Activity

OM 103: Costing and Pricing

Chapter 2: Cost Terms and Purposes

Problems:

1. Following are costs incurred by Abtina Manufacturing Corporation During the

previous month:
Direct Materials Php 5,000
Indirect Materials 2,000
Direct Labor 6,000
Indirect Labor 1,000
Factory Utilities 4,000
Advertising costs 8,000
Sales Commissions 12,000
Depreciation on Administration Building 3,000
Salaries on administrative building 20,000
Depreciation – Delivery Equipment 2,000
Overtime Pay – factory workers 1,500

Reqiured:

a. Solve for total product cost.

Given:
Direct Materials Php 5,000
Indirect Materials 2,000
Direct Labor 6,000
Indirect Labor 1,000
Factory Utilities 4,000
Overtime Pay – factory workers 1,500
Total product cost = ?
Solution:
Direct Materials Php 5,000
Indirect Materials 2,000
Direct Labor 6,000
Indirect Labor 1,000
Factory Utilities 4,000
Overtime Pay – factory workers 1,500
Total Php 19,500

b. Solve for total period cost.

 Given:
Advertising costs 8,000
Sales Commissions 12,000
Depreciation on Administration Building 3,000
Salaries on administrative building 20,000
Depreciation – Delivery Equipment 2,000
Total product cost = ?
Solution:
Advertising costs 8,000
Sales Commissions 12,000
Depreciation on Administration Building 3,000
Salaries on administrative building 20,000
Depreciation – Delivery Equipment 2,000
Total Php 45,000

c. Solve for total variable cost. (assuming the cost object is the product itself)
Given:
Direct Materials Php 5,000
Indirect Materials 2,000
Direct Labor 6,000
Indirect Labor 1,000
Factory Utilities 4,000
Sales Commissions 12,000
Overtime Pay – factory workers 1,500
Total product cost = ?
Solution:
Direct Materials Php 5,000
Indirect Materials 2,000
Direct Labor 6,000
Indirect Labor 1,000
Factory Utilities 4,000
Sales Commissions 12,000
Overtime Pay – factory workers 1,500
Total Php 31,500

d. Solve for total fixed cost. (assuming the cost object is the product itself)
Given:
Advertising costs 8,000
Depreciation on Administration Building 3,000
Salaries on administrative building 20,000
 Depreciation – Delivery Equipment 2,000
Total fixed cost = ?
Solution:
Advertising costs 8,000
Depreciation on Administration Building 3,000
Salaries on administrative building 20,000
Depreciation – Delivery Equipment 2,000
Total Php 33,000

2. Classification of costs, service sector. Consumer Focus is a marketing research firm that
organizes focus groups for consumer-product companies. Each focus group has eight individuals
who are paid 50 per session to provide comments on new products. These focus groups meet in
hotels and are led by a trained, independent, marketing specialist hired by Consumer Focus. Each
specialist is paid a fixed retainer to conduct a minimum number of sessions and a per session fee
of 2,000. A Consumer Focus staff member attends each session to ensure that all the logistical
aspects run smoothly.

Required:

Classify each cost item (A–H) as follows:

a. Direct or indirect (D or I) costs concerning each focus group.
b. Variable or fixed (V or F) costs concerning how the total costs of Consumer Focus change as
the number of focus groups conducted changes. (If in doubt, select based on whether the total
costs will change substantially if there is a large change in the number of groups conducted.)
A. Payment to individuals in each focus group to provide comments on new products .
a. Direct cost b. Varibale cost
B. Annual subscription of Consumer Focus to Consumer Reports magazine
a Indirect cost b. Varibale cost
C. Phone calls made by Consumer Focus staff member to confirm individuals will attend a focus
group session (Records of individual calls are not kept.)
a Indirect cost b. Varibale cost
D. Retainer paid to focus group leader to conduct 20 focus groups per year on new medical
products
a. Direct cost b. Fixed cost
E. Meals provided to participants in each focus group
a. Indirect cost b. Fixed cost
F. Lease payment by Consumer Focus for corporate office
a. Indirect cost b. Fixed cost
G. Cost of tapes used to record comments made by individuals in a focus group session (These
tapes are sent to the company whose products are being tested.)
a Indirect cost b. Varibale cost
 H. Gasoline costs of Consumer Focus staff for company-owned vehicles (Staff members submit
monthly bills with no mileage breakdowns.)
a. Indirect cost b. Fixed cost

3. Classification of costs, merchandising sector. Home Entertainment Center (HEC) operates a

large store in San Francisco. The store has both a video section and a music (compact disks and
tapes) section. HEC reports revenues for the video section separately from the music section.
Required:
Classify each cost item (A–H) as follows:

a. Direct or indirect (D or I) costs for the total number of videos sold.

b. Variable or fixed (V or F) costs for how the total costs of the video section change as the
total number of videos sold changes. (If in doubt, select based on whether the total costs will
change substantially if there is a large change in the total number of videos sold.)

