Chapt

Reared
pan a h e h l e ot ent ol gonis nmilacturea
r p a e an inme statement.
cquivalent of T0,(000 units ar
ethat the cmany pmiuccd the prod
ii Yphted What was the ancage
cOst er ul
or direetmaterials 1CI d What wmg the ye
Y unt fw h d mamufacturing overhcad?
was the ave
15,O000 n i l s of product du
Asme that the conpan espects to pioduce during the co
wOud yoU expe
h a l average cost er unit and
what total cost xpect the con
fineet materals at this level of activity" FOr nxeu nlanacturing overhcad y Ioye
matenals is a vanable cost.
Assume that dire
costsS. expian to the president.
A the manager responsible for production any ditierence in
above.
eTage costs per unit between (3) and (4)

2-19 Cost Classification and Cost Behavior [L02, LO5, L06]

ROBLEM
he Dorilane Company specializes in producing a set of wood patio furniture cone.
and tour chairs. The set enjoys great popularity, and tne company nas ample orderst of a tahg
o
on gong at its full capacity of 2.000 sets per year. Annual cOst data at full capa keepproduc
follow
Factory labor, direct. $118,000b
Advertising. $50,000
Factory supervision... $40,000
Property taxes, factory building $3,500
Sales commissions $80,000
Insurance, factory.. $2,500
Depreciation, administrative ofice equipment.... $4,000
Leasecost, factory equipment. $12,000
Indirect materials, factory. $6,000
Depreciation, factory building... $10,000
Administrative office supplies (billing) .
$3,000
Administrative office salaries...... *
$60,000
Direct materials used (wood, bolts, etc.) . 4 000
Utilities, factory. $20,000

Requred:
Prepare an answer sheet with the column headings shown below. Enter each cost item on vou
sheet. placing the under the appropriate headings. As examples, this
answer
dollaramount
been done already for the first two items in the list above. Note that each s t item is
ha
classified
in two ways: first. as variable or fixed with respect to the number
produced and of unts sold
and
second.
as a selling and administrative
cost or a product cost. (If the it m is a product
if should also be classified as either direct or indirect as shown.)
cos

Selling or
Cost Behavior Product Cost
Administrative
Cost itern Variable Fixed Cost Direct Indirect

Factory labor, direct.... $118,000 $118,000

Advertising $50,000 $50,000
To units of product.

Total the dollar amounts in each of the columns product

in () above. Compute the averagP

cost of one
patio set
Assume thal produclion drops to
only 1,000 sets annually, Would you expect the
verage

product cost per set to increase,

decrease,
talios

are necessary.
or remain unchanged? Explain. No colp
Reler to the
original data. The
president's brother-in-law has considered makine
patio set and has priced the necessary materials Hw
at a building
has asked the president if he
could supply store. I ne
any "at co
and the president agreed to let him purchase a patio set from the Dorilane Compa
do so.

Sales revetiut snh April 12..

 Cost Concepts 79

.wouid you espCct any

law should pay?
disagreement betwecn the two over the price the brother-in=
men
Explain. What price does the president probably have in mind? nC
brother-in-law?
b Becausethe company is
operating at full
might be justiieation for the capacity, what cost term used in the chapler
and still be president to
charge the ful1, regular price to the brother-in-law
selling "at cost"?
PROBLEM 2-20 Classifcation of Various Costs [LO1, LO2, LO5, LO7]
Staci Valeck began dabbling in
pottery
several years ago as a
it has been so popular with triends and hobby. Her work is quite creative, and
others that she has decided to
company and manutacture pottery full time. The quit her job with an aerospace
month. salary from Staci's aerospace job is $3,800 per
Staci will rent a small
building near her home to use as a place for manufacturing the
The rent will be $500 per month. She pottery.
estimates that the cost of clay and will be $2 for each
finished piece pottery. She will hire workers to
of glaze
produce the pottery at a labor rate ot S8 per
advertise heavily in the local area. An advertising pot
To sell her pots, Staci feels that she must
states that it will handle all agency
advertising for a fee of $600 per month. Staci's brother will sell the
pots: he will be paid a commission of $4 for each pot sold.
pots will be rented at a cost of S300 per month. Equipment needed to manufacture the
Staci has already paid the
legal and filing fees associated with incorporating her business i
the state where she lives. These fees amounted to
$500. A small room has been located in a tourist
area that Staci will use as a sales office. The rent will be $250 per month. A phone installed in the
room for taking orders will cost $40 per month. In addition, a recording device will be attached to
the phone for taking after-hours messages.
Staci has some money in savings that is
earning interest of $1,200 per year. These savings will
be withdrawn and used to get the business going. For the time being, Staci does not intend to draw
any salary from the new company.

