Chapter 2
Name______________________________
Q2-3 What are the major differences between financial and managerial accounting?
Q2-4 What are the three major elements of product costs in a manufacturing company?
Q2-6 Explain the difference between a product cost and a period cost.
Q2-10 Why are product costs sometimes called inventoriable costs? Describe the flow of such costs
in a manufacturing company from the point of incurrence until they finally become expenses on the
income statement.
EXERCISE 2-3
Name ____________________________
Product (Inventoriable)
Cost
1. Depreciation on salespersons’ cars
2. Rent on equipment used in the
factory.
3. Lubricants used for maintenance of
machines
4. Salaries of personnel who work in
the finished goods warehouse.
5. Soap and paper towels used by
factory workers at the end of a shift.
6. Factory supervisors’ salaries.
7. Heat, water & power consumed in
the factory.
8. Materials used in boxing units of
finished product for shipment overseas.
(units are not normally boxed)
9. Advertising outlays
10. Workers’ compensation insurance
on factory employees.
11. Depreciation on chairs and tables in
the factory lunchroom.
12. The salary of the receptionist in the
administrative offices.
13. Cost of leasing the corporate jet
used by the company’s executives.
14. The cost of renting rooms at a
Florida resort for holding of the annual
sales conference.
15. The cost of packaging the
company’s product.
Period
(noninventoriable)Cost
EXERCISE 2-6
Name ____________________________
Cost Behavior
Variable
Fixed
1. The cost of X-ray film used in the radiology lab at Virginia
Mason Hospital in Seattle (Number of X-rays taken) .......................................
2. The cost of advertising a rock concert in New York City
(Number of rock concert tickets sold) ...............................................................
3. The cost of renting retail space for a McDonald’s restaurant
in Hong Kong (Total sales at the restaurant) .....................................................
4. The electrical cost of running a roller coaster at Magic
Mountain (Number of times the roller coaster is run) .......................................
5. Property taxes paid by your local cinema theater (Number
of tickets sold) ...................................................................................................
6. The cost of sales commissions paid to salespersons at a
Nordstrom store (Total sales at the store)..........................................................
7. Property insurance on a Coca Cola bottling plant (Number
of cases of bottles produced) .............................................................................
8. The costs of synthetic materials used to make a particular
model of running shoe (Number of shoes of that model
produced) ...........................................................................................................
9. The costs of shipping Panasonic televisions to retail stores
(Number of televisions sold) .............................................................................
10. The cost of leasing an ultra-scan diagnostic machine at the
American Hospital in Paris (Number of patients scanned with
the machine) ......................................................................................................
EXERCISE 2-8
Item
1. Cost of the old X-ray machine
2. The salary of the head of the Radiology
Dept
3. The salary of the head of the Pediatrics
Dept
4. Cost of the new color laser printer
5. Rent of 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
Name ____________________________
Differential Cost
Opportunity Cost
Sunk Cost
EXERCISE 2-9
Name ____________________________
1.
Lake Company produces a tote bag that is very popular with college students. The cloth
going into the manufacture of the tote bag would be called direct materials and classified
as a _________________________ cost. In terms of cost behavior, the cloth could also
be described as a _________________________ cost.
2.
The direct labor costs required to produce the tote bags, combined with the
manufacturing overhead cost involved would bed known as
_________________________ cost.
3.
The company could have taken the funds that it has invested in production equipment and
invested them in interest-bearing securities instead. The interest forgone on the securities
would be called _________________________ cost.
4.
Taken together, the direct materials cost and the direct labor cost required to produce tote
bags would be called _____________________ cost.
5.
The company used to produce a smaller tote bag that was not very popular. Some three
hundred of these smaller bags are stored in one of the company’s warehouses. The
amount invested in these bags would be called a ____________________ cost.
6.
Tote bags are sold through agents who are paid a commission on each bag sold. For
financial accounting purposes, these commissions are classified as a
____________________ cost. In terms of cost behavior, commissions would be
classified as a ____________________ cost.
7.
For financial accounting purposes, depreciation on the equipment used to produce tote
bags is a ____________________ cost. However, for financial accounting purposes,
depreciation on any equipment used by the company in selling and administrative
activities would be classified as a ____________________ cost. In terms of cost
behavior, depreciation is usually a ____________________ cost
8.
A ____________________ cost is also known as an inventoriable cost, because such
costs go into the Work in Process inventory account and then into Finished Goods
inventory account before appearing on the income statement as part of cost of goods sold.
9.
