38

Cost Accounting

Problem I
Presented below is a list of costs and expenses usually incurred by Ram
Corporation, a manufacturer of furniture, in its factory.
1. Metal used in manufacturing tables
2. [nsurunce on factory machines
3. Leather used in manufacturing furniture
4. Wages paid to, machine operators
5. Depreciation of factory machinery
6. Salaries of factory supervisors
7. Wood used in manufacturing furniture
8. Sandpaper, holts_and nails
, 9. Property taxes on factory building
. l 0. Rent of factorv buildinl:!....
Instructions
Classify the above items into the following categories (a) direct materials, (b)
direct labor and (c) manufacturing overhead.
Problem 2
Classify the following as to fixed, variable or mixed
, 1. Factory rent
J2. Wages for workers paid based on units produced
3. Equipment maintenance
4. Cost accountant's salary
5. Depreciation based on output
6. Salary of factory supervisor
7. Telephone (monthly)
8. Paper in the manufacture of books
9. Wages of machine operators
, 0. Commission of salesmen

Problem 3 . . A)
Classify the following as either manufacturing (M), selling (S), or administrative (
1. Metal for the manufacture of golf clubs
' 2. Wages of drivers of delivery trucks
3. Rent on factory building
4. Freight-in of materials purchased
5. President"s salary
 ------
Chapter 2 Cost - Concepts and Classification
39
Problem 4
Classify each of the following costs of Bug Company in two
(V) fixed com (F); (b) as inventoriable costs (I) or period costs ;ys,
.
(a) as Variable
(a) V or_f (h}
1Qr P
Example: Direct labor
v .--L
--
L Wood used in bookcases
2. Machine depreciation based on mach. Hrs. =
3. Fire insurance on factory equipment
4. Wiring used in radios
5. Indirect materials
6. Sales commissions
7. Bottles used to package liquid
8. Gasoline for a delivery truck
9. Straight-line depreciation of trucks used
for delivery of sales to customers
10. Machine operat<?r's hourly wages

Problem 5
Kyrie Company produces different sizes of basketballs. The followin~ costs were
incurred during the year.

Materials P65,000 {P 15,000 is indirect) Ot1\ =- St>".

Labor 70,000 (P 18,000 is indirect) ~L -= ~I<
Factory overhead 95,000 (including indirect materials
and indirect labor)
General and administrative expenses 2,600
Office salaries 18,600

There were no work .in process at the end of the year, s,oog units were produced,
and 900/4 of the units produced were sold
Required:
1· Compute the prime costs
2
· Compute the conversion costs ,
3. Compute the total product costs
4. C0tnpute the total period costs
5
· lftbc selling price is PS0.00, how mucn is the net income
f
40
Cost Accounting

Problem 6

The financial statements of Mother Goose Company included these items:

Marketing costs P 160,000
Direct labor cost 245,000
Administrative costs 145,000
Direct materials used 285,000
Fixed factory overhead costs 175,000
Variable factory overhead costs 155,000

Compute for the following

1. Prime cost
2. Conversion cost
3. Total inventoriable/product cost
4. Total period cost

·Problem 7
Sales price
Fixed costs: P 200 per unit
Marketing and administrative
Manufacturing overhead · 24,000 per period
Variable costs: 30,000 per period
Marketing and administrative
- Manufacturing overhead 6 per ~nit
Direct labor 9 per unit
Direct materials 30 per unit
Units produced and sold 60 per unit
1,200 per period
Required: Compute for the following
1• Variable manufacturing cost per unit
2. Variable cost per unit
3. Full manufacturing cost per unit
4. Full cost to make and seH per unit
Chapter 2 Cost - Concepts and C!~ssification 41

Problem 8
Given the following facts, complete the requirements below:

Westinghouse Company manufactures major appliances. Because of growing

interest in its product, it has just had its most successful year. In preparing the
budget for next year, its controller compiled these data.