Required:
1. Prepare an answer sheet with the following column headings:

Period
Name Product Cost (Selling and
of the Variable Fixed Direct Direct Manufacturing Administrative) Opportunity Sunk
Cost Cost Cost Materials Labor Overhead Cost Cost Cost

List the different costs associaled with the new company down the extreme left column (under
Name of the Cost). Then pace an X under each heading that helps to describe the type of cost
involved. There may be s under several column headings for a single cost. (That is, a cost
may be a fixed cost. a puriond cost, and a sunk cost; you would place an X under each ofthese
column headings opoe the cOst.)
Under the Variable ost coiumn, iist only those costs that would be variable withrespeet
to the number of units of' otiery thai are produced and sold.
2. All of the costs you have listed above, except one, would be dilfierential costs between the
alternatives of Staci procucing poilery or staying with the aerospace company. Which cost is
not differential? Explain.

PROBLEM 2-21 Schedule of Cost of Goods Manufactured; Income State ent; Cost Behavior [LO1,
LO2, LO3, LO4, LO5]
Selected account balances for theyear ended December 31 are provided below for Superior Company:

Selling and administrative salaries $110,000

Purchases of raw materials. $290,000
Direct labor . . . * ?
Advertising expense. $80,000
Manufacturing overhead .
$270,000
Sales commissions $50,000
72
Chapter 2
Indirect Costs |LO6]
EXERCISE 2-7 Identitying Direct and that provides everything fron
Northwest Hospital is a full-service hospital from major surd
outpatient clinics.
emengency room care to

Required:
for each cost incumed at Northwest Hospital, indicale whether it would most 1

object by placing an XX iin the

likely be di
appropriate a
or an indirect cost of the specified cost rect cors

Cost Object Direct

Cost
A particular patient
Cost InCostdirect
Ex. Catered food served to patients X
1. The wages of pediatric nurses The pediatric department
2. Prescription drugs A particular patient
3. The pediatric department
Heating the hospital
4. The salary of the head of pediatrics The pediatric department
5. The salary of the head of pediatrics Aparticular pediatric patient
6. Hospital chaplain's salary A particular patient
7. Lab tests by outside contractor A particular patient
8. Lab tests by outside contractor A particular department

EXERCISE 2-8 Differential, Opportunity, and Sunk Costs [LO7]

Northwest Hospital is a full-service hospital that provides everything from major suroer
emergency room care to outpatient clinics. The hospital's Radiology Department is consideri
replacing an old inefficient X-ray machine with a state-of-the-art digital X-ray machine. Thea
machine would provide higher quality X-rays in less time and at a lower cost per X-ray. It would
also require less power and would use a color laser printer to produce easily
readable
X-Tav
images. Instead of investing the funds in the new X-ray machine, the Laboratory Department i
lobbying the hospital's management to buy a new DNA analyzer.
Required:
For each of the items below, indicate by placing an X in the
appropriate col:mn whether it should
be considered a differential cost, an
opportunity cost, or a sunk cost in the e'ecIsion to
replace the
old X-ray machine with a new machine. If none of the categories apply for a Particular item, leave
all columns blank.

Differential portunity Sunk

Item
Cost Cost Cost
Ex. Cost of X-ray film used in the old machine
X
1. Cost of the old X-ray machine... .
The
2. salary of the
head of the Radiology
Department..
3. The salary of the
head of the Pediatrics Department....
4. Cost of the new color laser printer.
5. Rent on the space occupied by Radiology.
6. The cost of
maintaining the old machine.
7. Benefts from a new DNA analyzer.
8. Cost of electricity to run the
X-ray machines .
.

