increases to an average of $0.50 per machine-hour at an activity level of 16,000 machine hours. Assuming that this activity is within the relevant range, what is the total expected cost if the activity level is 17,300 machine hours? C) $8,000 Feedback: Using the data provided above, this cost is fixed (rather than variable or mixed) in nature; it totals $8,000 at both 20,000 and 16,000 machine hours (MHs) as shown below. Average Cost Total Cost MHs (a) per MH (b) (a x b) 20,000 $0.40 $8,000 16,000 $0.50 $8,000 Accordingly, since this cost is fixed, it would be expected to total $8,000 at 17,300 machine hours (or, in fact, at any other level of machine hours within the relevant range).

A) $1,600 B) $6,960 C) $8,000 D) $9,000

The following information was summarized from the records of the Galecki Company for the year just ended: Sales $700,000 Fixed administrative expenses 110,000 Fixed cost of goods sold 100,000 Fixed selling expenses 50,000 Variable administrative expenses 30,000 Variable cost of goods sold 220,000 Variable selling expense 170,000 (Note that the information set forth above is that same as that provided for the previous question.) What was the company's gross margin? B) $380,000

A) $280,000 B) $380,000 C) $420,000 D) $440,000

The following information was summarized from the records of the Galecki Company for the year just ended: Sales $700,000 Fixed administrative expenses 110,000 Fixed cost of goods sold 100,000 Fixed selling expenses 50,000 Variable administrative expenses 30,000 Variable cost of goods sold 220,000 Variable selling expense 170,000 What was the company's contribution margin? A) $280,000

A) $280,000 B) $380,000 C) $420,000 D) $600,000

Given the cost formula Y = $30,000 + $5X, what is the expected total cost at an activity level of 16,000 units? D) $110,000 Feedback: The total cost at an activity level of 16,000 units is determined as follows. Total cost = $30,000 + (16,000 units x $5.00 per unit) = $110,000.

A) $30,000 B) $46,000 C) $80,000 D) $110,000

Hadron Company incurred $40,000 to ship 19,000 pounds and $34,000 to ship 16,000 pounds. If the company ships 18,000 pounds, what is its expected shipping expense? C) $38,000 Feedback: First, using the high-low method, the company's variable cost per unit for shipping costs would be determined as follows. Variable cost per unit = Change in costs ÷ Change in units Variable cost per unit = ($40,000 - $34,000) ÷ (19,000 - 16,000) = $6,000 ÷ 3,000 = $2.00 per pound shipped Then, the company's fixed shipping cost would be determined as follows. Total cost = Total variable cost + Total fixed cost or Total fixed cost = Total cost - Total variable cost Total fixed cost = $40,000 - (19,000 pounds x $2.00 per pound) = $2,000 Finally, if the company ships 18,000 pounds, its total shipping cost would be estimated as follows. Total cost = Total variable cost + Total fixed cost Total cost = (18,000 pounds x $2.00 per pound) + $2,000 = $38,000

A) $37,000 B) $37,895 C) $38,000 D) $38,250

Which of the following would not be classified as a product cost? C) The cost of shipping units of product to one of the company's customers Feedback: All selling and administrative costs are treated as period costs. The cost of shipping a unit of product to the company's customers is a selling cost. As such, it cannot be classified as a product cost.

A) The cost of air-conditioning the factory foreman's office B) Depreciation on the machinery in the factory C) The cost of shipping units of product to one of the company's customers D) All of the above would be classified as product costs

Which of the following matches the definition of an opportunity cost? B) The potential benefit that is given up when one alternative is selected rather than another. Feedback: An opportunity cost is the potential benefit that is given up when one alternative is selected over another.

A) The difference between the total cost of one alternative and the total cost of another alternative. B) The potential benefit that is given up when one alternative is selected rather than another. C) A cost that is saved by not adopting a given alternative. D) A cost that continues to be incurred even when there is no activity.

