Solution to Chapter 2
E2-24,2-30,P2-40, 2-37 E2-32,28 (1-3 parts) P2-43,2-54
EXERCISE 2-24 (20 MINUTES)
1.
Advertising costs: Period cost, fixed
2.
Straight-line depreciation: Product cost, fixed, manufacturing overhead
3.
Wages of assembly-line personnel: Product cost, variable, direct labor
4.
Delivery costs on customer shipments: Period cost, variable
5.
Newsprint consumed: Product cost, variable, direct material
6.
Plant insurance: Product cost, fixed, manufacturing overhead
7.
Glass costs: Product cost, variable, direct material
8.
Tire costs: Product cost, variable, direct material
9.
Sales commissions: Period cost, variable
10.
Wood glue: Product cost, variable, either direct material or manufacturing
overhead (i.e., indirect material) depending on how significant the cost is
11.
Wages of security guards: Product cost, variable, manufacturing overhead
12.
Salary of financial vice-president: Period cost, fixed
EXERCISE 2-30 (15 MINUTES)
Number of Muffler Replacements
600
700
800
Total costs:
Fixed costs ...................................................................
Variable costs ..............................................................
Total costs ..............................................................
Cost per muffler replacement:
Fixed cost .....................................................................
Variable cost ................................................................
Total cost per muffler replacement ......................
*Rounded.
(a) $56,000
(c) 24,000
(e) $80,000
$56,000
28,000
$84,000
(b) $56,000
(d) 32,000
(f) $88,000
(g) $ 93.33 * (h) $ 80
(j) 40.00
(k)
40
(m) $133.33
(n) $120
(i) $ 70
(l)
40
(o) $110
EXERCISE 2-30 (CONTINUED)
Explanatory Notes:
(a)
Total fixed costs do not vary with activity.
(c)
Variable cost per replacement = $28,000/700 = $40
Total variable cost for 600 replacements = $40  600 = $24,000
(g)
Fixed cost per replacement = $56,000/600 = $93.33 (rounded)
(j )
Variable cost per replacement = $24,000/600 = $40
PROBLEM 2-40 (10 MINUTES)
Cost Item Number
1.
2.
3.
4.
5.
6.
7.
8.
9.
Product Cost or Period Cost
Product
Period*
Product
Period*
Product
Period*
Product
Product
Product
*Service industry and retail firms typically treat all costs
as operating expenses which are period expenses. Such
firms do not inventory costs.
PROBLEM 2-37 (25 MINUTES)
1.
a.
Total prime costs:
Direct material ...................................................................................
Direct labor:
Wages ............................................................................................
Fringe benefits ..............................................................................
Total prime costs ..............................................................................
b.
$ 1,050,000
242,500
47,500
$ 1,340,000
Total manufacturing overhead:
Depreciation on factory building .....................................................
Indirect labor: wages ........................................................................
Production supervisor's salary .......................................................
$
57,500
70,000
22,500
Service department costs ................................................................
Indirect labor: fringe benefits ..........................................................
Fringe benefits for production supervisor .....................................
Total overtime premiums paid .........................................................
Cost of idle time: production employees ........................................
Total manufacturing overhead ........................................................
c.
Total conversion costs:
Direct labor ($242,500 + $47,500) ....................................................
Manufacturing overhead ..................................................................
Total conversion costs .....................................................................
d.
50,000
15,000
4,500
27,500
20,000
$ 267,000
$ 290,000
267,000
$ 557,000
Total product costs:
Direct material ...................................................................................
Direct labor........................................................................................
Manufacturing overhead ..................................................................
Total product costs ..........................................................................
$1,050,000
290,000
267,000
$1,607,000
PROBLEM 2-37 (CONTINUED)
e.
Total period costs:
Advertising expense.........................................................................
Administrative costs ........................................................................
Rental of office space for sales personnel .....................................
Sales commissions ..........................................................................
Product promotion costs .................................................................
Total period costs .............................................................................
$
49,500
75,000
7,500
2,500
5,000
$ 139,500
EXERCISE 2-32 (15 MINUTES)
1.
Phone bill, January: $200 + ($.15  7,000) .........................................
Phone bill, February: $200 + ($.15  8,000) .......................................
$1,250
$1,400
2.
Cost per call, January: $1,250/7000 ...................................................
Cost per call, February: $1,400/8000 ..................................................
$ .179 (rounded)
$ .175
3.
Fixed component, January .................................................................
Variable component, January: $.15  7,000 ......................................
Total ......................................................................................................
$ 200
1,050
$1,250
4.
Since each phone call costs $.15, the marginal cost of making the 7,001st call is $.15.
5.
The average cost of a phone call in January (rounded) is $.179 ($1,250/7,000).
EXERCISE 2-28 (25 MINUTES)
1.