For financial accounting purposes, the salary of Lake Company’s president is classified
as a _______________________ cost, because the salary will appear on the income
statement as an expense in the time period in which it is incurred.
10.
Costs can often be classified in several ways. For example, Lake Company pays $5,000
rent each month on its factory building. The rent would be part of manufacturing
overhead. In terms of cost behavior, it would be classified as a
____________________________ cost. The rent can also be classified as a
___________________________and a ___________________________ cost.
Exercise 2-10
Cost Item
Cost Behavior
Variable
1. Hamburger buns at a Wendy’s
outlet .........................................
2. Advertising by a dental office...
3. Apples processed and canned
by Del Monte ............................
4. Shipping canned apples from
a Del Monte plant to
customers ..................................
5. Insurance on a Bausch &
Lomb factory producing
contact lenses ............................
6. Insurance on IBM’s corporate
headquarters ..............................
7. Salary of a supervisor
overseeing production of
printers at Hewlett-Packard ......
8. Commissions paid to
Encyclopedia Britannica
salespersons ..............................
9. Depreciation of factory
lunchroom facilities at a
General Electric plant ...............
10 Steering wheels installed in
BMWs.......................................
Fixed
Selling and
Administrative
Cost
Product
Cost
E2-11
1.
Name ____________________________
Mason Company
Schedule of Cost of Goods Manufactured
2.
Mason Company
Cost of Goods Sold (on Income Statement)
Problem 2-14
Name ____________________________
1.
Name of the Cost
Variable
Cost
Rental revenue forgone, $30,000 per
year ..............................................................
Direct materials cost, $80 per unit ..................
Rental cost of warehouse, $500 per
month ...........................................................
Rental cost of equipment, $4,000 per
month ...........................................................
Direct labor cost, $60 per unit.........................
Depreciation of the annex space,
$8,000 per year ............................................
Advertising cost, $50,000 per year .................
Supervisor's salary, $1,500 per
month ...........................................................
Electricity for machines, $1.20 per
unit ...............................................................
Shipping cost, $9 per unit ...............................
Return earned on investments,
$3,000 per year ............................................
Fixed
Cost
Product Cost
Direct
Direct
Mfg.
Materials Labor
Overhead
Period
(Selling &
Admin) Cost
Opportunity
Cost
Sunk
Cost
Exercise 2B-2
Name ____________________________
1.
Prevention
Cost
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m
.
n.
o.
p.
q.
r.
s.
Appraisal
Cost
Internal
Failure
Cost
Product testing ..................................
Product recalls ..................................
Rework labor and overhead ..............
Quality circles ...................................
Downtime caused by defects ............
Cost of field servicing ......................
Inspection of goods...........................
Quality engineering ..........................
Warranty repairs ...............................
Statistical process control .................
Net cost of scrap ...............................
Depreciation of test equipment .........
Returns and allowances arising
from poor quality ..........................
Disposal of defective products .........
Technical support to suppliers ..........
Systems development .......................
Warranty replacements .....................
Field testing at customer site ............
Product design ....................................
2. Which of the four types of costs in (1) above are incurred in an effort to keep poor
quality of conformance from occurring?
Which of the four types of costs in (1) above are incurred because poor quality of
conformance from occurring?
External
Failure
Cost
Problem 2B-4
Name ____________________________
1. Analysis of the company’s quality cost report:
Last Year
Amount
% of total % of total
production quality
cost
cost
This Year
Amount % of total % of total
production
cost
Prevention costs:
Machine maintenance .............
Training suppliers ...................
Quality circles ........................
Total prevention costs ................
$70
0
0
70
$ 120
10
20
150
Appraisal costs:
Incoming inspection ...............
Final testing ............................
Total appraisal costs ...................
20
80
100
40
90
130
Rework ...................................
50
130
Scrap .......................................
40
70
Total internal failure costs .........
90
200
Warranty repairs .....................
90
30
Customer returns ....................
320
80
Total external failure costs .........
410
110
Total quality cost........................
$670
$ 590
Total production cost .................
$4,200
$4,800
Internal failure costs:
External failure costs:
Analyze your report & determine if Mercury’s quality improvement program has been
successful. List specific evidence to support your answer.
quality
cost
Problem 2B-4, con’t
2. Do you expect the improvement program as it progresses to continue in increase the
workload in the Production Dept?
3. Jorge believe that the quality improvement program was essential and the Mercury
could no longer afford to ignore the importance of product quality. Discuss how Mercury
could measure the cost of not implementing the quality improvement program.