1st Term, A.

Y 2020 - 2021
STRATEGIC COST MANAGEMENT

Self-Test (ungraded)
Topic 2: Cost terms, concepts and classifications and Cost behavior

NAME: (surname first)______________________________ SCORE:__________________

YR./ SEC.: _________________ DATE:
___________________

General Instruction: Write your answer on the space provided for each item.

Part I.
Ross Company has the following information available regarding costs at various levels of
monthly production:

Production volume 7,000 10,000

Direct materials $ 70,000 $100,000

Direct labor 56,000 80,000
Indirect materials 21,000 30,000
Supervisors' salaries 12,000 12,000
Depreciation on plant and
10,000 10,000
equipment
Maintenance 32,000 44,000
Utilities 15,000 21,000
Insurance on plant and equipment 1,600 1,600
Property taxes on plant and
   2,000    2,000
equipment
    Total $219,600 $300,600

Required:

a. Identify each cost as being variable, fixed, or mixed by writing the name of each cost
under one of the following headings:

Variable Costs Fixed Costs Mixed Costs

Direct materials Supervisors' salaries Maintenance
Direct labor Depreciation Utilities
Indirect materials Insurance
Property taxes

b. Develop an equation for total monthly production costs.

Variable costs = ($300,600 - $219,600)/($10,000 - $7,000) = $27.00

1
 Fixed costs = $300,600 - ($27.00  10,000) = $30,600 per month
Total monthly production costs = $30,600 + $27.00(# of units)
c. Predict total costs for a monthly production volume of 8,000 units.

Total costs = $30,600 + ($27.00  8,000) = $246,600

Part II.

The Valley Forge Company cost accountant wants to determine the cost behavior for
overhead. Based on observation and discussion with the plant workers, the following
accounts have been identified as the most relevant: Supervisor salaries and depreciation are
believed to be generally be fixed; Indirect labor, Utilities, and Purchasing are generally
believed to be variable; Indirect labor primarily is responsible for moving materials; Utility
cost is primarily caused by the electricity to run machinery; and Purchasing costs are driven
by the number of purchase orders. These accounts and their balances are given below:

Indirect Utilities Purchasing Supervisory Depreciation

Labor Salaries on Plant and
Equipment
July $ 28,500 $ 24,000 $ 76,400 $ 40,000 $ 13,000
August 31,600 21,200 70,800 46,000 13,000
September 33,600 25,000 75,200 64,000 13,000
October 41,400 25,000 80,400 55,600 13,000
November 40,000 25,000 79,800 50,800 13,000
December 34,000 25,000 79,400 34,000 13,000
Total $209,100 $145,200 $ 462,000 $ 290,400 $ 78,000

Information on the activities is given below:

# of moves machine hours purchase orders

July 340 5,400 250
August 380 5,200 300
September 400 5,800 450
October 500 6,200 380
November 480 6,000 340
December 420 5,600 200
Total 2,520 34,200 1,920

Required:
1 Why did the cost accountant decide that salaries and depreciation were
fixed?
2 Calculate the average account balance for each of the 5 accounts and
calculate the average monthly amount for each of the three drivers.
3 Calculate the fixed overhead and variable rates for each of the costs. Write
an equation for the total overhead cost.
4 In January, 490 moves; 4,375 machine hours, and 220 purchase orders were
expected. What is the amount of overhead predicted?

STRATEGIC COST MANAGMENT 2

1. Depreciation is fixed. Salaries is fixed because it does not vary with the drivers.

2. Indirect Utilities Purchasing Supervisory Depreciation on

labor Salaries Plant and
Equipment
Total $209,100 $145,200 $ 462,000 $ 290,400 $ 78,000
# of mos. 6 6 6 6 6
AVG $34,850 $ 24,200 $ 77,000 $ 48,400 $ 13,000

# of moves machine hours purchase orders

Total 2,520 34,200 1,920
# of months 6 6 6
avg 420 5,700 320

3. FOH = $48,400 + $13,000 = $61,400

VC = IL $34,850/420 =$82.98
Utilities = $24,200/5,700 = $4.246
Purchasing = $77,000/320 = $240.625
Total OH = $61,400 + $82.98(moves) + $4.246(MHR) + $240.625(PO)

4. Total OH = $61,400 + $82.98(490) + $4.246(4,375) + $240.625(220) = $173,573.95

Part III
Classify the following costs for an auto manufacturer as either direct materials, direct labor,
manufacturing overhead, or period costs.
a. Steel used in automobiles
b. Assembly department employee wages
c. Utility costs used in executive building
d. Travel costs used by sales personnel
e. Cost of shipping goods to customers
f. Property taxes on assembly plant
g. Glass used in automobiles
h. Maintenance supplies
i. Depreciation on assembly plant
j. Plant manager's salary
k. CEO's salary
l. Depreciation on executive building
m. Salary of marketing executive
n. Tires installed on automobiles
o. Advertising

Required:
Complete the answer sheet above by placing an “X” under each heading that identifies the
cost involved.

