72  CHAPTER 2  An Introduction to Cost Terms and Purposes

2-8 Why and when is it essential to calculate a unit cost?

2-9 Explain why unit costs must often be interpreted with caution.
2-10 Describe how manufacturing-, merchandising-, and service-sector companies differ from one another.
2-11 Inventoriable costs are usually associated with the manufacturing firms whilst period costs are
mainly for trading firms. Discuss.
2-12 Distinguish between inventoriable costs and period costs.
2-13 Explain how overtime premium and idle time affect labor costs.
2-14 Define product cost. Describe three different purposes for computing product costs.
2-15 Explain three common features of cost accounting and cost management and their applications.

Multiple-Choice Questions
In partnership with:

2-16 Which of the following is not correct regarding variable costs and fixed costs.
a. Variable costs change in proportion to changes in the related level of activity while fixed costs remain
unchanged irrespective of the level of activity within the relevant range.
b. Variable costs include costs of materials and factory wages while fixed costs include salaries paid to
office staff.
c. Variable costs remain variable throughout the production period and fixed costs remain fixed at all
times.
d. Variable costs can be reduced by reducing the level of activity while fixed cost cannot be reduced even
if the level of activity is reduced.
2-17 Comprehensive Care Nursing Home is required by statute and regulation to maintain a minimum 3:1 ratio of
direct service staff to residents to maintain the licensure associated with nursing home beds. The salary expense
associated with direct service staff for Comprehensive Care Nursing Home would most likely be classified as
1. Variable cost.
2. Fixed cost.
3. Overhead costs.
4. Inventoriable costs.
2-18 Frisco Corporation is analyzing its fixed and variable costs within its current relevant range. As its
cost driver activity changes within the relevant range, which of the following statements is/are correct?
I. As the cost driver level increases, total fixed cost remains unchanged.
II. As the cost driver level increases, unit fixed cost increases.
III. As the cost driver level decreases, unit variable cost decreases.
1. I, II, and III are correct.
2. I and II only are correct.
3. I only is correct.
4. II and III only are correct.
2-19 Which of these is correct about overtime premium and idle time?
a. Both overtime premium and idle time can be classified as overhead costs.
b. Overtime premium can be classified as labor cost if such activity relates to a single product.
c. Idle time refers to wages paid for unproductive time caused by machine breakdown, poor scheduling,
etc.
d. All of the above.
 Assignment Material 73

2-20 APAPA Limited is analyzing its inventoriable costs and period costs. Which of the following state-
ments is/are correct?
I. Inventoriable cost and period costs flow through the income statement at a merchandising company
similar to the way costs flow at a manufacturing company.
II. Inventoriable costs are considered assets in the balance sheet (or statement of financial position) but
period costs are considered operating costs in the income statement.
III. Period costs are all costs in the income statement other than cost of goods sold while inventoriable
costs are transformed to work-in-process goods and finished goods.
1. I and II only are correct.
2. II and III only are correct.
3. I and III only are correct.
4. I, II, and III are correct.

Exercises
2-21 Computing and interpreting manufacturing unit costs. Minnesota Office Products produces three
different paper products at its Vaasa lumber plant: Supreme, Deluxe, and Regular. Each product has its
own dedicated production line at the plant. It currently uses the following three-part classification for its
manufacturing costs: direct materials, direct manufacturing labor, and manufacturing overhead costs. Total
manufacturing overhead costs of the plant in July 2020 are $150 million ($15 million of which are fixed). This
total amount is allocated to each product line on the basis of the direct manufacturing labor costs of each
line. Summary data (in millions) for July 2020 are as follows:

Supreme Deluxe Regular

Direct material costs $ 89 $ 57 $ 60
Direct manufacturing labor costs $ 16 $ 26 $  8
Manufacturing overhead costs $ 48 $ 78 $ 24
Units produced 125 150 140

1. Compute the manufacturing cost per unit for each product produced in July 2020. Required
2. Suppose that, in August 2020, production was 150 million units of Supreme, 190 million units of Deluxe,
and 220 million units of Regular. Why might the July 2020 information on manufacturing cost per unit be
misleading when predicting total manufacturing costs in August 2020?
2-22 Distinguish between direct and indirect costs. Goldings Limited produces sports wears for school
children. The company incurred the following costs in the production of its inter-school sports wears:

Cost Amount
Materials used in the product £100,000
Depreciation on factory machine £ 80,000
Factory insurance £ 6,000
Labor cost for factory workers £120,000
Factory repairs £ 10,000
Advertising expense £ 35,000
Distribution expenses £ 15,000
Sales commission £ 20,000
Secretary’s salary £ 25,000

1. Classify each of the costs listed above as either direct or indirect costs.
Required
2. Compute the total manufacturing cost.
74  CHAPTER 2  An Introduction to Cost Terms and Purposes

2-23 Classification of direct and indirect costs, manufacturing sector. Timi Company manufactures
pens for schools. Summary data (in thousands) for the year ended December 31, 2019, are as follows:

