Exercises for Class Discussions: (Cost Behavior and Cost Sheet)

Q1. Classify the cost data as either ……sunk cost, fixed cost, controllable cost, incremental cost,
semi-variable cost, non-controllable cost, variable cost, semi-fixed cost or opportunity cost
1. A company is considering selling an old machine. The machine has a book value of ₹
20,000. In evaluating the decision to sell the machine, the ₹ 20 000 is a ...
2. As an alternative to the old machine, the company can rent a new one. It will cost ₹ 3000 a
year. In analyzing the cost–volume behavior the rental is a ...
3. To run the firm’s machines, here are two alternative courses of action. One is to pay the
operator a base salary plus a small amount per unit produced. This makes the total cost of the
operators a ....
4. As an alternative, the firm can pay the operators a flat salary. It would then use one machine
when volume is low, two when it expands, and three during peak periods. This means that
the total operator cost would now be a ...
5. The machine mentioned in (1) could be sold for ₹8000. If the firm considers retaining and
using it, the ₹ 8000 is a ...
6. If the firm wishes to use the machine any longer, it must be repaired. For the decision to
retain the machine, the repair cost is a ...
7. The machine is charged to the foreman of each department at a rate of ₹ 3000 a year. In
evaluating the foreman, the charge is a ...

Q2 Case-let: 1
J K Paper produces three different paper products – Supreme, Deluxe and Regular. Each product
has its own dedicated product line. It currently uses the following three-part classification for its
manufacturing costs: direct material, direct manufacturing labour and indirect manufacturing
costs. The total indirect manufacturing costs of the plant for the month of December are Rs 150
million (out of which Rs 20 million are fixed). The total amount is allocated to each product line
on the basis of direct manufacturing labour costs of each line. Summary data (in millions) for
December are as follows:

Particulars Supreme Deluxe Regular

Direct material cost (Rs.) 84.00 54.00 62.00

Direct manufacturing labour cost (Rs.) 14.00 28.00 8.00

Manufacturing overhead cost (Rs.)

Units produced 80 120 100

(i) Calculate the manufacturing cost per unit for each product produced in December.
(ii) Suppose that in January production was 120 million units of Supreme, 160 million units
of Deluxe and 180 million units of Regular. Why might the December manufacturing unit
cost information be misleading when predicting total manufacturing costs in January?
(iii) J K Paper employs a consultant to help them reduce energy costs at its plant. It does not
trace energy cost to each of its product line. The consultant observes that each production
line at the plant has multiple energy meters and that tracing of energy costs to each line is
possible. Of the Rs 150 million of indirect manufacturing costs in December, Rs 90
million is energy cost traceable to the product lines. The remaining Rs 60 million of
indirect manufacturing costs of the plant (including the Rs 20 million of fixed cost) is
allocated to each product line on the basis of direct manufacturing –labour costs at each
product line. Using this information, J. K Paper’s cost analyst reports the following
numbers (in millions) for December:

Particulars Supreme Deluxe Regular

Direct material cost (Rs.) 84.00 54.00 62.00

Direct manufacturing labour cost (Rs.) 14.00 28.00 8.00

Direct energy cost (Rs.) 39.8 40.7 9.5

Indirect manufacturing cost (Rs.)

Units produced 80 120 100

Why might J K paper’s managers prefer energy costs to be a direct cost rather than an indirect
manufacturing cost? Re-calculate the manufacturing cost per unit for each of the product line.
Q3: Case-let:2
Campbell Company is a metal and woodcutting manufacturer, selling products to the home
construction market. Consider the following data for 20XX:

Particulars Rs.

Sandpaper 20,000

Material handling costs 7,00,000

Lubricants and coolants 50,000

Miscellaneous & indirect manufacturing labor 4,00,000

Direct manufacturing labor 30,00,000

Direct materials inventory Dec.31, 20XX 5,00,000

Finished goods inventory Jan.1, 20XX 10,00,000

Finished goods inventory Dec.31, 20XX 15,00,000

Work-in-progress inventory Jan.1, 20XX 1,00,000

Work-in-progress inventory Dec.31, 20XX 1,40,000

Plant leasing costs 5,40,000

Depreciation –Plant equipment 3,60,000

Property taxes on plant equipment 40,000

Fire insurance on plant equipment 30,000

Direct material purchased 46,00,000

Revenues 1,36,00,000

Marketing promotions 6,00,000

Marketing salaries 10,00,000

Distribution costs 7,00,000

Customer-service costs 10,00,000

Required:
1. Prepare an income statement with a separate supporting schedule of cost of goods
manufactured. For all manufacturing items, classify costs as direct costs or indirect costs
and indicate by V or F whether each is basically a variable cost or a fixed cost (when the
cost object is a product unit). If in doubt, decide on basis of whether the total cost will
change substantially over a wide range of units produced.
2. Suppose that both the direct material costs and the plant leasing costs are for the
production of 9,00,000 units. What is the direct material cost of each unit produced?
What is the plant leasing cost per unit? Assume that the plant leasing cost is a fixed cost.
3. Suppose Campbell Company manufactures 10,00,000 units next year. Repeat the
computation in requirement 2 for direct material and plant leasing cost.
4. As a management consultant, explain concisely to the company president why the unit
cost for direct materials did not change in requirement 2 and 3 but the unit cost for plant
leasing costs did change.