MONTH VOLUME IN MACH. HRS. ELECTRICITY COST

6,000 p 60,000
JULY
AUGUST. 5,000 53,000
SEPTEMBER 4,500 49,500
OCTOBER 4,000 46,000
NOVEMBER 3.500 42,500
DECEMBER 3,000., l 39,000
6-MONTH TOTAL 26.000 P290,000

Using the high-low method compute

I The variable cost per machine hour ·
2 The monthly fixed electricity costs
3 The total electricity costs if 4,800 machine hours are projected to be used
next month

Problem 9
Johnson Corporation is preparing a flexible budget and desires to separate its--
electricity expense, which is semi-variable and fluctuates with total machine hours,
into its fixed and variable components. Information for the first three months of .
2009 is as follows:
Machine Hours Electricity Expense
January 3,500 P 31,500
February 2,000 20,000
M~rch 4,000 35,600
Requirements:
I . Compute the variable rate per machine hour.
2. Compute the fixed portion of Johnson's electricity expense.
3. Compute the total manufacturing costs if Johnson's actual machine
hours used is 4,500.
 42
Cost Account!ng

Pro~lem It

Valdez - Motors Co. makes motorcycles. Management wants to estimate

overhead costs to plan its operations. A recent trade pubJ~cation revealed that
overhead costs tend to vaiy with machine hours. To check this, they collected the
following data for the past 12 months. .. ·

Month No. Machine Hours Overhead Costs

I 175 P 4,500
2 170 4,225
3 160 4,321
4 190 5,250
5 175 4,800
6 200 5,100
7 160 4,450
8 150 4,200
9 210 5,475
10 180 4,760
11 170 4,325
12· 145 3,975

Requirements · -
1. Use the hlgh-1ow method to estimate the fixed and variable _portion of
overhead costs.based on machine hours.
2. If- the plant -is planning to operate at a level of 200- machine hours next
period, what would be the estimated overhead costs?
3. Use the method of least square to estimate the fixed and variable portion of
- overhead costs based on machine hours.
Chapter 2 Cost - Concepts and Classification 43
1:Rp-E-F ALSE QUESTIONS
Indicate whether the following statements are true or false by inserting in the blank.
space provided a capital "T' for true or "F" for false.
1. The materials. labor, and overhead costs incurred to produce a
product are called period costs.
----2. Marketing, Selling, and Administrative C~sts are the three broad
classifications of costs incurred by a manufacturing company.
_3. Lumber ·c an be both a finished product and a material. .
_ 4. Product cost consists of the sum of prime cost and conversion cost.
5. Total fixed costs decrease with increase in the number of units produced
- 6 . Period costs are found in both merchandising and manufacturing firms.
~ 7 . · The three cost elements of a manufactured· good are direct materials, direct
labor, and marketing costs.
8. A cost that is present under one alternative but absent in whole or part
under another alternative is known as a differential cost.
9. Like product costs, period costs are not necessarily treated as expenses in
the period in which they are incurred.
_ _ 10. Variable costs are costs that change, in total, in direct proportion to changes
in the level of activity.
11. The salary paid to the manager in charge of a warehouse is probably a
variable cost.
12. Indirect materials/factory supplies are classified as administrative expense.
==13. The salary paid to a factory foreman is classified as factory overhead .
. 14. In a manufacturing setting, prime costs are fixed.
~15. Fixed cost remains constant if expressed on a unit basis.
1-2,_Differential costs can be either fixed or variable
_ _ 1 7. A fixed cost is constant per unit of product.
_ _ 18. A decrease in production will ordinarily res.ult in an increase in fixed
production cost per unit.
_ _ 19. i\ factory supervisor's salary would be classified as a direct cost of a unit of
product. . -
_ _20. Factory rent is included in manufacturing overhead, but office rent is a
period cost. ·
_ _21. Product costs are also known as manufacturing costs.
22 Prime costs are always variable
· 23. Cost accounting is not n~ded a merchandising entity
_24 The statement of finan~tal position of a service business is the same as that
of a manufactunng business
_25. Selling and administrative expenses are sometimes called non-
manufacturing costs
 ,,
/