Cost Items
A. Ink for pens £ 600
B. Depreciation of delivery vehicles £ 4,000
C. Depreciation of factory machine £ 8,500
D. Interest expense £ 1,500
E. Salary of general manager £24,000
F. Wages of factory staff £ 5,000
G. Salary of supervisors £ 2,500
H. Machine maintenance costs £ 350
I. Plastics for pens £10,000
Required
1. For each cost item (A–I) from the records, identify the direct and indirect costs
2. Compute Timi Company’s total indirect manufacturing cost and explain the reason for excluding any
item.
2-24 Classification of costs, merchandising sector. Essential College Supplies (ECS) is a store on the
campus on a large Midwestern university. The store has both an apparel section (t-shirts with the school
logo) and a convenience section. ECS reports revenues for the apparel section separately from the conve-
nience section.
Required Classify each cost item (A–H) as follows:
a. Direct or indirect (D or I) costs of the total number of t-shirts sold.
b. Variable or fixed (V or F) costs of how the total costs of the apparel section change as the total number
of t-shirts sold changes. (If in doubt, select on the basis of whether the total costs will change substan-
tially if there is a large change in the total number of t-shirts sold.)
You will have two answers (D or I; V or F) for each of the following items:

Cost Item D or I V or F
A. Annual fee for licensing the school logo
B. Cost of store manager’s salary
C. Costs of t-shirts purchased for sale to customers
D. Subscription to College Apparel Trends magazine
E. Leasing of computer software used for financial budgeting at the ECS store
F. Cost of coffee provided free to all customers of the ECS store
G. Cost of cleaning the store every night after closing
H. Freight-in costs of t-shirts purchased by ECS

2-25 Classification of costs, manufacturing sector. The Cooper Furniture Company of Potomac,
Maryland, assembles two types of chairs (recliners and rockers). Separate assembly lines are used for
each type of chair.
Required Classify each cost item (A–I) as follows:
a. Direct or indirect (D or I) cost for the total number of recliners assembled.
b. Variable or fixed (V or F) cost depending on how total costs change as the total number of recliners as-
sembled changes. (If in doubt, select on the basis of whether the total costs will change substantially if
there is a large change in the total number of recliners assembled.)
 Assignment Material 75

You will have two answers (D or I; V or F) for each of the following items:

Cost Item D or I V or F
A. Cost of fabric used on recliners
B. Salary of public relations manager for Cooper Furniture
C. Annual convention for furniture manufacturers; generally Cooper Furniture attends
D. Cost of lubricant used on the recliner assembly line
E. Freight costs of recliner frames shipped from Durham, NC, to Potomac, MD
F. Electricity costs for recliner assembly line (single bill covers entire plant)
G. Wages paid to temporary assembly-line workers hired in periods of high recliner
production (paid on hourly basis)
H. Annual fire-insurance policy cost for Potomac, MD, plant
I. Wages paid to plant manager who oversees the assembly lines for both chair types

2-26 Variable costs, fixed costs, total costs. Bridget Ashton is getting ready to open a small restaurant.
She is on a tight budget and must choose between the following long-distance phone plans:
Plan A: Pay $0.10 per minute of long-distance calling.
Plan B: Pay a fixed monthly fee of $15 for up to 240 long-distance minutes and $0.08 per minute thereaf-
ter (if she uses fewer than 240 minutes in any month, she still pays $15 for the month).
Plan C: Pay a fixed monthly fee of $22 for up to 510 long-distance minutes and $0.05 per minute thereaf-
ter (if she uses fewer than 510 minutes, she still pays $22 for the month).
1. Draw a graph of the total monthly costs of the three plans for different levels of monthly long-distance Required
calling.
2. Which plan should Ashton choose if she expects to make 100 minutes of long-distance calls?
240 minutes? 540 minutes?
2-27 Variable costs, fixed costs, relevant range. Dotball Candies manufactures jawbreaker candies or
gobstoppers in a fully automated process. The machine that produces candies was purchased recently and
can make 4,400 jawbreakers per month. The machine costs $9,500 and is depreciated using straight-line de-
preciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other
fixed manufacturing overhead costs total $1,300 per month.
Dotball currently makes and sells 3,100 jawbreakers per month. Dotball buys just enough materials
each month to make the jawbreakers it needs to sell. Materials cost 10 cents per jawbreaker. Next year
Dotball expects demand to increase by 100%. At this volume of materials purchased, it will get a 10% dis-
count on price. Rent and other fixed manufacturing overhead costs will remain the same.
1. What is Dotball’s current annual relevant range of output? Required
2. What is Dotball’s current annual fixed manufacturing cost within the relevant range? What is the an-
nual variable manufacturing cost?
3. What will Dotball’s relevant range of output be next year? How, if at all, will total annual fixed and vari-
able manufacturing costs change next year? Assume that if it needs to Dotball could buy an identical
machine at the same cost as the one it already has.
2-28 Cost behavior. Compute the missing amounts. Required

Variable Costs Fixed Costs

Per Unit Total Per Unit Total
If 10,000 units are produced $5 ? $3 ?
If 20,000 units are produced ? ? ? ?
If 50,000 units are produced ? ? ? ?

2-29 Variable costs, fixed costs, relevant range. Gummy Land Candies manufactures jawbreaker can-
dies in a fully automated process. The machine that produces candies was purchased recently and can
make 5,000 jawbreakers per month. The machine cost $6,500 and is depreciated using straight-line depre-
ciation over 10 years assuming zero residual value. Rent for the factory space and warehouse and other
fixed manufacturing overhead costs total $1,200 per month.
Gummy Land currently makes and sells 3,900 jawbreakers per month. Gummy Land buys just enough
materials each month to make the jawbreakers it needs to sell. Materials cost $0.40 per jawbreaker.