ALHAMBRA ALUMINUM COMPANY
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X1
Direct material:
Raw-material inventory, January 1 .........................................
Add: Purchases of raw material .............................................
Raw material available for use ................................................
Deduct: Raw-material inventory, December 31 .....................
Raw material used ...................................................................
Direct labor ....................................................................................
Manufacturing overhead:
Indirect material .......................................................................
Indirect labor ............................................................................
Depreciation on plant and equipment ....................................
Utilities ......................................................................................
Other .........................................................................................
Total manufacturing overhead ................................................
Total manufacturing costs............................................................
Add: Work-in-process inventory, January 1 ...............................
Subtotal ..........................................................................................
Deduct: Work-in-process inventory, December 31.....................
Cost of goods manufactured........................................................
2.
$ 55,000
240,000
$295,000
75,000
$220,000
420,000
$ 12,000
22,000
110,000
23,000
35,000
202,000
$842,000
110,000
$952,000
125,000
$827,000
ALHAMBRA ALUMINUM COMPANY
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X1
Finished-goods inventory, January 1 ............................................................
Add: Cost of goods manufactured ................................................................
Cost of goods available for sale ....................................................................
Deduct: Finished-goods inventory, December 31 ........................................
Cost of goods sold ..........................................................................................
$160,000
827,000
$987,000
155,000
$832,000
EXERCISE 2-28 (CONTINUED)
3.
ALHAMBRA ALUMINUM COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X1
Sales revenue ..................................................................................................
Less: Cost of goods sold ...............................................................................
Gross margin ...................................................................................................
Selling and administrative expenses .............................................................
Income before taxes........................................................................................
Income tax expense (at 35%)..........................................................................
Net income .......................................................................................................
4.
$1,210,000
832,000
$ 378,000
105,000
$ 273,000
95,550
$ 177,450
In the electronic version of the solutions manual, press the CTRL key and
click on the following link: BUILD A SPREADSHEET
PROBLEM 2-43 (35 MINUTES)
1.
LAREDO LUGGAGE COMPANY
SCHEDULE OF COST OF GOODS MANUFACTURED
FOR THE YEAR ENDED DECEMBER 31, 20X2
Direct material:
Raw-material inventory, January 1 ...........................................
Add: Purchases of raw material ................................................
Raw material available for use ..................................................
Deduct: Raw-material inventory, December 31 ........................
Raw material used ......................................................................
Direct labor .....................................................................................
Manufacturing overhead:
Indirect material..........................................................................
Indirect labor...............................................................................
Utilities: plant..............................................................................
Depreciation: plant and equipment ...........................................
Other............................................................................................
Total manufacturing overhead ..................................................
Total manufacturing costs.............................................................
Add: Work-in-process inventory, January 1 ................................
Subtotal ...........................................................................................
$ 20,000
90,000
$110,000
12,500
$97,500
100,000
$ 5,000
7,500
20,000
30,000
40,000
102,500
$300,000
20,000
$320,000
Deduct: Work-in-process inventory, December 31......................
Cost of goods manufactured.........................................................
2.
LAREDO LUGGAGE COMPANY
SCHEDULE OF COST OF GOODS SOLD
FOR THE YEAR ENDED DECEMBER 31, 20X2
Finished goods inventory, January 1 ............................................................
Add: Cost of goods manufactured ................................................................
Cost of goods available for sale ....................................................................
Deduct: Finished-goods inventory, December 31 ........................................
Cost of goods sold ..........................................................................................
PROBLEM 2-43 (CONTINUED)
3.
$ 10,000
305,000
$315,000
25,000
$290,000
LAREDO LUGGAGE COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 20X2
Sales revenue ..................................................................................................
Less: Cost of goods sold ...............................................................................
Gross margin ...................................................................................................
Selling and administrative expenses .............................................................
Income before taxes........................................................................................
Income tax expense ........................................................................................
Net income .......................................................................................................
4.
15,000
$305,000
$475,000
290,000
$185,000
75,000
$110,000
45,000
$65,000
In the electronic version of the solutions manual, press the CTRL key and
click on the following link: BUILD A SPREADSHEET
PROBLEM 2-54 (20 MINUTES)
1.
a, d, e, k
2.
a, d, e, k
3.
j
4.
g (The $200 cost savings is a differential cost.)
5.
a, c, e
6.
b, d, e, k
7.
d, e, k
8.
b, d*, e, k
*Unless
9.
the dishwasher has been used improperly.
b, d, e, k
PROBLEM 2-54 (CONTINUED)
10.
a, c, e, k
11.
h
12.
a, d, e*, j
*The hotel general manager may have some control over the total space
allocated to the kitchen.
13.
d, e, i, j
14.
i
15.
d, e, i