Managerial Accounting and Cost Concepts

Behavior [L02,
PROBLEM 2-18 Schedule of Cost of Goods Manufactured; Income Statement: Cost
LO3, LO4, LO5, LO6]
Various cost and sales data for Meriwell Company for the just completed year appear in the work- Xcel
sheet below:

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1Finished goods inventory, beginning $20,000
2 Finished goods inventory, ending $40,000
3Administrative expenses $110,000
4 Manufacturing overhead $105,000
5 Purchases of raw materials $125,000
6 Raw materials inventory, beginning $9,000
7 Raw materials inventory, ending $6,000
8Direct labor $70,000
9 Work in process inventory, beginning $17,000
10|Work in process inventory, ending $30,000
11Sales $500,000
12 Selling expenses $80,000
13

Of the $105,000 of manufacturing overhead, $15,000 is variable and $90,000 is fixed.

Required:
1 Prepare a schedule of cost of goods manufactured.
2 Prepare an income statement.
3 Assume that the company produced the equivalent of 10,000 units of product during the year
just completed. What was the average cost per unit for direct materials? What was the average
cost per unit for fixed manufacturing overhead?
4 Assume that the company expects to produce 15,000 units of product during the coming year.
What average cost per unit and what total cost would you expect the company to incur for
direct materials at this level of activity? For fixed manufacturing overhead? Assume that direct
materials is a variable cost.
5 As the manager responsible for production costs, explain to the president any difference in the
average costs per unit between (3) and (4) above.

PROBLEM 2-19 Cost Classification and Cost Behavior [L03, LO6, LO7]
The Dorilane Company specializes in producing a set of wood patio furniture consisting of a table
and four chairs. The set enjoys great popularity, and the company has ample orders to keep produc
tion going at its full capacity of 2,000 sets per year. Annual cost data at full capacity follow:

Factory labor, direct $118,000

Advertising. $50,000
Factory supervision $40,000
Property taxes, factory building $3,500
Sales commissions $80,000
Insurance, factory. $2,500
Depreciation, administrative office equipment $4,000
Lease cost, factory equipment. $12,000
Indirect materials, factory. $6,000
Depreciation, factory building $10,000
Administrative office supplies (billing) $3,000
Administrative office salaries $60,000
Direct materials used (wOod, bolts, etc.) $94.000
Utilities, factory. $20.000
Chapter 2

Required:
Prepare an answer sheet with the column headings shown below. Enter each cost item on your
answer sheet, placing the dollar amount under the appropriate headings. As examples, this has
claseie
the list above. Note thateach cost item is
veen done already for the frst twoitems in respect to the number of units produced and sold:
in
andtwo ways: asfirst,
second, as variable
a selling or fixed withcost or a product cost. (If the item is a product cost,
, and administrative
as shown.)
11 should also be classifed as either direct or indirect
Selling or Product Cost
Cost Behavior Administrative
Cost Direct Indirect
Cost Item Variable Fixed
$118,000
Factory labor, direct $118,000 $50,000
$50,000
Advertising.
*To units of product.
Compute the average product
2 Total the dollar amounts in each of the columns in (1) above.
cost of one patio set.
3 Assume that production drops to only 1,000 sets annually. Would you expect the average
remain unchanged? Explain. No computations
product cost per set to increase, decrease, or
are necessary.
considered making himself a
4 Refer to the original data. The president's brother-in-law has store. The brother-in-law
patio set and has priced the necessary materials at a building supply
the Dorilane Company at cost,"
has asked the president if he could purchase a patio set from
and the president agreed to let him do so.
brother-in
a. Would you expect any disagreement between the two men over the price the
law should pay? Explain. What price does the president probably have in mind? The
brother-in-law?
b Because the company is operating at full capacity, what cost term used in the chapter
might be justification for the president to charge the full, regular price to the brother-in-law
and still be selling "at cost"?