Which one of the following costs would not be considered an indirect cost of serving a particular customer at a delicatessen? C) The cost of the bread used to make the sub sandwich that is ordered Feedback: In this situation, the costs listed must be identified as either direct or indirect. A direct cost is a cost that can be easily and conveniently traced to the particular cost object under consideration (that is the cost of serving a customer at a delicatessen). Indirect costs cannot be physically traced to the creation of products or can be traced only at great cost and inconvenience. (This question asks you to identify the cost that would not be considered an indirect cost; in other words, you must identify the direct cost that is listed to correctly answer the question.) The cost of the franchise manager (answer A), the cost of the tables and chairs (answer B) and the cost of the lighting and heating (answer D) would all be considered indirect costs. On the other hand, the cost of the bread used (C, the correct answer) could be easily and conveniently traced to the cost object (i.e., the cost of serving a particular customer at a delicatessen) and would be a relatively significant in terms of the cost of the sub sandwich. As such, the cost of the bread used would most likely be considered a direct cost.

A) The salary of the manager B) The cost of the tables and chairs used to furnish the restaurant C) The cost of the bread used to make the sub sandwich that is ordered D) The cost of lighting and heating the restaurant

Which of the following would not be classified as manufacturing overhead? D) All of the above would be classified as manufacturing overhead Feedback: Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. It includes items such as indirect materials, indirect labor, maintenance and repair on production equipment, and heat and light, property taxes, depreciation, and insurance on manufacturing facilities.

A) Wages of supervisor of the machining shop B) Depreciation of the equipment in the machining shop C) Property taxes relating to the building that houses the machining shop D) All of the above would be classified as manufacturing overhead

Within the relevant range: D) variable costs per unit will remain constant and fixed costs per unit will fluctuate. Feedback: The relevant range is the range of activity within which the assumptions about variable and fixed costs are valid. Within the relevant range, the following assumptions are made about variable and fixed costs. A variable cost is a cost that varies, in total, in direct proportion to changes in the level of activity; as such, a variable cost is constant when expressed on a per unit basis. A fixed cost is a cost that remains constant, in total, regardless of changes in the level of activity; as such, when expressed on a per unit basis, a fixed cost per unit increases and decreases inversely with changes in activity.

A) both total variable costs and total fixed costs will remain constant. B) both total variable costs and total fixed costs fluctuate. C) fixed costs per unit will remain constant and variable costs per unit will fluctuate. D) variable costs per unit will remain constant and fixed costs per unit will fluctuate.

12. External failure costs are likely to result when a defective product is shipped to a customer.

TRUE

16. A sunk cost cannot be changed by any decision made now or in the future.

TRUE

17. A decrease in production will ordinarily result in an increase in fixed production costs per unit.

TRUE

9. Direct material costs are generally variable costs.

TRUE

18. The cost of wood used to manufacture bookcases would be considered: b. A Direct Material and Variable Cost.

a. A Period Cost b. A Direct Material and Variable Cost. c. A Conversion Cost. d. A Fixed Cost.

10. Which of the following would be classified as a prevention cost on a quality cost report? d. Technical training provided to suppliers of materials used in our products.

a. Cost of spoilage. b. Supervision of testing and inspection activities. c. Liability arising from defective products. d. Technical training provided to suppliers of materials used in our products.

19. Manufacturing overhead includes: d. all manufacturing costs except direct labor and direct materials.

a. all direct material, direct labor and administrative costs. b. all selling and administrative costs. c. all manufacturing costs except direct labor. d. all manufacturing costs except direct labor and direct materials.

15. Managerial accounting places considerable weight on: a. detailed segment reports about departments, products, and customers.

a. detailed segment reports about departments, products, and customers. b. the financial history of the entity. c. ensuring that all transactions are properly recorded. d. generally accepted accounting principles.

13. The cost of the lumber that is used to manufacture tables is best described as a: b. variable cost

a. manufacturing overhead cost. b. variable cost c. period cost. d. conversion cost

Sunk cost

A cost that has already been incurred and that cannot be changed by any decision made now or in the future. (p. 46)

Direct cost

A cost that can be easily and conveniently traced to a specified cost object. (p. 28)

Mixed cost

A cost that contains both variable and fixed cost elements. (p. 37)

Exercise 2B-2 A number of activities that are a part of a company's quality control system are listed below:

1) Prevention Cost 2) Appraisal Cost 3) Internal Failure Cost 4) External Failure Cost a. Product testing 2) Appraisal Cost b. Product recalls 4) External Failure Cost c. Rework labor and overhead 3) Internal Failure Cost d. Quality circles 1) Prevention Cost e. Downtime caused by defects 3) Internal Failure Cost f. Cost of field servicing 4) External Failure Cost g. Inspection of goods 2) Appraisal Cost h. Quality engineering 1) Prevention Cost i. Warranty repairs 4) External Failure Cost j. Statistical process control 1) Prevention Cost k. Net cost of scrap 3) Internal Failure Cost l. Depreciation of test equipment 2) Appraisal Cost m. Returns and allowances arising from poor quality 4) External Failure Cost n. Disposal of defective products 3) Internal Failure Cost o. Technical support to suppliers 1) Prevention Cost p. Systems development 1) Prevention Cost q. Warranty replacements 4) External Failure Cost r. Field testing at customer site 2) Appraisal Cost s. Product design 1) Prevention Cost

3. The following data pertains to activity and the cost of maintenance for two recent months: Month 1 Month 2 Production Volume 2000 units 2500 units Maintenance Cost $900 $1,100 Based on the Hi-Low Method, the best estimate of the monthly fixed cost for maintenance is: 4. $100

1. $300 2. $500 3. $800 4. $100

2. The following data pertains to activity and the cost of maintenance for two recent months: Month 1 Month 2 Production Volume 2000 units 2500 units Maintenance Cost $900 $1,100 Based on the Hi-Low Method, the best estimate of the total month 1 variable cost for maintenance is: 3. $800

1. $300 2. $500 3. $800 4. $100

6. The higher income that would not be realized in future years as a result of staying in a dead end job rather than returning to school to complete a degree is an example of: 2. An opportunity cost

1. A sunk cost 2. An opportunity cost 3. An inventoriable cost 4. A prime cost

5. The sum of direct labor and manufacturing overhead is referred to as 1. Conversion Cost

1. Conversion Cost 2. Prime Cost 3. Sunk Cost 4. Opportunity Cost

Exercises # 2-4 1. Cups of Coffee Served in a Week 2,000 2,100 2,200 Fixed cost $1,200 $1,200 $1,200 Variable cost 440 462 484 Total cost $1,640 $1,662 $1,684 Average cost per cup served * $0.820 $0.791 $0.765 * Total cost ÷ cups of coffee served in a week

2. The average cost of a cup of coffee declines as the number of cups of coffee served increases because the fixed cost is spread over more cups of coffee.

8. If 12,500 units are produced, what is the average fixed manufacturing cost per unit produced? (Round your answer to 2 decimal places.)

Average fixed manufacturing cost per unit $3.20 Fixed manufacturing overhead per unit (a) $4.00 Number of units budgeted (b) 10,000 Total fixed manufacturing cost (a) x (b) $40,000 Total fixed manufacturing cost (a) $40,000 Number of units produced (b) 12,500 Average fixed manufacturing cost per unit produced (a) / (b) $3.20

Required: Classify the costs associated with each of these activities into one of the following categories: prevention cost, appraisal cost, internal failure cost, or external failure cost. Which of the four types of costs in (1) above are incurred in an effort to keep poor quality of conformance from occurring? Which of the four types of costs in (1) above are incurred because poor quality of conformance has occurred?

Prevention costs and appraisal costs are incurred in an effort to keep poor quality of conformance from occurring. (Pro-active approach) Internal and external failure costs are incurred because poor quality of conformance has occurred. (Re-active approach)

ISO 9000 standards

Quality control requirements issued by the International Organization for Standardization that relate to products sold in European countries. (p. 78)

Independent variable

A variable that acts as a casual factor; activity is the independent variable, as represented by the letter X, in the equation Y = a + bX. (p. 40)

Direct labor

Factory labor costs that ca be easily traced to individual units of product. Also called touch labor. (p. 29)

3. If a truck were driven 80,000 kilometers during a year, what total cost would you expect to be incurred?

Fixed cost $4,200 Variable cost: 80,000 kilometers × $0.074 per kilometer 5,920 Total annual cost $10,120

7. The advertising costs that Pepsi incurred to air its commercials during the Super Bowl can best be described as a: 2. fixed cost

1. variable cost 2. fixed cost 3. product cost 4. prime cost

Statistical process control

A charting technique used to monitor the quality of work being done in a workstation for the purpose of immediately correcting any problems. (p. 73)

Indirect cost

A cost that cannot be easily and conveniently traced to a specified cost object. (p. 29)

Common cost

A cost that is incurred to support a number of cost objects but that cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilot's wage is caused by any one passenger taking the flight. (p. 29)

Fixed cost

A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity. (p. 34)

Variable cost

A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit. (p. 33)

Engineering approach

A detailed analysis of cost behavior based on an industrial engineer's evaluation of the inputs that are required to carry out a particular activity and of the prices of those inputs. (p. 39)

2-9) Distinguish between discretionary fixed costs and committed fixed costs.

