Assignment 2: An Introduction to Cost

Terms and Purpose

Summary:
Exercise:
2-22
1. Variable manufacturing cost per vehicle
Steel $1,500 per Surfer
Tires 625 per Surfer
Direct manufacturing labor 700 per Surfer
Total $2,825 per Surfer

Fixed manufacturing costs per month

Plant management costs ($1,200,000 ÷ 12) $ 100,000
Cost of leasing equipment ($1,800,000 ÷ 12) 150,000
City license (for 110 surfers or 550 tires) 74,500
Total fixed manufacturing costs $324,500

Fixed costs per month (1 surfer takes 5 tires)

0 to 100 surfers per month = $100,000 + $150,000 + $50,000 = $300,000
101 to 200 surfers per month = $100,000 + $150,000 + $74,500 = $324,500
More than 200 surfers per month = $100,000 + $150,000 + $200,000 = $450,000

2.

The relevant range for the total fixed costs is

from 0 to 100 surfers; 101 to 200 surfers; more than 200 surfers. Within these ranges, the total
fixed costs do not change in total
 3. The unit cost for 100 vehicles produced per month is $5,825, while for 225 vehicles it is
only $4,825. This difference is caused by the fixed cost increment of $150,000 (an
increase of 50%, $150,000 ÷ $300,000 = 50%) being spread over an increment of 125
(225 – 100) vehicles (an increase of 125%, 125 ÷ 100). The fixed cost per unit is
therefore lower.

2-24
1.
A. Design of products and processes
Design a prototype of the RMC smartphone
Make design changes to the smartphone based on customer feedback

B. Production
Manufacture the RMC smartphone
Process orders from cell phone companies
Package the RMC smartphones

C. Marketing
Perform market research on competing brands
Market the new design to cell phone companies

D. Distribution
Deliver the RMC smartphones to the cell phone companies

E. Customer service
Provide online assistance to cell phone users for use of the RMC smartphone
2.
A. Design of products and processes
Engineering hours spent on initial product design
Number of design changes

B. Production
Number of smartphone orders processed
Number of cell phone companies purchasing the RMC smartphone
Machine hours required to run the production equipment

C. Marketing
Hours spent researching competing market brands

D. Distribution
Number of surveys returned and processed from competing smartphone users
Number of deliveries made to cell phone companies
Number of smartphones shipped by RMC
Number of deliveries made to cell phone companies

E. Customer service
Customer-service hours

2-28
1.
● Manufacturing-sector companies purchase materials and components and convert them
into different finished goods.
● Merchandising-sector companies purchase and then sell tangible products without
changing their basic form.
● Service-sector companies provide services or intangible products to their customers—for
example, legal advice or audits.
Only manufacturing and merchandising companies have inventories of goods for sale.

2. Inventoriable costs are all costs of a product that are regarded as an asset when they are
incurred and then become the cost of goods sold when the product is sold. These costs for a
manufacturing company are included in work-in-process and finished goods inventory (they are
“inventoried”) to build up the costs of creating these assets. Period costs are all costs in the
income statement other than cost of goods sold. These costs are treated as expenses of the period
in which they are incurred because they are presumed not to benefit future periods (or because
there is not sufficient evidence to conclude that such benefit exists). Expensing these costs
immediately best matches expenses to revenues.

3.
A. Lettuce and tomatoes purchased for resale by Star market—inventoriable cost of a
merchandising company. It becomes part of the cost of goods sold when the lettuce and
tomatoes are sold.
B. Electricity used for lighting at Maytag refrigerator assembly plant—inventoriable cost of
a manufacturing company. It is part of the manufacturing overhead that is included in the
manufacturing cost of a refrigerator finished product.
 C. Depreciation on Yahoo!’s computer equipment used to update directories of
websites—period cost of a service company. Yahoo! has no inventory of goods for sale
and, hence, no inventoriable cost.

D. Electricity used to provide lighting for Star Market’s store aisles—period cost of a
merchandising company. It is a cost that benefits the current period, and it is not traceable
to goods purchased for resale.
E. Depreciation on Maytag’s assembly testing equipment—inventoriable cost of a
manufacturing company. It is part of the manufacturing overhead that is included in the
manufacturing cost of a refrigerator finished product.
F. Salaries of Star Market’s marketing personnel—period cost of a merchandising company.
It is a cost that is not traceable to goods purchased for resale. It is presumed not to benefit
future periods (or at least not to have sufficiently reliable evidence to estimate such future
benefits).
G. Perrier mineral water consumed by Yahoo!’s software engineers—period cost of a service
company. Yahoo! has no inventory of goods for sale and, hence, no inventoriable cost.
H. Salaries of Yahoo!’s marketing personnel—period cost of a service company. Yahoo!has
no inventory of goods for sale and, hence, no inventoriable cost

2-32 1.
Peterson Company
Schedule of Cost Goods Manufactured
Direct Materials cost:
Beginning direct materials inventory 21000
Add: Purchase of direct materials 74000
Total direct materials available 95000
Ending inventory 23000
Direct material used 72000
Direct manufacturing labor cost 22000
Indirect manufacturing cost:
Inderect manufacturing labor 17000
Plant insurance 7000
depreciation-plant building & equipment 11000
Repairs and maintance - plant 3000
Total indirect manufacturing costs 38000
Manufacturing cost incurred 132000
add: beginning work in process inventory 26000
total manufacturing costs to account for 158000
Less: ending work in process inventory 25000
Cost of good manufactured 133000
2.

Peterson Company
Income Statement
Revenues 310000
COGS:
Beginning finished goods 13000
Cost of goods manufactured 133000
Cost of goods available for sale 146000
Ending finished goods 20000
COGS 126000
Gross Margin 184000
Operating Cost: 91000
Marketing, distribution, and customer-service costs 24000
General and administrative costs 115000
Total Operating costs 69000
Operating Income 115000

2-34

Howell Corporation
Schedule of Cost of Goods Manufactured
Direct material costs:
Beginning inventory, Jan 1, 2014 15
Purchases of direct materials 325
Cost of direct materials available for use 340
Ending inventory, Dec 31, 2014 20
Direct material used 320
Direct manufacturing labor costs 100

Indirect manufacturing costs: 60

Indirect manufacturing labor 10
Plant supplies used 30
Plant utilities 80
Depreciation-plant and equipment 5
Plant supervisory salaries 35 220
Miscellaneous plant overhead

Manufacturing cost incurred during 2014 640

Add: beginning work in process inventory, Jan 1, 2014 10
Total manufacturing costs to account for 650
Less: ending work in process, Dec 31, 2014 5
Cost of goods manufactured 645

Howell Corporation
Income Statement
Revenue 950
COGS
Beginning finished goods, Jan 1, 2014 70
Cost of goods manufactured 645
Cost of goods available for sale 715
Ending finished goods, Dec 31, 2014 55 660
Gross margin 290
Marketing, distribution, and cust-service costs 240
Operating income 50