EXERCISE 2-9 Definitions of Cost Terms [LO1, L02,

Following are a number of cost terms introduced in LO5, LO7]
the chapter:
Variable cost
Fixed cost Product cost
Sunk cost
Prime cost
Opportunity cost Conversion cost
Period cost
16 Chapter 2 Basic Cost Management
Concepts

Wine Sales

15,000 Bottles 20,000 Bottles

10,000 Bottles
$15.00
$12.00
Sales pilce per 75 liter bottie
18.00

Required: cach level

or Ouput. At what level of out
and sales al
Alculate the unit costs of wine production
put is the unit cost minimized? Assume the company will sell all of.its
cach level of production.
*lculate the company's profit at
maximized?
uput. At what production level is profit
best for the company
Which ofthe three output levels is the output
level increases? Why might the sales price
decrease as
4. Why does the unit cost of wine
per bottle decline as sales volume increases?
cach month for use in
Problem2-58
nrod,.
MR24 duc-
manufactures 30,000 units of part
Variable and Fixed Costs; Hoboken Indust currently monthly cost MR24 have a fixed
now used
to produce part
Make or Buy à Component of several of its products. The facilities were to buy part MR24
on 84,000 units per
month. If the company
continue at 40 percent of
(LO 2-8, 2-10) ID0,000 and a capacity to produce fixed costs Would
an outside supplier, the facilities
would be idle, but its
rom costs of part
MR24 are sll per
unit.

neir present amount. The variable production

Required:
MR24 each month, it would realize a
f Hoboken Industries continues to 30,000 units of part
use
if the supplier's unit price is
MR24 from an outside supplier only
net benefit by purchasing part
less than what amount?
2. Tf Hoboken Industries is able to obtain part MR24 from an outside supplier at a unit purchase price
of $12.875, what is the monthly usage at which it will be indifferent between purchasing and mak

ing part MR24?

(CMA, adapted)

Cases
CompTech, Inc. manufactures printers for use with home computing systems. The firm currently manu-
Case2-59 factures both the electronic components for its printers and the plastic cascs in which the devices are
Economic Characteristics of
enclosed. Jim Cassanitti, the production manager, recently received a propesal from Universal Plas-
Costs; Cl0Sing a Department,
tics Corporation to manufacture the cases for CompTech's printers. If the casest are purchased outside
Ethics
CompTech will be able to close down its Printer Case Department. To help decide whether to accept the
(LO 2-1, 2-9, 2-10)
bid from Universal Plastics Corporation, Cassanitti asked CompTech's contr:or to prepare an analysis
of the costs that would be saved ifthe Printer Case Department were closed. Ewluded in the controller's
ist of annual cost savings were the following items:

Building rental (The Printer Case Department occupies one-sixth of

the factory building, which Complech rents for $177,000 per year.)..******************************* -****** * ***************** $29,500
Salary of the Printer Case Department supervisor. . . .* * * * * * * * " * * * * * * * * * * * * * * ' * * * * " * * * * * * * * * * * * * * * * * * * * * * * * * * * *********************

$50,000

In a lunchime conversalion with the controller, Cassanitti learned that CompTech was currently
renting space in a warehouse for $359,000. The space is used to store completed printers. If the Printer
Case Department were discontinued, the ent1re storage operation could be moved into the factory build
ing and occupy the space vacated by the closed department. Cassaniti also learned that the supervisor
of the Printer Case Department would be retained by CompTech even if the department were closea.
The supervisor would be assigned the job of managing the assembly department, whose supervisor
recently gave notice of his reirement. All oI Complech's department supervisors earn the same salary

Required:
1. You have been hired as a consultant by assanitti to advise him in his decision. Write a memo to
Cassanitti commenting on the costs of space and supervisory salaries included in the controller' s
cost analysis. Explain in your memo about the real" costs of the space occupied by the Printer
Case Department and the supervISOr s salary. What types of costs are these?
2. Independent of your response t0 reguirement (), suppose that
hed by his friend Jack Westtord, the assistant CompTech's controller had been
supervisor of the Printer Case Departmen
 Chapter 2 Basic Cost Management Concepts 77

ard is worried that he will be laid off if the Printer Case Department is closed down. He has
West
his friend to understate the cost savings from closing the department, in order to slant the
ed
tion manager's decision toward kceping the department in operation. Comment on the con-
producton manager

troller's ethical responsibilities

tarted a summer internship with the successliul Case2-60

YuJust management consulting firm of Kirk, Spock, Understanding Cost
ov: Your first day
Your t on the job was a
busy one, as the
following problems were presented to you.
andMe Concepts
Required
Supply the requested commems in each of the following independent situations. (LO 2-7, 2-8, 2-10)
O
FastQ Company, a specialist im
prinung, has established 500 convenience copying cnters
.
the country. In order to upgrade ius services, the company is considering three new models of through
ser Copying machines tor use im producing high-quality copies. These high-quality copies would
laser
he added to the growing inst ot products offered in the FastQ shops. The selling price to the customer a). b0.000 copies
for each laser copy would be the same, no matter which machine is installed in the shop. The three
models of laser copying machines under consideration are 1024S, a small-volume model; 1024M, a
edium-volume model; and 1024G, a large-volume model. The annual rental costs and the operat-
m
costs vary with the size of each machine. The machine capacities and costs are as follows:
ng