PROBLEM 2-20 Classification of Various Costs [LO2, LO3, L06, LO8]

Staci Valek began dabbling in pottery several years ago as a hobby. Her work is quite creative, and
it has been so popular with friends and others that she has decided to quit her job with an aerospace
company and manufacture pottery full time. The salary from Staci's aerospace job is $3,800 per
month.
Staciwill rent a small building near her home to use as a place for manufacturing the pottery.
The rent willbe $500 per month. She estimates that the cost of clay and glaze will be $2 for each
finished piece of pottery.She will hire workers to produce the pottery at alabor rate of $8 per pot.
To sell her pots,Staci feels that she must advertise heavily in the local area. An advertising agency
states that it wil handle all advertising for a fee of $600 per month. Staci's brother will sell the
pots: he willbe paid a commission of $4 for each pot sold. Equipment necded to manufacture the
pots willbe rented at a cost of $300 per month.
Staci has already paid the legal and filing fees associated with incorporating her business in
the state. These fees amounted to $500. Asmall room has been located in a tourist area that Staci
will use as a sales office. The rent will be $250 per month. Aphone installed in the room for taking
orders will cost $40 per month. In addition, a recording device will be attached to the phone for
taking after-hours messages.
Stacihas some money in savings that is earning interest of $1,200 per year. These savings will
be withdrawn and used to get the business going. For the time being, Staci does not intend to draw
any salary from the new company.
Required:
1. Prepare an answer sheet with the following column headings:
Period
Name
Product Cost (Selling and
of the Variable Fixed Direct Direct Manufacturing Administrative) Opportunity Sunk
Cost Cost Cost Materials Labor Overhead Cost Cost Cost
 Managerial Accounting and Cost Concepts

left column (under

List the different costs associated with the new company down the extreme
of cost
Name of Cost), Then place an X under each heading that helps to describe the type
several column headings for a single cost. (That is, a cost
involved. There may be X's under each of these
a period cost, and a sunk cost; you would place an Xunder
may be a fixed cost,
column headings opposite the cost.)
Ünder the Variable Cost column, list only those costs that would be variable with respect
toAllthe number of units of pottery that are produced and sold.
of the costs you have listed above, except one, would be differential costs between the al
2.
ternatives of Staci producing pottery or staying with the aerospace company. Which cost is not
differential? Explain.
PROBLEM 2-21 Schedule of Cost of Goods Manufactured: Income Statement; Cost Behavior [LO2,
LO3, LO4, LO5, LO6]
Selected account balances for the year ended December 31 are provided below for Superior Company:
Sellingand administrative salaries $110,000
Purchases of raw materials $290,000
Direct labor
Advertising expense $80,000
Manufacturing overhead $270,000
Sales commissions $50,000

Inventory balances at the beginning and end of the year were as follows:

Beginning of End of
the Year the Year

Raw materials $40,000 $10,000

Work in process ? $35,000
Finished goods $50,000 ?

The total manufacturing costs for the year were $683,000; the goods available for sale totaled
$740,000; and the cost of goods sold totaled $660,000.
Required:
1 Prepare a schedule of cost of goods manufactured and the cost of goods sold section of the
company's income statement for the year.
2 Assume that the dollar amounts given above are for the equivalent of 40,000 units produced
during the year. Compute the average cost per unit for direct materials used and the average
cost per unit for manufacturing overhead.
3. Assume that in the following year the company expects to produce 50,000units and manufac
turing overhead is fixed. What average cost per unit and total cost would you expect to be in
curred for direct materials? For manufacturing overhead? (Assume that direct materials is a
variable cost.)
4. As the manager in charge of production costs, explain to the president the reason for any dif
ference in average cost per unit between (2) and (3) above.

PROBLEM 2-22 Ethics and the Manager [L03]

M. K. Gallant is president of Kranbrack Corporation, a company whose stock traded on a na
tional exchange. In a meeting with investment analysts at the beginning of the year, Gallant had
predicted that the company's earnings would grow by 20% this year. Unfortunately,sales have
been less than expected for the year, and Gallant concluded within two weeks of the end of the fis
cal vear that it would be impossible to ultimately report an increase in earnings as large as pre
dicted unless some drastic action was taken. Accordingly, Gallant has ordered that wherever
possible, expenditures should be postponed to the new year-including canceling or postponing
orders with suppliers, delaying planned maintenance and training, and cutting back on end-of-year
advertising and travel. Additionally, Gallant ordered the company's controller to carefully scruti
nize all costs that are currently classified as period costs and reclassify as many as possible as
product costs. The company is expected to have substantial inventories of work in process and
finished goods at the end of the year.