Chapter 2: Cost Terms, Concepts and Classifications
What are the main purposes of cost classification?
For preparing external reports
To predict cost behaviour
For purposes of assigning costs to products or departments
Case 2-27 (60 minutes)
1. No distinction has been made between period expenses and product
costs on the income statement. Product costs (e.g., direct materials,
direct labour, and manufacturing overhead) should be assigned to
inventory accounts and flow t
My division had another great year last year. We all worked hard, and the results were there.
But again we got no reward for our hard work. Its very frustrating.
Division Manager, General Products Division
1. Students answers may differ in some details from this solution.
Problem 8-18 (75 minutes)
Sales . $1,000,000 $ 800,000 $1,000,000
Variable cost of goods sold @
$4 per unit.
Variable selling and
administrative @ $2 per unit .
Problem 8-17 (40 minutes)
For the months ended
Costs of goods sold:
Variable manufacturing Cost
Fixed manufacturing Cost
Cost of good manufactured
Goods available for sale
Case 9-27 (120+ minutes)
1. a Sales budget:
Budgeted sales in
Selling price per unit .
Total sales . $650,000
b Schedule of expected cash collections
Case 10-37 (60 minutes)
1. The number of units produced can be computed by using the total
standard cost applied for the period for any input (materials, labour, or
overhead), or it can be computed by using the total standard cost
applied for all inputs t
1. For direct materials, compute the price & quantity variance.
AQ x AP
AQ x SP
AQ x SP
SQ x SP
1) NORMAL COST SYSTEM
500,000 ([email protected])
ALL OTHER ASSETS
Problem 10-20 (45 minutes)
1. Direct materials price and quantity variances:
Direct Materials Price Variance = AQ (AP SP)
78,000 metres ($3.75 per metre $3.50 per metre) = $19,500 U
Direct Materials Quantity Variance = SP (AQ SQ)
$3.50 per metre (78,000 m
Problem 8-14 (45 minutes)
1. a. and b.
Direct materials .
Direct labour .
Variable manufacturing overhead .
Fixed manufacturing overhead
($240,000 30,000 units) .
Unit product cost .
Sales (26,000 units, 34,000 units) .
Problem 7-32 (20 minutes)
1. Break-even points:
= 30,000 units
= 41,667 units
2. A 10% profit-to-sales ratio requires a profit of $20 0.10 = $2 per unit
Therefore, the equation becomes:
1. For June, do the following:
Start by computing number of units sold in June
July is 10% higher than June, so divide July by 1.10
33,000 / 1.10 = 30,000. (NOTE: 30,000 x 10% increase = $33,000)
Next use margin of safety to compute June sales in dollars.
Cost of equipment required .
Working capital required.
Net annual cash receipts .
Cost of road repairs .
Salvage value of equipment .
Working capital released.
Net present value.
Problem 13-28: Net Present Value of a New Product.
1. Net Cash Flows: Note that we often have uneven cash flows
Sales in Units
Sales in $ ($45 ea)
Less V. Exp ($25)
Less Fixed Exp
Other Fixed Expenses
Add Back Non-Cash De
1. Roi= operating income/avg. oper assets
Income before interest and taxes
2. calculating residual income
residual income=operating income-(average operating assets *minimum reqired rate of return)
this computation differs from roi
roi measures operating
Investment in new equipment
Salvage from sale of the old equip
Net annual cash receipts
Is the budget process effective and efficient at achieving corporate goals?
Are the responsibility centers properly defined: sales & plant?
Quality: NOTE - all manufacturers have basically same qualit
This is just a rough outline with some of the points to consider. Not all points are included. For exam
purposes you would want to carefully develop your best thoughts in each section.
Pricing dispute between managers
Should Fettinger (mana
Chapter 2: Variable, Fixed & Other Costs
It is important to be able to classify costs as either variable or fixed so that you can predict future cost
behaviours (i.e. how costs will react to changes in activity levels).
Fill in the following chart and dis
Problem 2-26 (45 minutes)
Schedule of Cost of Goods Manufactured
For the year ended xxxx
Raw materials inventory, beginning . $ 20,000
Add: Purchases of raw materials . 160,000
Raw materials available for use . 180,
Problem 3-29 (60 minutes)
Predetermined = Estimated total manufacturing overhead cost
Estimated total amount of the allocation base
$900,000 direct labour cost
= 160% Direct labour cost
b. $21,200 160% = $33,920
Problem 3-23 (90 minutes)
1. a. Raw Materials . 820,000
Accounts Payable .
b. Work in Process . 817,000
Manufacturing Overhead . 13,000
Raw Materials .
c. Work in Process . 140,000
Manufacturing Overhead . 60,000
Salaries and Wages Payable
Problem 4-10 (45 minutes)
1. Equivalent Units of Production
Transferred to next department.
Ending work in process:
Materials: 80,000 units 75% complete .
Conversion: 80,000 units 25% complete .
Equivalent units of production .