Cost accounting

Chapter (1) the nature, concepts, and classifications of cost accounting

 The primary purpose of accounting is to provide financial information relating to an
economic entity.
 It is concerned with measuring, recording and reporting financial information for various
groups of users.
 Information is required by management to plan and control the activities of a business.

Cost or managerial accounting

is the system designed to measure product costs, performance, and control the operations of
the firms.

Financial accounting versus cost accounting:

 Financial accounting is largely concerned with financial statements for external use by
those who supply funds to the firm (stock holders and creditors), and those who help
analyze the financial information (financial analysts), and other external parties who have
a financial interest in the firm.
 Cost or managerial accounting is primarily concerned with the accumulation and analysis
of information( to measure product costs, performance, and control the operation of the
firm) relevant for the internal use by managers for planning, controlling and decision
making.
The design of a cost or managerial system is based on the needs of management.

Cost accounting versus management accounting:

 Cost accounting
The national association of accountants (NAA) defines cost accounting as “ a technique or
method for determining the cost of a project, process, or things used by the majority of
the legal entities in a society”
 Management accounting
The (NAA) defines management accounting as the process of :
o Identification (of transactions)
o Measurement ( of transactions)
o Accumulation (of transactions)
o Analysis ( of transactions with other related events)
o Preparation and interpretation (of the date)
o Communication ( to management for internal and external use)
 It covers a broader range than cost accounting. Also, according to the NNA,
management accounting is used by management to plan, evaluate, control and assure
accountability. (referred to as the responsibilities.
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Objectives of management accounting:
The objective are planning, controlling and decision making – stated by the NNA as:
(1) to provide information needed for planning and controlling.
(2) to participate in the management process (decision making and coordinating the
entire organization).

To achieve the objectives, management accountants must

(a) accept the responsibilities of : planning, evaluating, controlling and assuring
accountability of resources and external reporting

(b) perform the activities necessary are : reporting , interpretation, resource

management, information systems development, vertification and administration.

(c) perform the operational process of: identification, measurement, accumulation,

analysis, preparation, interpretation and communication.

Cost concepts, definitions and classifications:

Cost accounting involves the use of the control of and the planning of costs. The term cost
differs from expense and loss as seen by their definitions:

1. Cost: the value of the sacrifice made (benefit given up ) to acquire goods or services.
 It measurable in dollars by the reduction of assets or the incurrence of liabilities.
 At the time of acquisition, the cost incurred is for present or future benefits.
 The basis for product costing, performance evaluation, and managerial decision making.

2. Expense: a cost that has given a benefit and is now expired.

 When the benefits (goods or services) are utilized, the cost becomes an expense.
 An Unexpired cost is classified as an assets because benefits are still to be received (e.g,
prepaid insurance).

3. Loss: A cost that occurs when goods or services purchased are determined to be valueless
without having provided any benefit.
This loss appears as a deduction from revenues.

4. Revenues are defined as the price of the products sold or the services rendered.
Expenses and loss both reduce revenue, but are separately disclosed in the income
statement.

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Exercise (1-6) Revenue, Expense, and Loss Computation
The Lu-Lu Manufacturing Company purchased four identical items of inventory for a total
cost of $20,000. On May 5, the company sold two of the items for $6,000 each; on May 25,
it discarded as worthless the remaining two items because they were found to be
defective.
Required: Compute the revenue, expense, and loss from these transactions
Solution
 Revenue = $6,000 × 2 = $12,000
Cost per unit = = = $5,000
 Expense (COGS) = 5,000 × 2 = $10,000
 Loss = 5,000 × 2 = $10,000 resulted on may 25 , when the remaining two iterms in the
inventory were discared as worthless

Problem (1-2) Expense, Loss, and Asset Computation

The PITA Manufacturing Company produced 75,000 units for the year ending December
31, 19X1. No units were in process at the beginning or end of this period. The cost of
goods manufactured was $300,000. During the year, the following occurred:
o 59,000 units were sold at $5 per unit.
o 14,000 units were still awaiting sale.
o 2,000 units were found defective.
There was no beginning finished goods inventory.
Required:
Prepare a multiple step income statement for PITA Manufacturing Company