44 Cost Accounting

MJ]L TIPLE CHOIC~E .._

1. Indirect material cost is a
Conversion ~Qst Prime cost
a. No No
b. No Yes
c. Yes Yes
d. Yes No

2. Direct labor cost is a

Conversion cost Prime cost
a. No No
b. . No Yes
c. Yes Yes
d. Yes No

·3. Indirect labor is a

a. Prime cost.
b. Conversion cost.
c. Period cost.
d. Non-manufacturing cost.
4. In a job cost system, manufacturing overhead is
An indirect costJ:»f iobs A necessary eJement of production
a. No Yes
b. No No
C. Yes Yes
d. Yes No

5. Prime cost and conversion cost share what common element of total cost?
a. Variable overhead.
,
b. Fixed overhead.
c. Direct.materials.
d. Direct labor.
Chapter 2 Cost - Concepts and Classification 45

6. Which of the following is an clement of prime cost?

Direct materials Direct labor
a. Yes Yes
b. Yes No
C. No Yes
d. No No

7 • Wages paid to factory machine operators of a manufacturing plant are an

clement of
Prime cost Conversioncost
a. No No
b. No Yes
c. Yes No
d. Yes Yes

8. Costs that vary inversely with changes in volume include

a. Total variable costs.
b. Total variable costs divided by volume.
c. Total fixed costs.
.d. Total fixed co~ts divided by volume.

.9. When a unit of product is the cost object, factory overhead generally is:
a. A direct manufacturing cost.
b. An indirect manufacturing cost.
c. Both of the above.
d. Non~ of the above.

10. Factory rent is

a. A prime cost and an inventoriable cost.
b. A prime cost and a period cost
c. A conversion cost and an inventoriable cost.
d. A conversion cost and a_ period ~st.
-
46
Cost Accou 11tillt
11. Examples of factory overhead costs are
a. Lubricants for factory machinery.
b. Depreciation of factory machi~ery.
c. Both of the above.
d. None of the above.

12. In general, the cost that could usually be most reliably predicted is:
a. Variable cost per unit.
b. Fixed cost per unit
c. Total variab1e cost.
d. Total fixed cost.

13. Factory supplies used would be an example of which of the following?

Prime cost Conversion cost
a. Yes Yes
b. Yes No
C. No Yes
d. No No
14. For a manufacturing company, which of the following is an example of a period
rather than a product cost?
a. Depreciation of factory equipment.
b. Wages of a salesperson.
c. Wages of machine operators.
d. Insurance on factory equipment.
15. The variable port_ion of the semi-variable cost of e'Iectricity for a
manufacturing plant is a:
Conversion cost Peri.24£.ost
a. Yes No
b. Yes Yes
c. No Yes
d. No No
Chapter 2 Cost- Concepts and Classification 47
16• Ind·irect costs are also known ·as:
a. Differential costs
b. Common costs
C • Opportunity costs
d. Sunk costs
17. Variable cost
a. increases on a per unit basis as the number of units produced
increases.
b. is constant if expressed on a per unit basis.
C. remains the same in total as production increases.
by
d. is not affected changes in activity from period to period.
18. All of the following are examples of product costs except:
a. depreciation on the company's retail outlets.
b. salary of the plant manager.
C. insurance on the factory equipment
d. rental costs of the factory facility.

19. The distinction between indirect and direct costs depends on

a. whether a cost is controllable or noncontrollable.
b. whether a cost is variable or fixed.
c. whether a cost is a product or a period cost.
d. whether a cost ·can be conveniently and physically traced to a unit under
consideration.