A discretionary fixed cost has a fairly short planning horizon—usually a year. Such costs arise from annual decisions by management to spend on certain fixed cost items, such as advertising, research, and management development. A committed fixed cost has a long planning horizon—generally many years. Such costs relate to a company's investment in facilities, equipment, and basic organization. Once such costs have been incurred, they are "locked in" for many years.

R2 (R squared)

A measure of goodness of fit in least-squares regression analysis. It is the percentage of the variation in the dependent variable that is explained by variation in the independent variable. (p. 67)

Activity base

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-rays taken increases. Therefore, the number of X-rays is the activity base that explains the total cost of X-ray film. (p. 33)

Account analysis

A method for analyzing cost behavior in which an account is classified as either variable or fixed based on the analyst's prior knowledge of how the cost in the account behaves. (p. 39)

High-low method

A method of separating a mixed cost into its fixed and variable elements by analyzing the change in cost between the high and low activity levels. (p. 40)

Least-squares regression method

A method of separating a mixed cost into its fixed and variable elements by fitting a regression line that minimizes the sum of the squared errors. (p. 42)

2-3) Explain the difference between product cost and a period cost.

A product cost is any cost involved in purchasing or manufacturing goods. In the case of manufactured goods, these costs consist of direct materials, direct labor, and manufacturing overhead. A period cost is a cost that is taken directly to the income statement as an expense in the period in which it is incurred.

Quality cost report

A report that details prevention costs, appraisal costs, and the costs of internal and external failures. (p. 76)

Dependent variable

A variable that responds to some casual factor; total cost is the dependent variable, as represented by the letter Y, in the equation Y = a + bX. (p. 39)

Problem 2-21 1. Property taxes, factory Fixed Indirect 2. Boxes used for packaging detergent produced by the company Variable Direct 3. Salespersons' commissions Variable A) Selling Cost 4. Supervisor's salary, factory Fixed Indirect 5. Depreciation, executive autos Fixed B) Administrative Cost 6. Wages of workers assembling computers Variable Direct 7. Insurance, finished goods warehouses Fixed A) Selling Cost 8. Lubricants for production equipment Variable Indirect 9. Advertising costs Fixed A) Selling Cost 10. Microchips used in producing calculators Variable Direct 11. Shipping costs on merchandise sold Variable A) Selling Cost 12. Magazine subscriptions, factory lunchroom Fixed Indirect 13. Thread in a garment factory Variable Indirect 14. Billing costs Variable A) Selling Cost* 15. Executive life insurance Fixed B) Administrative Cost 16. Ink used in textbook production Variable Indirect 17. Fringe benefits, assembly-line workers Variable Direct** 18. Yarn used in sweater production Variable Direct 19. Wages of receptionist, executive offices Fixed B) Administrative Cost

A) Selling Cost B) Administrative Cost C) Manufacturing (Product) Cost 1) Direct 2) Indirect Variable or Fixed * Could be administrative cost. ** Could be indirect cost.

Selling costs

All costs that are incurred to secure customer orders and get the finished product or service into the hands of the customer. (p. 30)

Product costs

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 Inventoriable costs. (p. 31)

Administrative costs

All executive, organizational, and clerical costs associated with the general management of an organization rather than with manufacturing or selling. (p. 30)

Manufacturing overhead

All manufacturing costs except direct materials and direct labor. (p. 30)

7. If 8,000 units are produced, what is the average fixed manufacturing cost per unit produced?

Average fixed manufacturing cost per unit $5 Fixed manufacturing overhead per unit (a) $4.00 Number of units budgeted (b) 10,000 Total fixed manufacturing cost (a) x (b) $40,000 Total fixed manufacturing cost (a) $40,000 Number of units produced (b) 8,000 Average fixed manufacturing cost per unit produced (a) / (b) $5.00

Guest-Days Custodial Supplies Expense High activity level 12,000 $13,500 Low activity level 4,000 7,500 Change 8,000 $6,000 Variable cost per guest-day $0.75 per guest-day Fixed cost per month $4,500