Solution
o Sales price per unit = $ 5
o Cost per unit = = = $4

Sales revenue = Number of units sold × sales price per unit

= 59,000 units × $5 = $295,000

Cost of goods sold = number of units sold × cost per unit

= 59,000 units × $4 = $ 236,000

Loss for defective units = number of units defected × cost per unit
= 2,000 × $4 = $8,000

o Assets recorded as finished goods inventory = 14,000 units × $4 = $56,000

Pita manufacturing company

income statement
for the year ended dec 31, 19x1
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 Sales ………………………………………………….. $ 295,000
(-) cost of goods sold ………………………………. (236,000)
gross profit ……………………………………… 59,000
(-) loss on defective units ………………………… (8,000)
operating income ……………………………... 51,000

Problem ( 1- 8) Revenue, expense, and Loss computation

Paul and terry’s gym supply house began business on January 1, 19X1. During the month
of January the following transactions occurred:
QUANTITY PER UNIT .
Purchase selling
Description purchased sold Cost price
 Bench press machine 3 2 $500 $800
 Lat pull down machine 5 3 400 700
 Leg press machine 6 2 600 1,000
 Arm curl machine 4 0 200
The arm curl machines were determined to be defective. Because the manufacturer of the
arm curl machine went out of the business and the machines cannot be returned, they
will be discarded as worthless.
Required: compute for the month of January:
a. total revenue b. total expense (cost of goods sold) c. total loss
solution
a) total revenue = number of units × sales price per unit
Number of Selling price
Description units sold per unit Revenue
Bench press machine 2 units × $ 800 = $ 1,600
Lat pull down machine 3 units × 700 = 2,100
Leg press machine 2 units × 1,000 = 2,000
total revenue = 5,700

B) total expense (cost of goods sold) = number of units sold × purchase cost per unit
Number of Selling price cost of goods
Description units sold per unit sold
Bench press machine 2 units × $ 500 = $ 1,000
Lat pull down machine 3 units × 400 = 1,200
Leg press machine 2 units × 600 = 1,200
total cost of goods sold = 3,400

Problem (1 – 9 ) Expense, loss, and asset computation.

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The Might Max Manufacturing company produces vitamin pills. No production was in
process at the beginning or end of this period. The following activity took place during the
year 20X1:

Produced:
o 500,000 Vitamin A pills at a cost of $.02 each
o 300,000 Vitamin B pills at a cost of $.03 each
Sold:
o 400,000 Vitamin A pills at a cost of $.05 each
o 250,000 Vitamin B pills at a cost of $.06 each
Discarded:
o 20,000 Vitamin A pills and 10,000 Vitamin B pills because they were past their
expiration date.

Other operating expenses were $12,000. There was no beginning finished goods inventory.

Required: prepare a multiple step income statement for the Mighty Max manufacturing
company (ignore income taxes).

Solution

Might max manufacturing company

Income statement
For the year ended dec 31, 19×1
Sales (vitamin A: 400,000 × .05) 20,000
(Vitamin B: 250,000 × .06) 15,000  35,000

(-) cost of goods sold

(vitamin A: 400,000 × .02) 8,000
(Vitamin B: 250,000 × .03) 7,500  (15,500)

Gross profit ……………………………………………………… 19,500

(-) loss on discarded vitamins

(vitamin A: 20,000 × .02) 400
(Vitamin B: 10,000 × .03) 300  (700)

(-) other operating expenses (12,000)

Net income …………………………………………………. $ 6,800

Cost accounting information pool:

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The cost accounting information pool consists of past revenues and costs necessary for
product costing and performance evaluation, and projecting revenue and costs necessary for
managerial decision making.

The data may be organized using eight categories:

1) elements of a product: ‫عناصر االنتاج‬

The three integral components or cost elements of product are :
1. Materials ‫مواد خام‬
The principle substances used in production that are transformed into finished goods by the
addition of direct labor and factory overhead.

The materials may be divided into direct and indirect materials as follows:
a) direct materials:
all material that can be identified with, easily traced to the product, and that represent a
major material cost of producing a product (examples: the lumber used to build a bunk bed)

b) indirect materials
 all materials involved in the production of the product that are not direct materials
(examples: the glue used to build a bunk bed)
 indirect materials are included as part of factory overhead.

2. Labor ‫عمالة‬
Labor is the physical or mental effort expanded in the production of the product.

Labor costs may be divided into direct and indirect labor as follows:
(a) direct labor
all labor directly involved in the production of a finished product, easily traced to the
product , and that represents a major labor cost of producing product (example. Machine
operators)

(b) indirect labor:

 all labor involved in the production of the product that is not considered direct labor
( example. Plants supervisor)
 indirect labor is included as part of factory overhead.

