ACCT 215 Problems Solutions, Fall 2011

Chapter 02 Managerial Accounting and Cost Concepts Chapter 2 Managerial Accounting and Cost Concepts Exercise 2-1 (10 minutes) 1. The wages of employees who build the sailboats: direct labor cost. 2. The cost of advertising in the local newspapers: marketing and selling cost. 3. The cost of an aluminum mast installed in a sailboat: direct materials cost. 4. The wages of the assembly shop’s supervisor: manufacturing overhead cost. 5. Rent on the boathouse: a combination of manufacturing overhead, administrative, and marketing and selling cost. The rent would most likely be prorated on the basis of the amount of space occupied by manufacturing, administrative, and marketing operations. 6. The wages of the company’s bookkeeper: administrative cost. 7. Sales commissions paid to the company’s salespeople: marketing and selling cost. 8. Depreciation on power tools: manufacturing overhead cost. 2-1 Chapter 02 Managerial Accounting and Cost Concepts Exercise 2-2 (15 minutes) Product Cost Period Cost 1. The cost of the memory chips used in a radar set........................................................ X 2. Factory heating costs...................................... X 3. Factory equipment maintenance costs........ X 4. Training costs for new administrative employees..................................................... X 5. The cost of the solder that is used in assembling the radar sets........................... X 6. The travel costs of the company’s salespersons................................................. X 7. Wages and salaries of factory security personnel...................................................... X 8. The cost of air-conditioning executive offices........................................... X 9. Wages and salaries in the department that handles billing customers................... X 10. Depreciation on the equipment in the fitness room used by factory workers....... X 11. Telephone expenses incurred by factory management................................................ X 12. The costs of shipping completed radar sets to customers......................................... X 13. The wages of the workers who assemble the radar sets................................................ X 2-2 Chapter 02 Managerial Accounting and Cost Concepts 14. The president’s salary..................................... X 15. Health insurance premiums for factory personnel...................................................... X 2-3 Chapter 02 Managerial Accounting and Cost Concepts Exercise 2-3 (15 minutes) 1. Cups of Coffee Served in a Week 1,800 1,900 2,000 Fixed cost $1,100 $1,100 $1,100 Variable cost 468 494 520 Total cost $1,568 $1,594 $1,620 Average cost per cup served* $0.871 $0.839 $0.810 * 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. 2-4 Chapter 02 Managerial Accounting and Cost Concepts Exercise 2-4 (20 minutes) 1. Occupancy- Days Electrical Costs High activity level (August). 3,608 $8,111 Low activity level (October) ............................................ 186 1,712 Change.................................. 3,422 $6,399 Variable cost = Change in cost ÷ Change in activity = $6,399 ÷ 3,422 occupancy-days = $1.87 per occupancy-day Total cost (August).......................................................... $8,111 Variable cost element ($1.87 per occupancy-day × 3,608 occupancy-days) ........................................................................................ 6,747 Fixed cost element.......................................................... $1,364 2. 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. This will result in seasonal effects on the fixed electrical costs. Additionally, fixed costs will be affected by how many days are 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. 2-5 Chapter 02 Managerial Accounting and Cost Concepts Exercise 2-5 (15 minutes) 1. Traditional income statement Redhawk, Inc. Traditional Income Statement Sales ($15 per unit × 10,000 units)...................... $150,000 Cost of goods sold ($12,000 + $90,000 – $22,000).......................... 80,000 Gross margin......................................................... 70,000 Selling and administrative expenses: Selling expenses (($2 per unit × 10,000 units) + $20,000)........ 40,000 Administrative expenses (($1 per unit × 10,000 units) + $15,000)........ 25,000 65,000 Net operating income........................................... $   5,000 2. Contribution format income statement Redhawk, Inc. Contribution Format Income Statement Sales........................................................................ $150,000 Variable expenses: Cost of goods sold ($12,000 + $90,000 – $22,000)....................... $80,000 Selling expenses ($2 per unit × 10,000 units). 20,000 Administrative expenses ($1 per unit × 10,000 units)............................ 10,000 110,000 2-6 Chapter 02 Managerial Accounting and Cost Concepts Contribution margin............................................. 40,000 Fixed expenses: Selling expenses................................................. 20,000 Administrative expenses................................... 15,000 35,000 Net operating income........................................... $   5,000 2-7 Chapter 02 Managerial Accounting and Cost Concepts Exercise 2-7 (15 minutes) Differential Opportunity Sunk Item Cost Cost Cost 1. Cost of the new flat-panel displays................................... X 2. Cost of the old computer terminals................................ X 3. Rent on the space occupied by the registration desk....... 4. Wages of registration desk personnel............................... 5. Benefits from a new freezer... X 6. Costs of maintaining the old computer terminals.............. X 7. Cost of removing the old computer terminals.............. X 8. Cost of existing registration desk wiring............................. X Note: The costs of the rent on the space occupied by the registration desk and the wages of registration desk personnel are neither differential costs, opportunity costs, nor sunk costs. These are costs that do not differ between the alternatives and are therefore irrelevant in the decision, but they are not sunk costs since they occur in the future. 2-8 Chapter 02 Managerial Accounting and Cost Concepts Exercise 2-8 (20 minutes) 1. The company’s variable cost per unit would be: In accordance with the behavior of variable and fixed costs, the completed schedule is: Units produced and sold 60,000 80,000 100,000 Total costs: Variable costs......................... $150,000 $200,000 $250,000 Fixed costs.............................. 360,000 360,000 360,000 Total costs.................................. $510,000 $560,000 $610,000 Cost per unit: Variable cost........................... $2.50 $2.50 $2.50 Fixed cost................................ 6.00 4.50 3.60 Total cost per unit..................... $8.50 $7.00 $6.10 2. The company’s income statement in the contribution format is: Sales (90,000 units × $7.50 per unit)............................... $675,000 Variable expenses (90,000 units × $2.50 per unit)........   225,000 Contribution margin......................................................... 450,000 Fixed expenses.................................................................. 360,000 Net operating income...................................................... $ 90,000 2-9 Chapter 02 Managerial Accounting and Cost Concepts Exercise 2-9 (30 minutes) Name of the Cost Variable Cost Fixed Cost Product Cost Period (Selling and Admin.) Cost Opportunity Cost Sunk Cost Direct Material s Direct Labor Mfg. Overhead Rental revenue forgone, $40,000 per year.......................... X Direct materials cost, $40 per unit................................................ X X Supervisor’s salary, $2,500 per month........................................... X X Direct labor cost, $18 per unit...... X X Rental cost of warehouse, $1,000 per month........................ X X Rental cost of equipment, $3,000 per month........................ X X Depreciation of the building, $10,000 per year.......................... X X X Advertising cost, $50,000 per year............................................... X X Shipping cost, $10 per unit........... X X Electrical costs, $2 per unit............ X X Return earned on investments, $6,000 per year............................ X 2-10 Chapter 02 Managerial Accounting and Cost Concepts Exercise 2-12 (20 minutes) 1. Miles Driven Total Annual Cost* High level of activity............ 120,000 $13,920 Low level of activity............. 80,000 10,880 Change.................................. 40,000 $   3,040 * 120,000 miles × $0.116 per mile = $13,920 80,000 miles × $0.136 per mile = $10,880 Variable cost per mile: Fixed cost per year: Total cost at 120,000 miles...................................... $13,920 Less variable cost element: 120,000 miles × $0.076 per mile.......................... 9,120 Fixed cost per year................................................... $ 4,800 2. Y = $4,800 + $0.076X 3. Fixed cost....................................................................... $ 4,800 Variable cost: 100,000 miles × $0.076 per mile........ 7,600 Total annual cost.......................................................... $12,400 2-11 Chapter 02 Managerial Accounting and Cost Concepts Problem 2-14 (45 minutes) 1. House Of Organs, Inc. Traditional Income Statement For the Month Ended November 30 Sales (60 organs × $2,500 per organ)................. $150,000 Cost of goods sold (60 organs × $1,500 per organ)........................ 