Chapter 1: Homework Q & A
1. Required: For each of the following cost incurred at Northwest Hospital, indicate whether it would most likely be
a direct cost or an indirect cost of the specified cost object.
Ex. Catered food served to patients
A particular patient
Direct cost
1. The wages of pediatric nurses
The pediatric department
Direct cost
2. Prescription drugs
Particular patient
Direct cost
3. Heating the hospital
The pediatric department
Indirect cost
4. The salary of the head of pediatrics
The pediatric department
Direct cost
5. The salary of the head of pediatrics
Particular pediatric patient
Indirect cost
6. Hospital chaplain’s salary
Particular patient
Indirect cost
7. Lab tests by outside contractor
Particular patient
Direct cost
8. Lab tests by outside contractor
Particular department
Direct cost
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2. The PC Works assembles custom computers from components supplied by various manufacturers. The
company is very small, and its assembly shop and retail sales store are housed in a single facility in a Redmond,
Washington, industrial park. Listed below are some of the costs that are incurred at the company.
Required: For each cost, indicate whether it would most likely be classified as direct labor, direct materials,
manufacturing overhead, selling, or an administrative cost.
1. The cost of a hard drive installed in a computer.
Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost
2. The cost of advertising in the Puget Sound Computer User newspaper.
Direct labor cost
Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost
3. The wages of employees who assemble computers from components.
Direct labor cost
Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost
4. Sales commissions paid to the company’s salespeople.
Direct labor cost
Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost
5. The wages of the assembly shop’s supervisor.
Direct labor cost
Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost
6. The wages of the company’s accountant.
Direct labor cost
Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost
7. Depreciation on equipment used to test assembled computers before release to customers.
Direct labor cost
Direct materials cost
Manufacturing overhead cost
Marketing and selling cost
Administrative cost
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3. Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures
sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is
privately owned, has approached a bank for a loan to help it finance its growth. The bank requires financial
statements before approving such a loan.
Required: Classify each cost listed below as either product costs or period costs for the purpose of preparing
the financial statements for the bank.
Costs
Product Cost / Period Cost
1. Depreciation on salespersons’ cars.
Period cost
2. Rent on equipment used in the factory.
Product cost
3. Lubricants used for machine maintenance.
Product cost
4. Salaries of personnel who work in the finished goods warehouse.
Period cost
5. Soap and paper towels used by factory workers at the end of a shift.
Product cost
6. Factory supervisors’ salaries.
Product cost
7. Heat, water, and power consumed in the factory.
Product cost
8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.)
Period cost
9. Advertising costs.
Period cost
10. Workers’ compensation insurance for factory employees.
Product cost
11. Depreciation on chairs and tables in the factory lunchroom.
Product cost
12. The wages of the receptionist in the administrative offices.
Period cost
13. Cost of leasing the corporate jet used by the company’s executives.
Period cost
14. The cost of renting rooms at a Florida resort for the annual sales conference.
Period cost
15. The cost of packaging the company’s product.
Product cost
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4. Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly
expense of a coffee stand is $500 and the variable cost per cup of coffee served is $0.27.
Required: Fill in the following table with your estimates of total costs and cost per cup of coffee at the indicated
levels of activity for a coffee stand. (Round the Average cost per cup of coffee served to 3 decimal places.)
Cups of Coffee Served in a Week
Does the avg cost per cup of served increase,
2,400 2,500 2,600
decrease, or remain the same as the cups of
Fixed cost
$500 $500 $500
coffee served in a week increases?
Variable cost
648
675
702
- Increases
Total cost
$1,148 $1,175 $1,202
- Decreases
Avg cost cup served
$0.478 $0.470 $0.462
- Remain the same
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5.