3. Factory overhead
Consist of
(a) indirect materials
(b) indirect labor
(c) all other indirect manufacturing costs
all other costs that cannot be directly identified with specific products.

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Example of other factory overhead costs besides
Indirect materials , indirect labor, are rent, light , and heat for the factory, and depreciation
of factory equipment.

Exercise (1-3)
1-3 Hill Corporaon has the following classica ons of cost elements:
a) Producon supervisor’s salary FOH
b) Cost accountant’s salary FOH
c) Fire insurance on factory building FOH
d) Machine operator’s wages DL
e) Packaging for product DM
f) Raw materials for the product mix DM
Required: Indicate whether the above cost elements are direct material, direct
labor, or
factory overhead
Hill Corporaon has the following classicaons of cost elements:
a) Producon supervisor’s salary FOH
b) Cost accountant’s salary FOH
c) Fire insurance on factory building FOH
d) Machine operator’s wages DL
e) Packaging for product DM
f) Raw materials for the product mix DM
Required: Indicate whether the above cost elements are direct material, direct
labor, or
factory overhead
Hill Corporation has the following classifications of cost elements:
a) Production supervisor’s salary
b) Cost accountant’s salary
c) Fire insurance on factory building
d) Machine operator’s wages
e) Packaging for product
f) Raw materials for the product mix
Required:
Indicate whether the above cost elements are direct material,
direct labor, or factory overhead
solution

A) Factory Overhead C) Factory Overhead E) Direct Material

B) Factory Overhead D) Direct Labor F) Direct Material

Exercise (1-5) DIRECT AND INDIRECT MATERIALS

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Chewy Chocolate Chip Company uses the following materials to produce its
chocolate chip cookies:
a) Bleached flour
b) Sugar
c) Chocolate chips
d) Solvent to clean machines
e) Partially hydrogenated soybean oil
f) Lubricants for machines
g) Eggs
h) Adhesives for cookie boxes
i) Skim milk
Required: Indicate whether these items represent direct or indirect materials
Solution
a) direct materials. d) indirect materials. g) direct materials.
b) direct materials. e) direct materials. h) direct materials.
c) direct materials. f) indirect materials. i) direct materials.

2) relationship to production :
The analysis in this category is similar to the analysis of costs by element.
This grouping aids in the management objective of the planning and control.

Cost in this category may be classified as

a) prime costs:
 the sum of direct materials and direct labor
 prime costs = direct material + direct labor.
 These costs directly related to production.

B) Conversion costs:
 Those costs that are related to the transforming direct materials into finished products.
 Conversion costs = direct labor + factory overhead costs.
 Summarizing these costs is for analysis purposes only, it is not used to accumulate costs
for determining the cost of a product.
 Therefore, including direct labor is both analyses, does not result in double counting
direct labor.

Prime costs Conversion costs

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 Direct Factory
Direct labor
materials Overhead

3) relationship to volume :

Costs vary with changes in volume of production.

 To understand the relationship of change in volume to change in costs
 To understand this concept, costs are classified into three categories:

a) variable costs:
 total costs changes in direct proportion to changes in volume or output but within the
relevant range, while the unit cost remains constant.
 Total variable cost is controllable by individual department heads.

 Relevant range is defined as that interval of activity (i.e unit of production ) within which
total fixed costs and per unit variable cost remain constant.
 Once production exceeds the relevant range, a new total fixed cost and per unit variable
cost must be used for new relevant range.

b) fixed costs:
 those costs in total remain constant while having a unit that varies with production
(output)
 beyond (more) the relevant range of output, fixed costs will vary.
 Upper level management controls production volume and is therefore help responsible for
the level of fixed costs.

c) mixed costs:
these costs have characteristics of both variable and fixed costs. There are two types of mixed
costs:

1) semi variable costs:

The fixed portion of the cost is the cost actually using the service .
(ex: telephone services fixed fee for service in the home, additional charge for each call made)

Example:
Assume that a company rent a delivery truck at flat fee of 2,000 per year plus $1.5 for each
mile driven , assume that the number of miles driven are 10,000

The total annual cost of delivery truck computed as follows

 Flat fee (fixed component) …………………………….. $ 2,000

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 Mileage charge (variable component) (10,000 × 1.5) $ 15,000
 Total costs ……………………………………………………………… 17,000

2) step costs :
These costs are fixed for a very interval, or relevant range, then they change abruptly as the
activity level changes.