90,000 Gross margin......................................................... 60,000 Selling and administrative expenses: Selling expenses: Advertising....................................................... $    950 Delivery of organs (60 organs × $60 per organ)........................ 3,600 Sales salaries and commissions [$4,800 + (4% × $150,000)].......................... 10,800 Utilities.............................................................. 650 Depreciation of sales facilities....................... 5,000 Total selling expenses........................................ 21,000 Administrative expenses: Executive salaries............................................ 13,500 Depreciation of office equipment................. 900 Clerical [$2,500 + (60 organs × $40 per organ)]..... 4,900 Insurance.......................................................... 700 2-12 Chapter 02 Managerial Accounting and Cost Concepts Total administrative expenses.......................... 20,000 Total selling and administrative expenses......... 41,000 Net operating income........................................... $ 19,000 Problem 2-14 (continued) 2. House Of Organs, Inc. Contribution Format Income Statement For the Month Ended November 30 2-13 Chapter 02 Managerial Accounting and Cost Concepts Total Per Unit Sales (60 organs × $2,500 per organ)................. $150,000 $2,500 Variable expenses: Cost of goods sold (60 organs × $1,500 per organ)..................... 90,000 1,500 Delivery of organs (60 organs × $60 per organ).......................... 3,600 60 Sales commissions (4% × $150,000)................. 6,000 100 Clerical (60 organs × $40 per organ)................ 2,400 40 Total variable expenses.................................. 102,000 1,700 Contribution margin............................................. 48,000 $     800 Fixed expenses: Advertising.......................................................... 950 Sales salaries....................................................... 4,800 Utilities................................................................. 650 Depreciation of sales facilities.......................... 5,000 Executive salaries............................................... 13,500 Depreciation of office equipment.................... 900 Clerical................................................................. 2,500 Insurance............................................................ 700 Total fixed expenses............................................. 29,000 Net operating income........................................... $   19,000 3. Fixed costs remain constant in total but vary on a per unit basis with changes in the activity level. For example, as the activity level increases, fixed costs decrease on a per unit basis. Showing fixed costs on a per unit basis on the income statement make them appear to be variable costs. That is, management might be misled into thinking that the per unit fixed costs 2-14 Chapter 02 Managerial Accounting and Cost Concepts would be the same regardless of how many organs were sold during the month. For this reason, fixed costs should be shown only in totals on a contribution-type income statement. 2-15 Chapter 02 Managerial Accounting and Cost Concepts Problem 2-15 (30 minutes) 1. a. 6 b. 11 c. 1 d. 4 e. 2 f. 10 g. 3 h. 7 i. 9 2. Without an understanding of the underlying cost behavior patterns, it would be difficult, if not impossible for a manager to properly analyze the firm’s cost structure. The reason is that all costs don’t behave in the same way. One cost might move in one direction as a result of a particular action, and another cost might move in an opposite direction. Unless the behavior pattern of each cost is clearly understood, the impact of a firm’s activities on its costs will not be known until after the activity has occurred. 2-16 Chapter 02 Managerial Accounting and Cost Concepts Problem 2-16 (20 minutes) Direct or Indirect Cost of the Immunization Center Direct or Indirect Cost of Particular Patients Variable or Fixed with Respect to the Number of Immunizations Administered Item Description Direct Indirect Direct Indirect Variable Fixed a. The salary of the head nurse in the Immunization Center......................................... X X X b. Costs of incidental supplies consumed in the Immunization Center such as paper towels... X X X c. The cost of lighting and heating the Immunization Center......................................... X X X d. The cost of disposable syringes used in the Immunization Center......................................... X X X e. The salary of the Central Area Well-Baby Clinic’s Information Systems manager............ X X X f. The costs of mailing letters soliciting donations to the Central Area Well-Baby Clinic..................................................................... X X X g. The wages of nurses who work in the Immunization Center*....................................... X X X h. The cost of medical malpractice insurance for the Central Area Well-Baby Clinic..................... X X X 2-17 Chapter 02 Managerial Accounting and Cost Concepts i. Depreciation on the fixtures and equipment in the Immunization Center.............................. X X X * The wages of the nurses could be variable and a direct cost of serving particular patients. Problem 2-17 (30 minutes) 1. Maintenance cost at the 80,000 machine-hour level of activity can be isolated as follows: Level of Activity 60,000 MH 80,000 MH Total factory overhead cost..................................... 274,000 pesos 312,000 pesos Deduct: Indirect materials @ 1.50 pesos per MH*....... 90,000 120,000 Rent.................................... 130,000 130,000 Maintenance cost................ 54,000 pesos 62,000 pesos * 90,000 pesos ÷ 60,000 MHs = 1.50 pesos per MH 2. High-low analysis of maintenance cost: Machine-Hours Maintenance Cost High activity level.............. 80,000 62,000 pesos Low activity level................ 60,000 54,000 Change observed.............. 20,000 8,000 pesos 2-18 Chapter 02 Managerial Accounting and Cost Concepts 2-19 Chapter 02 Managerial Accounting and Cost Concepts Fixed cost element: Total cost at the high level of activity.................. 54,000 Pesos Less variable cost element (60,000 MHs × 0.40 pesos per MH)................... 24,000 Fixed cost element................................................ 30,000 Pesos Therefore, the cost formula is 30,000 pesos per year, plus 0.40 peso per 2-20 Chapter 02 Managerial Accounting and Cost Concepts machine-hour or Y = 30,000 pesos + 0.40 peso X. Problem 2-17 (continued) 3. Total factory overhead cost at 65,000 machine-hours is: Indirect materials (65,000 MHs × 1.50 pesos per MH)......................... 97,500 pesos Rent...................................................... 130,000 Maintenance: Variable cost element (65,000 MHs × 0.40 peso per MH)............ 26,000 pesos Fixed cost element.......................... 30,000 56,000 Total factory overhead cost.............. 283,500 pesos 2-21 Chapter 02 Managerial Accounting and Cost Concepts Problem 2-18 (45 minutes) 1. Cost of goods sold..................... Variable Shipping expense...................... Mixed Advertising expense.................. Fixed Salaries and commissions........ Mixed Insurance expense.................... Fixed Depreciation expense............... Fixed 2. Analysis of the mixed expenses: Units Shipping Expense Salaries and Comm. Expense High level of activity..... 4,500 £56,000 £143,000 Low level of activity...... 3,000 44,000 107,000 Change........................... 1,500 £12,000 £ 36,000 Variable cost element: Fixed cost element: Shipping Salaries and 2-22 Chapter 02 Managerial Accounting and Cost Concepts Expense Comm. Expense Cost at high level of activity. . £56,000 £143,000 Less variable cost element: 4,500 units × £8 per unit..... 36,000 4,500 units × £24 per unit... 108,000 Fixed cost element................. £20,000 £   35,000 The cost formulas are: Shipping expense: £20,000 per month plus £8 per unit or Y = £20,000 + £8X. Salaries and Comm. expense: £35,000 per month plus £24 per unit or Y = £35,000 + £24X. 3. Frankel Ltd. 2-23 Chapter 02 Managerial Accounting and Cost Concepts Income Statement For the Month Ended June 30 Sales revenue................................................. £630,000 Variable expenses: Cost of goods sold (4,500 units × £56 per unit)..................... £252,000 Shipping expense (4,500 units × £8 per unit)....................... 36,000 Salaries and commissions expense (4,500 units × £24 per unit)..................... 108,000 396,000 Contribution margin...................................... 234,000 Fixed expenses: Shipping expense........................................ 20,000 Advertising................................................... 70,000 Salaries and commissions.......................... 35,000 Insurance..................................................... 9,000 Depreciation................................................ 42,000 176,000 Net operating income................................... £   58,000 2-24