Month
January
February
March
April
May
June
July
August
September
October
November
December
OccupancyDays
2,640
2,860
980
2,420
2,090
4,470
4,020
3,940
1,630
1,090
1,390
2,910
Electrical
Costs
$ 13,200
$ 14,300
$ 4,900
$ 12,100
$ 10,450
$ 18,860
$ 17,160
$ 16,760
$ 8,150
$ 5,450
$ 6,950
$ 14,550
Required: Using the high-low method, estimate the fixed
cost of electricity per month and the variable cost of
electricity per occupancy-day. (Do not round your
intermediate calculations. Round your Variable cost
answer to 2 decimal places and Fixed cost element
answer to nearest whole dollar amount)
High activity
Low activity
Change
Variable Cost
Fixed cost element
Occupancy Electrical
Days
Costs
4,470
$18,860
980
4,900
3,490
$13,960
$4.00 Per Day
$980
What other factors other than occupancy-days are likely to affect the variation in electrical costs from month to
month? (You may select more than one answer)
- Income taxes paid on hotel income.
- Seasonal factors like winter or summer.
- Number of days present in a month.
- Systematic factors like guests, switching off fans and lights.
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6. Cherokee Inc. is a merchandiser that provided the following information:
Required: Prepare a traditional income statement.
Number of units sold
Selling price per unit
Variable selling expense per unit
Variable administrative expense per unit
Total fixed selling expense
Total fixed administrative expense
Beginning merchandise inventory
Ending merchandise inventory
Merchandise purchases
$
$
$
$
$
$
$
$
13,000
17
1
3
19,000
16,000
9,000
23,000
85,000
Cherokee, Inc. Traditional Income Statement
Sales
$221,000
Cost of Goods Sold
$71,000
Gross Margin
$150,000
Selling and administrative expenses:
Selling Expenses
$32,000
Administrative Expenses
$55,000
(blank)
$0
(blank)
$0
$87,000
Net Operating Income
$63,000
Cherokee, Inc. Contribution Format Income Statement
Sales
$221,000
Variable expenses:
Administrative Expenses
$39,000
Selling Expenses
$13,000
Cost of Goods Sold
$71,000
(blank)
$0
(blank)
$0
$123,000
Contribution margin:
$98,000
Fixed expenses:
Selling Expenses
$19,000
Administrative Expenses
$16,000
(blank)
$0
(blank)
$0
$35,000
Net Operating Income
$63,000
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7. The hospital’s Radiology Department is considering replacing an old inefficient X-ray machine with a state-ofthe-art digital X-ray machine. The new machine would provide higher quality X-rays in less time and at a lower
cost per X-ray. It would also require less power and would use a color laser printer to produce easily readable Xray images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is lobbying the
hospital’s management to buy a new DNA analyzer.
Required: Classify each item as a differential cost, an opportunity cost, or a sunk cost in the decision to replace
the old X-ray machine with a new machine. If none of the categories apply for a particular item, select "None".
Item
Ex. Cost of X-ray film used in the old machine
1. Cost of the old X-ray machine
2. The salary of the head of the Radiology Department
3. The salary of the head of the Pediatrics Department
4. Cost of the new color laser printer
5. Rent on the space occupied by Radiology
6. The cost of maintaining the old machine
7. Benefits from a new DNA analyzer
8. Cost of electricity to run the X-ray machines
Cost
Differential cost
Sunk cost
None
None
Differential cost
None
Differential cost
Opportunity cost
Differential cost
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8. Arden Company reported the following costs and expenses for the most recent month:
Direct Materials
Direct Labor
Manufacturing Overhead
Selling Expenses
Administrative Expenses
$ 88,000
$ 50,000
$ 27,000
$ 30,000
$ 43,000
What is the total amount of product costs?
$165,000 = ( DM + DL + MO )
What is the total amount of period costs?
$73,000 = ( Sell = Admin )
What is the total amount of conversion costs?
$77,000 = ( DL + MO )
What is the total amount of prime costs?
$138,000 = ( DM + DL )
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9. Required: A partially completed schedule of the company’s total and per unit costs over the relevant range of
65,000 to 105,000 units produced and sold annually is given below: Complete the schedule of the company’s
total and unit costs. (Round the variable cost and fixed cost to 2 decimal places.)
Assume that the company produces and sells
Units Produced and Sold
95,000 units during the year at a selling price of
65,000
85,000
105,000 $8.48 per unit. Prepare a contribution format
Total costs:
income statement for the year.