An example of step costs is

For certain time periods, a supervisor may be able to oversee 10 workers, then two
supervisors would be required. If for example 10 workers are used, still only two supervisors
would be needed however if the number of workers increases to 21, three supervisors would
be needed.

Instead of hiring an additional supervisor, for example an organization may pay current
supervisors time and a half to work a few extra time.

Some example:

Mixed cost
Variable costs: Fixed costs Semi variable cost step costs
Example: Example Example: Example:
 Direct matrial  Building maintenance  Truck rental  supervisor salary
 Direct labor  Equipment maintenance  Equipment rental  inspection salary
 Electricity for machinery  Depreciation (except for  Telephone service
 Depreciation under units unit of production)
of production method  Plant taxes
 Plant insurance
 Warehouse rent
 Factory heat

EXERCISE 1.4 FIXED, VARIABLE, AND MIXED COSTS

Some of the categories used by the Broadway Corporation are presented below:
a) Factory rent
b) Wages for employees who are paid based on number of hours worked
c) Factory heat
d) Equipment maintenance
e) Cost accountant’s salary

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f) Salaries for factory supervisors
g) Electricity to run equipment
h) Depreciation (units of production method)
i) Telephone service
Required: Indicate whether the above items represent fixed, variable, semi-
variable, or step costs
Solution
a) Fixed d) Fixed g) Semi Variable
b) Variable e) Fixed h) Variable
c) Fixed f) Steps Costs i) Semi Variable

Exercise (1-7) ALTERNATIVE LEVELS OF PRODUCTION

The Hi & Lo Zipper Manufacturing Company is considering two alternative levels of
production as follows:
Projected production level:
Plan 1 ………………………………………………………………………………. 4,500 units
Plan 2 ………………………………………………………………………………. 7,200 units
Fixed costs (relevant range is 3,000 - 8,000 units) $20,000
Variable costs ………………………………………………………………… $2.25 per unit
Required: Compute the production costs under both plans
Solution
Plan 1
 Variable costs (4,500 units × $2.25) $10,125
 Fixed costs ………………………………………………… $20,000
 Total production costs ………………………………………. $30,125

Plan 2
 Variable costs (7,200 units × $2.25) $16,200
 Fixed costs ………………………………………………….. $20,000
 Total production costs ………………………………………. $36,200

notes that

 Total production costs are lower for plan 1 than plan 2 but the cost per unit under plan 1
is higher than under plan 2.
 total fixed costs remain constant under both plans while total variable cost change.
 Fixed costs per unit are lower under plan 2 because fixed costs are allocated over more
units than plan 1.

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 Under both plans, variable cost per unit remain the same because they are not effected
by changes in volume.

4) ability to trace
This analysis classifies costs into two groups based on management’s ability to trace it to
specific job, department, etc.

a) direct costs : these cost can be identified to specific item or area.

b) indirect costs :
these costs affects many items or areas and cannot be traced to one specific item or area.
Normally these costs must be systematically “allocated “ to the areas to which they apply.

5) department where incurred :

 Another means of classifying cost is by the department where they are incurred.
 This assist management in controlling factory overhead and measuring income .

Two types of department in manufacturing concern are:

(a) production :
 a department where conversion or production processes are performed.
 This department contributies directly to production and the costs are production
departments costs.

b) service :
 a department not directly engaged in production
 a portion of the costs are allocated to a production department, the remainder of the
costs (not related to production ) are service department costs that are expensed

6) functional areas:
 This method groups costs by the type of activity performed. It is purpose is to aid
management in cost analysis.

The basic functional area costs of a manufacturing concern are:

a) manufacturing costs
 costs that are incurred to produce the product (direct materials , direct labor and
factory overhead) .

b) marketing cost:
 cost that are incurred to sell a produce or service.

c) administration costs:
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 costs that are incurred to direct , control , and operating a company.
 Includes salaries paid to management and staff.

d) financing costs
 costs that related to obtaining funds for the company (e.g interest charges)

7) period charged to income :

 Analysis of costs in this category is based on when the costs are charged against revenues
 Used for income measurement , preparation of financial statements and matching
expense to revenue in proper period.
 Some costs are initially recorded as assets ( called capital expenditures) then later
expensed other costs are expensed immediately (called revenue expenditures)

Two categories used

a) products costs
 these costs consist of the three basic cost elements:
 products costs = direct materials + direct labor + factory overhead.
 These costs are inventoried until sold.
 When sold , the product cost is called cost of goods sold and matched against the
revenue of the product sold.

b) period cost:
cost that are not related to the product, they are not inventoried but are expensed
immediately. Like : selling expenses , general and administrative expenses.