Change in expense / Change in activity $6,000 / 8,000 guest-days = $0.75 per guest-day Custodial supplies expense at high activity level $13,500 Less variable cost element: 12,000 guest-days x $0.75 per guest-day 9,000 Total fixed cost $4,500 Cost formula is Y = $4,500+ $0.75 X

c.) Calculate Contribution Margin for Game # 4

Contribution Margin = Sales Revenue - Variable Costs = $ 3 (280 pretzels sold) - $ 392 = $ 840 - $ 392 = $ 448

Linear cost behavior

Cost behavior is said to be linear whenever a straight line is a reasonable approximation for the relation between cost and activity. (p. 40)

Internal failure costs

Costs that are incurred as a result of identifying defective products before they are shipped to customers. (p. 74)

Appraisal costs

Costs that are incurred to identify defective products before the products are shipped to customers. (p. 74)

Quality cost

Costs that are incurred to prevent defective products from falling into the hands of customers or that are incurred as a result of defective units. (p. 73)

External failure costs

Costs that are incurred when a product or service that is defective is delivered to a customer. (p. 75)

Period costs

Costs that are taken directly to the income statement as expenses in the period in which they are incurred or accrued. (p. 31)

Conversion cost

Direct labor cost plus manufacturing overhead cost. (p. 32)

Prime cost

Direct materials cost plus direct labor cost. (p. 32)

What other factors other than occupancy-days are likely to affect the variation in electrical costs from month to month?

Electrical costs may reflect seasonal factors other than just the variation in occupancy days. For example, common areas such as the reception area must be lighted for longer periods during the winter than in the summer. This will result in seasonal fluctuations in the fixed electrical costs. Additionally, fixed costs will be affected by the number of days in a month. In other words, costs like the costs of lighting common areas are variable with respect to the number of days in the month, but are fixed with respect to how many rooms are occupied during the month. Other, less systematic, factors may also affect electrical costs such as the frugality of individual guests. Some guests will turn off lights when they leave a room. Others will not.

Required: 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.

High activity level (August) 2,406 $5,148 Low activity level (October) 124 1,588 Change 2,282 $3,560

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. (p. 35)

Direct materials

Materials that become an integral part of a finished product and whose costs can be conveniently traced to it. (p. 29)

Exercises 2-5) 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

11. The Lakeshore Hotel's guest-days of occupancy and custodial supplies expense over the last seven months were:

Month Guest-Day of Occupancy Custodial Supplies Expense March 4,000 $ 7,500 April 6,500 $ 8,250 May 8,000 $ 10,500 June 10,500 $ 12,000 July 12,000 $ 13,500 August 9,000 $ 10,750 September 7,500 $ 9,750

Guest-days is a measure of the overall activity at the hotel. For example, a guest who stays at the hotel for three days is counted as three guest-days.

Required: 1. Using the high-low method, estimate a cost formula for custodial supplies expense. (Round the Variable cost per guest-day to 2 decimal points.)

EXERCISE 2-8) Hoi Chong Transport, Ltd., operates a fleet of delivery trucks in Singapore. The company has determined that if a truck is driven 105,000 kilometers during a year, the average operating cost is 11.4 cents per kilometer. If a truck is driven only 70,000 kilometers during a year, the average operating cost increases to 13.4 cents per kilometer.

Required: Using the high-low method, estimate the variable and fixed cost elements of the annual cost of the truck operation.

Quality circles

Small groups of employees that meet on a regular basis to discuss ways of improving quality. (p. 73)

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. (p. 29)

4. Indirect materials are not directly charged to a specific job but rather are included in manufacturing overhead.

TRUE

Contribution margin

The amount remaining from sales revenues after all variable expenses have been deducted. (p. 45)

Discussion Questions 2-15) What is the contribution margin?

The contribution margin is total sales revenue less total variable expenses.

Quality of conformance

The degree to which a product or service meets or exceeds its design specifications and is free of defects or other problems that mar its appearance or degrade its performance. (p. 73)

Differential revenue

The difference in revenue between two alternatives. (p. 46)

Indirect labor

The labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. (p. 30)

Opportunity cost

The potential benefit that is given up when one alternative is selected over another. (p. 46)

Relevant range

The range of activity within which assumptions about variable and fixed cost behavior are valid. (p. 36)

Cost structure

The relative proportion of fixed, variable, and mixed costs in an organization. (p. 33)

An accounting student runs a pretzel concession at his college's football games. After the first three games the following data is available to assess performance and make decisions about future operations: Game #1 Game #2 Game #3 No. of Pretzels Sold 300 250 290 Total Cost of Sales $ 900 $ 830 $ 886

The student knows that total costs are comprised of a variable component (ingredients, toppings, napkins) and a fixed component (afternoon rental of cooking cart, wages paid to self) and would like to better understand those.