A. Annual retainer paid to a video distributor

a. Indirect cost b. Fixed cost
B. Electricity costs of the HEC store (single bill covers entire store)
a Indirect cost b. Varibale cost
C. Costs of videos purchased for sale to customers
a. Direct cost b. Varibale cost
D. Subscription to Video Trends magazine
a Indirect cost b. Varibale cost
E. Leasing of computer software used for financial budgeting at the HEC store
a. Indirect cost b. Fixed cost
F. Cost of popcorn provided free to all customers of the HEC store
a Indirect cost b. Varibale cost
G. Earthquake insurance policy for the HEC store
a. Indirect cost b. Fixed cost
H. Freight-in costs of videos purchased by HEC
a. Direct cost b. Varibale cost

4. Classification of costs, manufacturing sector. The Fremont, California, plant of New United
Motor Manufacturing, Inc. (NUMMI), a joint venture of General Motors and Toyota, assembles
two types of cars (Corollas and Geo Prisms). Separate assembly lines are used for each type of
car.
Required:
Classify each cost item (A–H) as follows:

a. Direct or indirect (D or I) costs concerning the total number of cars of each type
assembled (Corolla or Geo Prism).
b. Variable or fixed (V or F) costs concerning how the total costs of the plant change as the
total number of cars of each type assembled changes. (If in doubt, select based on whether
the total costs will change substantially if there is a large change in the total number of cars
of each type assembled.)

A. Cost of tires used on Geo Prisms

a. Direct cost b. Varibale cost
B. Salary of public relations manager for NUMMI plant
a. Indirect cost b. Fixed cost
C. Annual awards dinner for Corolla suppliers
a Indirect cost b. Varibale cost
D. Salary of engineer who monitors design changes on Geo Prism
a. Indirect cost b. Fixed cost
E. Freight costs of Corolla engines shipped from Toyota City, Japan, to Fremont, California
a. Direct cost b. Varibale cost
F. Electricity costs for NUMMI plant (single bill covers entire plant)
a Indirect cost b. Varibale cost
G. Wages paid to temporary assembly-line workers hired in periods of high production (paid on
hourly basis)
a. Direct cost b. Varibale cost
H. Annual fire-insurance policy cost for NUMMI plant
a. Indirect cost b. Fixed cost

Answer the Following:

1. Define cost object and give three examples.
 Cost object is a classification of costs that is desired by the user. Examples could be a
cost center (departments), a production order and a special project (for example,
installation)
2. Define direct costs and indirect costs.
 Direct costs are those costs which are incurred for producing a particular product
while Indirect costs are those costs which are related to the product but not traceable
in an economically feasible manner.
3. Why do managers consider direct costs to be more accurate than indirect costs?
 Managers consider direct costs to be more accurate than indirect costs because, when
the costs are allocated, then managers are less certain whether the cost allocation base
accurately measures the resources demanded by cost object, therefore using direct
cost is more accurate because it can be traceable to a particular cost object.
4. Name three factors that will affect the classification of a cost as direct or indirect.
 The three factors that will affect the classification of cost as direct or indirect are:
1. The materiality of the cost in question;
2. Available information-gathering technology; and
3. Desing of operation
5. Define variable cost and fixed cost. Give an example of each.
 Variable cost changes in total in proportion to changes in the related level of total
activity or volume. For example: Sales commission
  Fixed cost remains unchanged in total for a given time period with a wide changes in
the related level of total activity or velume. For example: the leasing cost of a
machine that is unchanged.
6. What is a cost driver? Give one example.
 Cost driver is a variable (level of ctivity or volume) that affects total costs over a
given time span. For example: the number of vehicles assembled is a driver of the
costs of steering wheels on a motor-vehicle assembly line.
7. What is the relevant range? What role does the relevant-range concept play in explaining how
costs behave?
 Relevant range is the band of normal activity level or volume in which there is a
specific relationship between the level of activity or volume and the cost in question.
Costs are described as avariable or fixed with respect to a particular relevant range
8. Explain why unit costs must often be interpreted with caution.
 Unit costs must often be interpreted with caution because, in computing it, there are
some amount of total cost placed in the numerator divided by the related number of
unit placed in the denominator. Fixed cost is included to the numerator that will not
change despite there is a changes in the denominator, therefore to multiply the unit
cost by activity or volume change to predict changes in total costs at different activity
or volume levels.
9. Describe how manufacturing-, merchandising-, and service-sector companies differ from
each other.
 In manufacturing-sector, companiespurchases materials and components then
convert them into various finished goods. In merchandising-sector, companies
purchase and then sell tangible products without changing their basic form while in
service-sector, companies provide services or intangible products to their customers.
10. What are three different types of inventory that manufacturing companies hold?
 Direct material inventory, Work-In-Process inventory and Finished goods
inventory are the three different types of inventory that manufacturing companies
hold.
11. Distinguish between inventoriable costs and period costs.
 Inventoriable cost is the all cost of the product that is considered as an assets in the
balance sheet when they are incurred and that become cost of goods sold only when
the product is sold, while the period cost is the all cost in the income statement, other
than the cost of goods sold that are treated as expenses of the accounting period.
12. Define the following: direct material costs, direct manufacturing-labor costs, manufacturing
overhead costs, prime costs, and conversion costs.
Direct material costs
 It is the acquisition costs of all materials that eventually become part of the cost
object thhat can be traced to the cost object and it is an acquisition costs of direct
materials including freight-in.
Direct manufacturing-labor costs
 Is the total costs of employing workers that work directly on a manufacturing product
that can be traced to the cost obeject.
Manufacturing overhead costs
  It is also called as factory overhead that comprises the indirect expenses associated
with the operations of manufacturing plant; costs that cannot be directly charged to a
specific product or project.
Prime costs
 It is direct cost that company incurs in manufacuting a product.
 Prime cost = Direct Materials Cost + Direct Labor Cost
Conversion costs
 Are all manufacturing costs except for the cost of raw materials.