Direct Materials Direct Labor Manufacturing Overhead Period Cost

a. X
b. X
c. X
d. X
e. X
f. X

STRATEGIC COST MANAGMENT 3

 g. X
h. X
i. X
j. X
k. X
l. X
m
. X
n. X
o. X

Part IV
A number of costs and measures of activity are listed below.

Possible Measure of
Cost Description Activity
1. Cost of vaccine used at a clinic Vaccines administered
2. Building rent at a taco shop Dollar sales
3. Salary of production manager at a snowboard manufacturer Snowboards produced
4. Cost of electricity for production equipment at a snowboard
manufacturer Snowboards produced
5. Ferry captain’s salary on a regularly scheduled passenger ferry Number of passengers
6. Cost of glue used in furniture production Units produced
7. Janitorial wages at a snowboard manufacturer Snowboards produced
8. Depreciation on factory building at a snowboard manufacturer Snowboards produced
9. Cost of advertising at a snowboard company Snowboards sold
10. Cost of shipping bags of fertilizer to a customer at a chemical plant Bags shipped

Required:
For each item above, indicate whether the cost is MAINLY fixed or variable with respect to the
possible measure of activity listed next to it.

1. Variable
2. Fixed
3. Fixed
4. Variable
5. Fixed
6. Variable
7. Fixed
8. Fixed
9. Fixed
10. Variable

STRATEGIC COST MANAGMENT 4

Part V.

A number of costs are listed below.

Cost Description Cost Object
1. Wages of carpenters on a home building site A particular home
2. Cost of wiring used in making a personal computer A particular personal
computer
3. Manager’s salary at a hotel run by a chain of hotels A particular hotel guest
4. Manager’s salary at a hotel run by a chain of hotels The particular hotel
5. Cost of aluminum mast installed in a yacht at a yacht manufacturer A particular yacht
6. Monthly lease cost of X-ray equipment at a hospital The Radiology (X-Ray)
Department
7. Cost of screws used to secure wood trim in a yacht at a yacht
manufacturer A particular yacht
8. Cost of electronic navigation system installed in a yacht at a yacht
manufacturer A particular yacht
9. Cost of a replacement battery installed in a car at the auto repair
shop of an automobile dealer The auto repair shop
10. Cost of a measles vaccine administered at an outpatient clinic at a
hospital A particular patient

Required:
For each item above, indicate whether the cost is direct or indirect with respect to the cost object
listed
next to it.

1. Direct
2. Indirect
3. Indirect
4. Direct
5. Direct
6. Direct
7. Indirect
8. Direct
9. Direct
10. Direct

Part VI.
A direct labor worker at Chiarini Corporation is paid $14 per hour for regular time and time and a half
for all work in excess of 40 hours per week. The company's fringe benefits cost $4 for each hour of
employee time (both regular and overtime). Last week this employee worked 45 hours but was idle for
3 hours due to material shortages. The company treats all fringe benefits as part of manufacturing
overhead.
Required:
Determine how much of the worker's wages for the week would be classified as direct labor
cost and how much would be classified as manufacturing overhead cost. Show your work.

Ans:

Direct labor:
$14 per hour × 42 hours............................................ $588
Manufacturing overhead:
Idle time: $14 per hour × 3 hours.............................. $ 42

STRATEGIC COST MANAGMENT 5

 Overtime premium: $7 per hour × 5 hours................ 35
Fringe benefits: $4 per hour × 45 hours....................  180
Total manufacturing overhead...................................... $257

Part VII.
The following data have been provided the Monster Manufacturing Company for the most recent
period:

Sales....................................................................................... $16,800
Raw materials inventory, beginning........................................ $900
Raw materials inventory, ending............................................. $750
Purchases of raw materials..................................................... $8,400
Direct labor............................................................................. $1,240
Manufacturing overhead......................................................... $2,070
Administrative expenses......................................................... $1,890
Selling expenses..................................................................... $1,000
Work in process inventory, beginning..................................... $700
Work in process inventory, ending.......................................... $1,050
Finished goods inventory, beginning...................................... $970
Finished goods inventory, ending........................................... $1,120

Required:
Calculate the cost of goods manufactured and prepare an income statement.

Cost of goods manufactured:

Direct materials = $900+$8,400-$750 = $8,550
Total manufacturing costs = $8,550+$1,240+$2,070 = $11,860
Cost of goods manufacturing = $11,860+$700-$1,050 = $11,510

Monster Manufacturing Company

Income Statement
Sales............................................................................ $16,800
Cost of goods sold:
Beginning finished goods inventory........................... $    970
Plus cost of goods manufactured..............................  11,510
Cost of goods available for sale................................ 12,480
Less ending finished goods inventory.......................    1,120
Cost of goods sold........................................................   11,360
Gross margin................................................................ 5,440
Selling and administrative expenses:
Administrative expenses........................................... 1,890
Selling expenses.......................................................    1,000
Total selling and administrative expense......................    2,890
Net operating income................................................... $ 2,550

STRATEGIC COST MANAGMENT 6

STRATEGIC COST MANAGMENT 7