Variable costs
$234,000 $306,000 $378,000
Harris Company
Fixed costs
330,000 $330,000 $330,000
Contribution Format Income Statement
Total costs
$564,000 $636,000 $708,000
Sales
$805,600
Cost per unit:
Variable Expenses
$342,000
$3.60
$3.60
$3.60
Variable cost
Contribution Margin
$463,600
$5.08
$3.88
$3.14
Fixed cost
Fixed Expense
$330,000
Total cost per unit
$8.68
$7.48
$6.74
Net Operating Income
$133,600
VC = $234,000/65,000 = $3.60 & FC = $330,000/65,000 = $5.08
FC = $330,000/85,000 = $3.88 & FC = $330,000/105,000 = $3.14
Sales = 95,000*$8.48 | VE = 95,000*$3.60 | CM = 805,000-342,000 | NOI = 463,000-330,000 = 133,600
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10. Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate
considerably from year to year according to increases and decreases in the number of direct labor-hours worked
in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below:
Level of Activity
Low
High
$ 66,000
$ 88,000
$ 267,000
$ 304,400
Direct labor-hours
Total factory overhead costs
The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed
these costs at the 66,000-hour level of activity as follows:
Indirect materials (variable)
Rent (fixed)
Maintenance (mixed)
$ 85,800
$ 127,000
$ 54,200
Total factory overhead costs
$ 267,000
To have data available for planning, the company wants to break down the maintenance cost into its variable and
fixed cost elements.
Required: Estimate how much of the $304,400 factory overhead cost at the high level of activity consists of
maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $304,400 consists of
indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate
calculations). Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate
calculations. Round "Variable cost element" to 2 decimal places.)
DLH
88,000
66,000
22,000
High level of activity
Low level of activity
Change
Variable cost element
Fixed cost element
Maintenance
$63,000
$54,200
$8,800
Y = $127,000 + $0.40 X
$0.40 per DLH
$127,000
What total factory overhead costs would you expect the company to incur at an operating level of 72,600 direct
labor-hours? (Do not round intermediate calculations)
Total factory overhead cost
$281,000
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11. Marwick’s Pianos, Inc., purchases pianos from a large manufacturer and sells them at the retail level. The
pianos cost, on the average, $1,484 each from the manufacturer. Marwick’s Pianos, Inc., sells the pianos to its
customers at an average price of $3,100 each. The selling and administrative costs that the company incurs in a
typical month are presented below:
During August, Marwick’s Pianos, Inc., sold and delivered 56 pianos
Required: Prepare an income statement for Marwick’s Pianos, Inc., for August. Use the traditional
format, with costs organized by function. (A "Net operating loss" should be entered as a negative
number.)
Marwick's Pianos, Inc.
Traditional Income Statement
For the Month of August
Sales
Cost of goods sold
Gross Margin
Selling and administrative expenses:
Selling expenses:
Advertising
Sales salaries and commissions
Delivery of pianos
Utilities
Depreciation of sales facilities
$173,600
$83,104
$90,496
931
13,468
3,360
645
4,935
0
0
23,339
Total selling expenses:
Administrative expenses:
Executive salaries
Insurance
Clerical
Depreciation of office equipment
13,560
698
4,701
870
0
0
19,829
Total administrative expenses:
Total selling and administrative expenses:
Net operating income
43,168
$47,328
Prepare an income statement for Marwick’s Pianos, Inc., for August, this time using the contribution format,
with costs organized by behavior. Show costs and revenues on both a total and a per unit basis down through
contribution margin. (A "Net operating loss" should be entered as a negative number)
Sales
Variable expenses:
Clerical
Sales commissions
Delivery of pianos
Cost of goods sold
Total variable expenses:
Contribution Margin:
Fixed expenses:
Marwick's Pianos, Inc.
Contribution Format Income Statement
For the Month of August
Total
$173,600
Per Piano
$3,100
2,240
8,680
3,360
83,104
0
0
97,384
40
155
60
1,484
0
0
1,739
$76,216
$1,361
Advertising
Utilities
Depreciation of sales facilities
Executive salaries
Insurance
Depreciation of office equipment
Clerical
Sales salaries
Total fixed expenses
Net operating income
931
645
4,935
13,560
698
870
2,461
4,788
0
0
28,888
$47,328