Discussion Questions 2-1) What are the three major elements of product costs in a manufacturing company?

The three major elements of product costs in a manufacturing company are direct materials, direct labor, and manufacturing overhead.

Cost behavior

The way in which a cost reacts to changes in the level of activity. (p. 33)

Discretionary fixed costs

Those fixed costs that arise from annual decisions by management to spend on certain fixed cost items, such as advertising and research. (p. 35)

b.) Calculate Total Cost for Game #4

Total = Fixed + Variable = $ 480 + $ 392 = $ 872

Variable cost = Change in cost ÷ Change in activity = $3,560 ÷ 2,282 occupancy-days = $1.56 per occupancy-day

Total cost (August) $5,148 Variable cost element ($1.56 per occupancy-day × 2,406 occupancy-days) 3,753 Fixed cost element $1,395

10. If 12,500 units are produced, what is the total amount of fixed manufacturing cost incurred to support this level of production?

Total fixed manufacturing cost $40,000 Fixed manufacturing overhead per unit (a) $4.00 Number of units budgeted (b) 10,000 Total fixed manufacturing cost (a) x (b) $40,000

9. If 8,000 units are produced, what is the total amount of fixed manufacturing cost incurred to support this level of production?

Total fixed manufacturing cost $40,000 Fixed manufacturing overhead per unit (a) $4.00 Number of units budgeted (b) 10,000 Total fixed manufacturing cost (a) x (b) $40,000

2. For financial accounting purposes, what is the total amount of period costs incurred to sell 10,000 units?

Total period cost $65,000 Sales commission $1.00 Variable administrative expense 0.50 Variable selling and administrative per unit $1.50 Variable selling and administrative per unit (a) $1.50 Number of units sold (b) 10,000 Total variable selling and administrative expense (a) x (b) $15,000 *Fixed selling and administrative expense per unit (c) $5.00 Number of units used to calculate fixed cost per unit (d) 10,000 Total fixed selling and administrative expense (c ) x (d) 50,000 Total period (non manufacturing) cost $65,000 *($3.00 fixed selling + $2.00 fixed administrative expense)

Required: 1. For financial accounting purposes, what is the total amount of product costs incurred to make 10,000 units?

Total product cost $150,000 (Direct materials + Direct labor + Variable manufacturing overhead = Variable manufacturing cost per unit) ( $6.00 + 3.50 + 1.50 = $11.00) Variable manufacturing cost per unit (a) $11.00 Number of units produced (b) 10,000 Total variable manufacturing cost (a) x (b) $110,000 Fixed manufacturing overhead per unit (c ) $4.00 Number of units used to calculate fixed cost per unit (d) 10,000 Total fixed manufacturing cost (c ) x (d) $40,000 Total product cost $150,000

5. If 8,000 units are sold, what is the total amount of variable costs related to the units sold?

Total variable cost $100,000 Direct materials $6.00 Direct labor 3.50 Variable manufacturing overhead 1.50 Sales commissions 1.00 Variable administrative expense 0.50 Variable Cost Per Unit Sold $12.50 Variable cost per unit sold (a) $12.50 Number of units sold (b) 8,000 Total variable costs (a) x (b) $100,000

6. If 12,500 units are sold, what is the total amount of variable costs related to the units sold?

Total variable cost $156,250 Direct materials $6.00 Direct labor 3.50 Variable manufacturing overhead 1.50 Sales commissions 1.00 Variable administrative expense 0.50 Variable cost per unit sold $12.50 Variable cost per unit sold (a) $12.50 Number of units sold (b) 12,500 Total variable cost (a) x (b) $156,250

2-5) What effect does an increase in volume have on---

Unit fixed costs? a. Unit fixed costs decrease as volume increases. Unit variable costs? b. Unit variable costs remain constant as volume increases. Total fixed costs? c. Total fixed costs remain constant as volume increases. Total variable costs? d. Total variable costs increase as volume increases.

a.) Calculate the variable cost per pretzel sold (unit cost).