20. Which of the following should not be included as manufacturing overhead in

the manufacture of a wooden chair?
a. Glue in the chair
b. The amount paid to the individual who stains the chair
c. The workman's compensation insurance of the su,pervisor who
oversees production
d. The factory utilities of the department in which production 1akes place
 11

.,
48 Cost Accounting

MULTIPLE CHOICE .... PROBLEMS

The following costs relate to Antonio Industries for the last quarter.
Conversion cost . P 435,000
Direct materials 215,000
Manufacturing overhead 190,000
Selling and administrative expense 185,000
1. What is Antonio's prime cost for last quarter?
a. P'.460,000
b. P 410,000
c. P 405,00Q
d. P 375,000
2. Antonio's total manufacturing cost is
a. P 460,000
b. P 645,000
C, p 650,000
d. P 840,000
3. Antonio's total period cost is
a. P 185,000
b. P 275,000
c. P 400,000
d. P 620,000

Milktopia. Inc. produces and sells milk flavored bubble gum. Over the last five
months Milktopia had the following production costs and production volume ..
Month Cost Volume (in cases)
March P 6,000 12
April - 6,659 14
May 8,370 18
June 8,800 19
July 8,050 17
4.. Using the high-low method, what is the fixed cost per month for bubble gum
production? ·
a. P 400 c. P 4,800
b. P 1,200 d. P 7,600

5.. The variable cost per case is

a. P 400 C. p 1,200
b. P 600 d. P 2,800
Chapter 2 Cost - Concepts and Classification 49
Justine Co. produced 5,500 outdoor chairs for Job Order No. 610. Total material
cost was P 51,700. Each chair required 2.2 hours of direct labor at P8.90/ hour. A
total of P53,845 of factory overhead was traced to Order 610.
6. What is the prime cost per unit of this order?
a. P 19.58 c. P 29.37
b. P 28.98 d. P 38.77
7. What is the conversion co;;t per unit of this order?
a. p 19.58 C. p 29.37
b. P 28.98 d. P 38.77
8. What is the unit cost of this order?
a. P37.88 c. P 28.09
b. P 38.77 d. P 36.99

During the month of August, Amer Corporation produced 12,000 units and sold
them for P20 per unit Total fixed cost for the period were P 154,000, and the
operating profit was P 26~000.
9. Based on the foregoing infonnation, the variable cost per unit is
a. _P 4.50 c. P 6.00
b. P 5.00 d. P 7.17

Data to be used in applying the high-low method shows the highest cost of P69,000
and the lowest cost of P52,000. The data show P 148,000 as the highest level of
sales and P97,000 as the lowest level.
I 0. What is the variable cost per peso sales?
a. P 0.33 C. P 0.54
b. P 0.47 d. P 3.00

Ravena Company manufactures office furniture. During the most productive month
of the year, 3,500 desks were manufactured at a total cost of P84,400. In its slowest
month, the company made 1,100 desks at a cost of P46,000 .
11. Using the high-low method of cost estimation, the total fixed cost are
a. P56,000 c. Pl 7,600
b. P28,400 d. P38,400
.12. The variable cost per unit is
a. P 16.00
c. P 14.00
b. P 15.00 d. P 17.00

'
 so
Last year. Abner Company incurred the following costs
Direct materials
Direct labor
· p -50,000
20.000
'
Cost Accounting

Factory overhead 130,000

Selling expense 40,000
Administrative expense 36,000
Units produced and sold 10,000 units at a price P31 each
13. Prime cost per unit is
a. P 7.00
b.Pl5.00 c. P 5.00
d. P20.00
14. Conversion cost per unit is
a. P 7.00
b. P 15.00 c P20.00.
d. P26.00
15. Cost of goods sold per unit is
a. P 7.00
b. P 15.00 c. P20.00
d. P26.00
16. -Gross profit per unit is
a.PI 1.00
b. P 15.00 C. p 16.()()
d. P 24.00
l 7. Operating income 1s
a. P 24,000
b. P 110,000 c. P 74,000
d. Pl 10,000

Norman Company produced 1,000 units of a product which was · sold at a price of
P9S.OO each. Total selling and ·a dministrative incurred P30,000
Direct materials P 25.00
Direct labor 16.00
Factory overhead 19.00
18. Conversion cost per unit is
a: P 41.00 c. P35.00
b. P44.00 d. P45.00
19. Cost of goods sold per unit is
a: P 41.00 C.P35.00
b. P 44.00 d. P60.00
20. Gross profit per unit is
a. P54.00 c. P60.00
b. PS l.00 . d. P35.00