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Ch.+3+solutions+-+print+warning! - CHAPTER 3 CASH FLOWS AND...

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C HAPTER 3 CASH FLOWS AND COST TERMINOLOGY S OLUTIONS Review Questions 3.1 Product costs are the costs associated with getting products and services for sale, whereas period costs are not directly related to readying products and services for sale. 3.2 Revenues less product costs = revenues less cost of goods sold or cost of providing services. 3.3 The matching principle. 3.4 The products service firms offer are not tangible or storable. 3.5 Merchandising firms buy goods from suppliers and resell substantially the same products to customers. 3.6 Cost of goods sold = cost of beginning inventory + cost of goods purchased during the period – cost of ending inventory. 3.7 Manufacturing firms use labor and equipment to transform inputs such as raw materials and components into outputs (finished goods). 3.8 Because they vary proportionally with production volume and can be traced directly to products. 3.9 Variable manufacturing overhead varies proportionally with production volume, whereas fixed manufacturing overhead does not change as production volume changes. 3.10 Prime costs equal the sum of direct materials and direct labor; conversion costs equal the sum of direct labor and manufacturing overhead. 3.11 Cost pools, cost objects, cost driver (allocation basis), and allocation volume (denominator volume). 3.12 Determine the allocation rate (overhead rate), and allocate the cost. 3.13 They are equal.
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Discussion Questions 3.14 For long-term software and consultancy projects, typically one of two methods is followed. The first is the completed contract method. Under this method, the company accumulates the expenses incurred in the project in an “inventory” account, and states this inventory at cost in the balance sheet as of the balance sheet date. In the year in which the project is completed, this cost is then charged to the income statement against the revenues earned from the project (like cost of goods sold for a manufacturing firm). The second method is the percentage completion method. Under this method, expenses for each period are charged directly to the income statement each year, and a proportional amount of the total project revenue is also recognized as income in that year. In this case, there is no inventory account for the project. 3.15 Yes, a restaurant would typically be classified as a service firm because the benefit from the “product” is not received by the customer over a period of time in the future. There is no transfer of ownership of an “asset” as it were. Restaurant patrons receive the benefit of the eating experience while being served at the restaurant site —this benefit cannot be bought and stored for future use (the exception of course is “take-outs,” but we are not considering take-outs here). 3.16 We would classify U-Haul as a service firm as well for the same reason we consider
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Ch.+3+solutions+-+print+warning! - CHAPTER 3 CASH FLOWS AND...

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