Units Cost Hi 300 pretzels $900 Lo 250 pretzels 835 Diff 50 pretzels $ 70 Y = A + Bx Total = Fixed + Variable B = slope of variable cost line = Diff $ / Diff Units = $70 / 50 pretzels = $1.40 / pretzel (unit variable cost)

c.) Calculate Total Fixed cost for a game.

Using Game #1 Fixed Cost = Total - Variable = $ 900 - $ 1.40 (300) = $ 900 - $ 420 = $ 480

NEXT - The student estimates that 280 pretzels can be sold at Game #4 if they are sold at $3 each. a.) Calculate Total Variable Cost for Game #4.

Variable Cost = $ 1.40 (280) = $ 392

b.) Calculate Total Variable cost for Game #1

Variable Cost = $ 1.40 (300) = $ 420 as already calculated in part (b.)

2. Using the cost formula you derived above, what amount of custodial supplies expense would you expect to be incurred at an occupancy level of 11,000 guest-days? (Do not round your intermediate calculations.)

Variable cost $8,250 Fixed cost 4,500 Total cost $12,750 Y = $4,500 + ($0.75 x 11,000) Y = $4,500 + 8,250 Y = $12,750

Kilometers driven Total Annual Cost* High level of activity 105,000 $11,970 Low level of activity 70,000 9,380 Change 35,000 $ 2,590 * 105,000 kilometers × $0.114 per kilometer = $11,970 70,000 kilometers × $0.134 per kilometer = $9,380

Variable cost per kilometer: Fixed cost per year: Total cost at 105,000 kilometers $11,970 Less variable portion: 105,000 kilometers × $0.074 per kilometer 7,770 Fixed cost per year $4,200

3. If 8,000 units are sold, what is the variable cost per unit sold? (Round your answer to 2 decimal places.)

Variable cost per unit sold $12.50 Direct materials $6.00 Direct labor 3.50 Variable manufacturing overhead 1.50 Sales commission 1.00 Variable administrative expense 0.50 Variable Cost Per Unit Sold $12.50

4. If 12,500 units are sold, what is the variable cost per unit sold? (Round your answer to 2 decimal places.)

Variable cost per unit sold $12.50 Direct materials $6.00 Direct labor 3.50 Variable manufacturing overhead 1.50 Sales commission 1.00 Variable administrative expense 0.50 Variable Cost Per Unit Sold $12.50

2. Express the variable and fixed costs in the form Y= a + bX.

Y = $4,200 + $0.074X

Review Test Submission: Quiz 1: Chapters 1 & 2 1. Which one of the following is NOT one of the Institute of Management Accountants' four Standards of Ethical Conduct? c. Independence

a. Competence b. Confidentiality c. Independence d. Integrity

2-2) Define the following: (a) direct materials, (b) indirect materials, © direct labor, (d) indirect labor, and (e) manufacturing overhead.

a. Direct materials are an integral part of a finished product and their costs can be conveniently traced to it. b. Indirect materials are generally small items of material such as glue and nails. They may be an integral part of a finished product but their costs can be traced to the product only at great cost or inconvenience. c. Direct labor consists of labor costs that can be easily traced to particular products. Direct labor is also called "touch labor." d. Indirect labor consists of the labor costs of janitors, supervisors, materials handlers, and other factory workers that cannot be conveniently traced to particular products. These labor costs are incurred to support production, but the workers involved do not directly work on the product. e. Manufacturing overhead includes all manufacturing costs except direct materials and direct labor. Consequently, manufacturing overhead includes indirect materials and indirect labor as well as other manufacturing costs.

2-4) Distinguish between (a) a variable cost, (b) a fixed cost, and © a mixed cost.

a. Variable cost: The variable cost per unit is constant, but total variable cost changes in direct proportion to changes in volume. b. Fixed cost: The total fixed cost is constant within the relevant range. The average fixed cost per unit varies inversely with changes in volume. c. Mixed cost: A mixed cost contains both variable and fixed cost elements.

8. Within the relevant range, as the number of units produced increases: a. the variable cost per unit remains the same and the total fixed costs remain the same.

a. the variable cost per unit remains the same and the total fixed costs remain the same. b. total fixed costs increase. c. total variable costs increase and total fixed costs decrease. d. total variable costs increase and fixed cost per unit remains the same.