Copier Model
1024S 1024M 1024G
Annuai capaciy (copies)..
******************************************************************"****** * 100,000 350,000 800.000
COsts.
Annual machine rental..
********************"*** **************** 8,000 $ 11,000 $ 20,000
Direct material and direct labor.
*********************""*********** ***** 02 02 02
Variable overnead costs..
********************************************************************* 12 07 03

a. Calculate the volume level in copies where FastQ Company would be indifferent to acquiring either
the small-volume model laser copier, 1024S, or the medium-volume model laser copier, 1024M.
b. The management of FastQ Company is able to estimate the number of copies to be sold at
each establishment. Present a decision rule that would enable FastQ Company to select the
most profitable machine without
having to make a separate cost calculation for each estab-
lishment. (Hint: To specify a decision rule, determine the volume at which FastQ would be
indifferent between the small and medium copiers. Then determine the volume at
which FastQ
would be indifferent between the medium and
large copiers.)
Alderon Enterprises is evaluating special order it has received for a
a

ceramic fixture to be used

in aircraft engines. Alderon itas recent'y been
operating at less than full capacity, so the firm's
management will accept the utler ii te price offered exceeds the costs that will be incurred in
producing it. You have been asked tor adv1ce on liow to determine the cost of two raw materials
that would be required to produce the order.
a. The special order will require
H gallons of endor, a highly perishable material that is pur
chased as needed. Alderon curreuly has 1,200
gallons of endor on hand, since the material is
used in virtually all of the
company's products. The last time endor was purchased, Alderon
paid $5.00 per gallon. However, the average price
The market price for endor is
paid for the endor in stock was only $4.75.
quite volatile, with the current price at $.50. If the special order
1S accepted, Alderon will have to
endor used. By then the
place a new order next week to replace the 800 gallons of
price is expected to reach $5.75 per gallon.
Using the cOst terminology introduced in this
chapter, comment on each of the cost
preceding discussion. What is the real cost of endor if the special order is figures
tioned in the men-

b. The special order also would produced? .

require 1,500 kilograms of tatooine, a material not
required in any of Alderon's regular normally
products. The company does happen to have 2,000 kilo-
grams of tatooine on hand, since it
material. Alderon
formerly manufactured a ceramic product that used the
recently received an offer of $14,000 from Solo Industries for its entire
Supply of tatooine. However, Solo Industries is not interested in buying any quantity less than
Alderon's entire
2,000-kilogram stock. Alderon's Moreover, ifistheunenthusiastie
offer, since Alderon paid $20,000 for the tatooine.management
about
Solo a
tatooine were purchased
Oday's market price, it would cost $11.00 per kilogram. Due to the volatility of the tatooine,
Ideron will need to get rid of its entire supply one way or another. If the material is not used
production or sold, Alderon will have to
pay $1,000 foreach S00 kilograms that is
trald
ported away and disposed of in a hazardous waste
disposál site.
78 Basic Cost Management
Concepis
Chapter 2
on each oftho
cach ofthe
cOmment
cost
terminology
introduced in this chapler,
rcal cCoSt ol talo0ine to be used:
in the figures
Sngthe cost discussion.
What is the
n e n t i o n c d in the
preceding
SCeral ornder?
TV series
on slate-of-the-art manulacturing. The
on
state-of-the-

3. Alocal PBS station has decided to produce

a
atlempling
1o analyze of the proio
some

TV series, Justin Tyme, is currently crew on

localion to shoot varic
netor
of the intends to take a TV production 8:00-9:00 P
shown in the
cONIsfor the series. Tyme
as they Ifthe
occur.
four-week series
is
scheduled. Manaan
prime
nanulacturing
scenes
show that 1s currently
wildlife
m e slo, the station will
have to cancel a each I percent is expected.
wildlifeshow, and o
audience for the u
l0 percent viewing
a show is expected to be watched ed by
projects In contrast, the
manufacturing
Dring in donations of $10,000. of the viewership will likelv.
However, each
I percent
percent viewing audience.
ofthe canceled, it can be sold to
network television
or
f
wildlife show is
S5.000 in donations. If the
only
$25.000. comment on each of the financial
introduced in this chapter,
amounts the cost terminology
USingmentioned in the scenario above. What are the relative merits Or the two shows arding

the projected revenue to the station?

CMA, adapted)