8) relationship to planning , controlling and decision making:

a. standard and budgeted costs:
 standard costing assigns a stand or projected unit cost for direct materials, direct labor and
factory overhead.
 Budgets project a total cost for future activity.
 Both budgets and standards are used by management to initially plan and later control
operations ( via the analysis of variance between the budget or standard and actual

b) controllable and non controllable :

 controllable costs are those that may be directly influenced by managers where as non
 controllable costs are not directly administrated at a given level of management authority

c) committed and discretionary fixed cost

 committed cost are those that are essential to the continuation of the organization

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 they are fixed and normally increase (e.g salaried personnel)
 discretionary fixed costs can vary from one year to the next, are monitored by
management and do not necessary have to increase (e.g annual repairs and maintenance
expense).

d) relevant and irrelevant costs:

 relevant costs are costs that are direct affected by management’s choice of alternatives.
 Irrelevant costs are costs that are not influenced by a management decision.
 An example of an irrelevant costs is a sunk cost such as depreciation.
 It cannot be eliminated and thus an irrelevant cost because management cannot influence
this expense.

e. differential cost:
 these are difference in costs that result from the management decision to take alternative
action.
 If increase called incremental costs
 If decrease called decremental costs.

f) opportunity costs:
 the measurable value of benefit that is lost because management choose an alternative
course of action.
 Not recorded on the books, but must be considered when making decision as to
alternative courses of action.

g. shutdown costs
 fixed costs that are incurred even when there is no production.
 Example: Taxes on building insurance and security guard salaries.

Exercise (1-9)
PRIME COSTS, CONVERSION COSTS, AND PRODUCT COSTS
The following information relates to the Snowball Manufacturing Company:
Direct materials …………………………………………………………………………………. $ 25,000
Indirect materials ……………………………………………………………………………….… 5,000
Direct labor …………………………………………………………………………………………. 30,000
Indirect labor ……………………………………………………………………………………….. 4,500
Factory overhead (excluding indirect materials and indirectlabor) 15,000
Required: Compute the prime costs, conversion costs, and product costs.

Solution

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1) prime costs = direct material + direct labor
= 25,000 + 30,000 = 55,000

2) conversion costs = direct labor + factory overhead

= 30,000 + * 24,500 = 54,500

Factory overhead = 5,000 + 4,500 + 15,000 = 24,500*

3) product costs = direct material + direct labor + factory overhead

= 25,000 + 30,000 + 24,500 = 79,500

Exercise (1 – 12) PROJECTION OF INCOME

Chris’s Police Supply Company sells handcuffs to law enforcement agencies. The
following income statement was prepared for 19X1:
Sales (800 units @ $90) ……………………………………….. $72,000
Cost of goods sold (800 units @ $50) …………………… 40,000
Gross profit ………………………………………………………….. $32,000
Operating expenses (800 units @ $12.50) …….. 10,000
Operating income ………………………………………………… $22,000

Additional information:
Variable cost of goods sold per unit $35
Variable operating expenses per unit $5
Required: What would the projected income for 19X2 be for Chris’s Police
Supply Company if the sales tripled, assuming existing facilicies would sell be adequate and
the other variables would not change?
Solution
For 19x2
Units to be sold = 800 units × 3 = 2,400 units
Sales revenue = 2,400 units × $90 = $216,000

Cost of goods sold

(a) variable cost per unit = $35
(b) fixed cost per unit = 50 – 35 = $15
Total fixed costs = 800 × 15 = 12,000

Total cost of goods sold

variable cost = 2,400 × 35 = 84,000
fixed cost 12,000
96,000

Operating expenses :
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Total operating expenses:

Total operating expense per unit = 12,5

variable operating cost per unit = 5
fixed cost operating cost per unit = 7.5

Total operating costs = 800 × 7.5 = 6,000

Total operating cost for the 2,400 unit

Variable cost = 2,400 × 5 = 12,000
Fixed costs 6,000
18,000

Chris’s policy supply company

Income statement
For the year 19x2
Sales revenue ……………………………………….. 216,000
cost of goods sold …………………………………. (96,000)
gross profit ………………………………………… 120,000
- operating expense …………………………….. (18,000)
102,000

Problem (1 – 1) COMPUTATION OF VARIOUS COSTS

available for the period ended

December 31, 19X3:
 Materials put into producon:
$82,000, of which $78,000 was
considered direct
materials
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 Factory labor costs for the period:
$71,500, of which $12,000 was for
indirect
labor
 Factory overhead costs for factory
depreciaon: $50,000
 Selling, general, and
administrave expenses: $62,700
 Units completed during the period:
18,000
Required: Compute the following:
a) Prime costs
b) Product costs
c) Conversion costs
d) Period costs
IOU Manufacturing Company produces wallets. The following cost information is
available for the period ended December 31, 19X3:
 Materials put into production: $82,000, of which $78,000 was considered direct material
 Factory labor costs for the period: $71,500, of which $12,000 was for indirect labor
 Factory overhead costs for factory depreciation: $50,000
 Selling, general, and administrative expenses: $62,700

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 Units completed during the period: 18,000
Required: Compute the following:
a) Prime costs b) Product costs
c) Conversion costs d) Period costs
solution

 direct materials = $78,000

indirect materials = 82,000 – 78,000 = 4,000
 indirect labor = 12,000
direct labor = total labor cost – indirect labor
= 71,500 – 12,000 = $59,500
 factory overhead =
indirect materials 4,000
+ indirect labor 12,000
+ factory overhead 50,000
66,000

a) prime costs = direct materials + direct labor

= 78,000 + 59,500 = 137,500

b) coversion costs = direct labor + factory overhead

= 59,500 + 66,000 = 125,500

c) product costs = direct materials + direct labor + factory overhead

= 78,000 + 59,500 + 66,000 = 203,500

d) period costs = selling , general and administrator expense

= 62,700

Problem (1 – 3)
The gorilla company manufactures small stuffed gorillas. The total revenue is $59,000.
The company incurred the following costs:
Materials ………………………………………. $ 5,200 (10% is indirect materials)
Labor …………………………………………… 7,000 (12% is indirect labor)
Factory overhead …………………………… 25,000 ( including indirect materials and
General and administrative expenses 14,700 indirect labor )

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Office salaries ………………………………… 4,800
Equipment purchased at the end of period
(ignore depreciation) ……………………………. 5,300
Total …………………………………………………….. 62,000
There were no units still in process at the end of the year, and 92% of the goods produced
during the year were sold.

Required :
a. compute what the net income or loss would be if there were no distinction between
product and period costs, and gorilla company was on a cash basis.
b. show the analysis that should have been prepared.
c. compute the correct net income or loss.
Solution
Total materials ………………………………………………… $ 5,200
less : indirect materials (5,200 × 10%) ……………… (520)
direct materials ………………………………………. 4,680

Total labor ………………………………………………………. $ 7,000

less : indirect labor (7,000 × 12%) ……………………. (840)
direct labor …………………………………………….. 6,160

a) total revenue ………………………………………………… $ 59,000

less : total costs (62,000 – 520 – 840 ) …………….. (60,640)
net loss …………………………………………………………. (1,640)

b)
Product Capital Revenue Total
Costs expenditure Expenditure
Direct materials 4,680 4,680
Direct labor 6,160 6,160
Factory overhead 25,000 25,000
General and administrative 14,700 14,700
Expense
Office salaries 4,800 4,800
Equipment 5,300 5,300
35,840 5,300 19,500 60,640
c) total revenue …………………………………………. 59,000
less : product cost (35,840 × 92%) ……… 32,973
period cost – revenue expenditure 19,500 → (52,473)
net income ……………………………………………………………….. 6,527

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problem (1-4) COMPUTATION OF VARIOUS COSTS
Woody Lumber Manufacturing Company had no units in process on January 1. On
December 31, there were 100,000 finished units on hand and no units in process.
During the year, 250,000 units had been sold. Materials costing $375,000 had been put
into process; 80% were direct materials. Labor costs were $400,000; 65% was direct labor.
Additional factory overhead costs were the following:
Heat, light, and power …………………. $160,000
Depreciation ……………………………….. 45,000
Property taxes ……………………………. 85,000
Repairs and maintenance …………... 20,000
Selling expenses were $125,000 ; general and administrative expenses were $80,000.
Required: Compute the following:
a) Prime costs b) Product costs
c) Conversion costs d) Period costs

solution

direct materials = 375,000 × 80% = 300,000

indirect materials = 375,000 – 300,000 = 75,000
direct labor = 400,000 × 65% = 260,000
indirect labor = 400,000 – 260,000 = 140,000
factory overhead = 160,000 + 45,000 + 85,000 +20,000 +75,000 +140,000 = 525,000

a) prime costs = direct materials + direct labor

= 300,000 + 260,000 = 560,000

b) conversion costs = direct labor + factory overhead

= 260,000 + 525,000 = 785,000

c) product costs = direct materials + direct labor + factory overhead

= 300,000 + 260,000 + 525,000 = 1,085,000

d) period costs = selling expense + general & administrative expenses

= 125,000 + 80,000 = 205,000

problem (1 – 5 )
paul’s horse saddle manufacturing company wants to make an analysis of the current
period’s operating costs to determine why they increased by $75,000 from the previous
period. The following information is available:
19x1 19x2
Manufacturing costs $400,000 $420,000
Marketing costs 60,000 50,000
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Administrative costs 90,000 110,000
Financing costs 50,000 95,000
Required : prepared an analysis by functions from the above information.

Solution

19X1 19x2 Total change

Manufacturing costs 400,000 420,000 + 20,000
Marketing cost 60,000 50,000 - 10,000
Administrative cost 90,000 110,000 + 20,000
Financing cost 50,000 95,000 + 45,000
600,000 675,000 + 75,000

Problem (1 – 7) COST BEHAVIOR-ORIENTED INCOME STATEMENT

Kevin’s Accountants’ Stationery Supply-House sells wood number 2 pencils. The
following functionally oriented income statement was prepared for 19X1:
Sales (100,000 dozen @ $.60) $ 60,000
Cost of goods sold (100,000 dozen @ $.40) 40,000
Gross profit …………………………………………………. $ 20,000
Operating expenses ……………………………………….. 50,000
21 | Page Dr. Magdy Kamel
 Operating loss ……………………………………………. $(30,000)

Additional information:
Fixed cost of goods sold …….. $10,000
Fixed operating expenses …….. 25,000
Required: Prepare the 19X1 income statement for Kevin’s Accountants’ Stationery
Supply House using the cost behavior-oriented income statement format. (Contribution
margin approach).

Solution

Total cost of goods sold …………………………………………. 40,000

Total operating expenses …………………………………………. 50,000
Total cost ………………………………………………………. 90,000

Total fixed costs:

Fixed cost of goods sold …………………………………………. 10,000
Fixed operating expenses ………………………………………… 25,000
35,000

Total variable cost = total cost – total fixed cost

= 90,000 – 35,000 = 55,000

Variable cost per dozen = = .55 per dozen

Kevin’s accountants’ stationery supply house

Income statement
For the ended dec 31, 19x1
Sales (100,000 × .60) ……………………………. 60,000
Less: variable costs (100,000 × .55) ………. 55,000
Contribution margin …………………… 5,000
Less: fixed costs …………………………………… 35,000
Operating loss ……………………………………….. (30,000)

Problem (1 – 10) Analysis of function

Peter selibate, president of the first national friendly bank, is concerned about the
decreasing profits from 19X8 to 19X9. The following cost information is available for both
years:
19X8 19X9
 Interest cost $400,000 $390,000

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 Advertising costs 70,000 70,000
 Promotional costs (toasters given to new depositors) 5,000 6,000
 Tellers’ salaries 50,000 52,000
 Bank vice president’s salary 40,000 43,000
 President’s salary 75,000 125,000
Required: prepare an analysis by function for these costs.

Solution

19 x8 19x9 total change

Interest costs 400,000 390,000 - 10,000
Advertising costs 70,000 70,000 -0-
Promotion costs 5,000 6,000 + 1,000
Teller’s salaries 50,000 52,000 + 2,000
Bank vice president salary 40,000 43,000 + 3,000
President salary 75,000 125,000 + 50,000
640,000 686,000 + 46,000

23 | Page Dr. Magdy Kamel