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The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that the company incurs.
Required:
For each cost, indicate whether it would most likely be classified as direct materials, direct labor, manufacturing overhead, selling, or an administrative cost.
- The cost of a hard drive installed in a computer.
- Direct labor cost
- Direct materials cost
- Manufacturing overhead cost
- Selling cost
- Administrative cost
- The cost of advertising in the Puget Sound Computer User newspaper.
- Direct labor cost
- Direct materials cost
- Manufacturing overhead cost
- Selling cost
- Administrative cost
- The wages of employees who assemble computers from components.
- Direct labor cost
- Direct materials cost
- Manufacturing overhead cost
- Selling cost
- Administrative cost
- Sales commissions paid to the company’s salespeople.
- Direct labor cost
- Direct materials cost
- Manufacturing overhead cost
- Selling cost
- Administrative cost
- The salary of the assembly shop’s supervisor.
- Direct labor cost
- Direct materials cost
- Manufacturing overhead cost
- Selling cost
- Administrative cost
- The salary of the company’s accountant.
- Direct labor cost
- Direct materials cost
- Manufacturing overhead cost
- Selling cost
- Administrative cost
- Depreciation on equipment used to test assembled computers before release to customers.
- Direct labor cost
- Direct materials cost
- Manufacturing overhead cost
- Selling cost
- Administrative cost
Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help finance its growth. The bank requires financial statements before approving the loan.
Required:
Classify each cost listed below as either a product cost or a period cost for the purpose of preparing financial statements for the bank.
| Costs | Product Cost / Period Cost |
|---|---|
| Depreciation on salespersons’ cars. | Period Cost |
| Rent on equipment used in the factory. | Product Cost |
| Lubricants used for machine maintenance. | Product Cost |
| Salaries of personnel who work in the finished goods warehouse. | Period Cost |
| Soap and paper towels used by factory workers at the end of a shift. | Product Cost |
| Factory supervisors’ salaries. | Product Cost |
| Heat, water, and power consumed in the factory. | Product Cost |
| Materials used for boxing products for shipment overseas. (Units are not normally boxed.) | Period Cost |
| Advertising costs. | Period Cost |
| Workers’ compensation insurance for factory employees. | Product Cost |
| Depreciation on chairs and tables in the factory lunchroom. | Product Cost |
| The wages of the receptionist in the administrative offices. | Period Cost |
| Cost of leasing the corporate jet used by the company’s executives. | Period Cost |
| The cost of renting rooms at a Florida resort for the annual sales conference. | Period Cost |
| The cost of packaging the company’s product. | Product Cost |
Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $2,500 and the variable cost per cup of coffee served is $0.39.
Required:
- Fill in the following table with your estimates of the company’s total cost and average cost per cup of coffee at the indicated levels of activity.
- Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases?
Solution
- Fill in the following table with your estimates of the company’s total cost and average cost per cup of coffee at the indicated levels of activity. (Round the “Average cost per cup of coffee served” to 3 decimal places.)
Explanation:
Average cost per cup of coffee served = Total cost ÷ Cups of coffee served in a weekCups of Coffee Served in a Week 900 1,000 1,100 Fixed cost 2,500 2,500 2,500 Variable cost 351 390 429 Total cost 2,851 2,890 2,929 Average cost per cup of coffee served 3.167 2.890 2.663 - Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases?
- Increase
- Decrease
- Remain the same
Explanation:
The average cost of a cup of coffee decreases as the number of cups of coffee served increases because the fixed cost is spread over more cups of coffee.
Required information
[The following information applies to the questions displayed below.]
[The following information applies to the questions displayed below.]
Kubin Company’s relevant range of production is 21,000 to 25,000 units. When it produces and sells 23,000 units, its average costs per unit are as follows:
| Average Cost per Unit | |
|---|---|
| Direct materials | $ 8.10 |
| Direct labor | $ 5.10 |
| Variable manufacturing overhead | $ 2.60 |
| Fixed manufacturing overhead | $ 6.10 |
| Fixed selling expense | $ 4.60 |
| Fixed administrative expense | $ 3.60 |
| Sales commissions | $ 2.10 |
| Variable administrative expense | $ 1.60 |
Required:
- Assume the cost object is units of production:
- What is the total direct manufacturing cost incurred to make 23,000 units?
- What is the total indirect manufacturing cost incurred to make 23,000 units?
- Assume the cost object is the Manufacturing Department and that its total output is 23,000 units.
- How much total manufacturing cost is directly traceable to the Manufacturing Department?
- How much total manufacturing cost is an indirect cost that cannot be easily traced to the Manufacturing Department?
- Assume the cost object is the company’s various sales representatives. Furthermore, assume that the company spent $82,800 of its total fixed selling expense on advertising and the remainder of the total fixed selling expense comprised the fixed portion of the company’s sales representatives’ compensation.
- When the company sells 23,000 units, what is the total direct selling expense that can be readily traced to individual sales representatives?
- When the company sells 23,000 units, what is the total indirect selling expense that cannot be readily traced to individual sales representatives?
Solution
- Assume the cost object is units of production:
- What is the total direct manufacturing cost incurred to make 23,000 units? (Round per unit values to 2 decimal places.)
- What is the total indirect manufacturing cost incurred to make 23,000 units? (Round per unit values to 2 decimal places.)
1a. Direct materials per unit 8.10 Direct labor per unit 5.10 Direct manufacturing cost per unit 13.20 Number of units sold 23,000 Total direct manufacturing cost 303,600 1b. Variable manufacturing overhead per unit 2.60 Fixed manufacturing overhead per unit 6.10 Indirect manufacturing cost per unit 8.70 Number of units sold 23,000 Total indirect manufacturing cost 200,100 Explanation:
1b. The average fixed manufacturing overhead cost per unit of $6.10 is valid for only one level of activity—23,000 units produced.
- Assume the cost object is the Manufacturing Department and that its total output is 23,000 units.
- How much total manufacturing cost is directly traceable to the Manufacturing Department? (Round per unit values to 2 decimal places.)
- How much total manufacturing cost is an indirect cost that cannot be easily traced to the Manufacturing Department?
2a. Direct materials per unit 8.10 Direct labor per unit 5.10 Variable manufacturing overhead per unit 2.60 Fixed manufacturing overhead per unit 6.10 Total manufacturing cost per unit 21.90 Number of units sold 23,000 Total direct costs 503,700 2b. Total indirect costs 0 Explanation:
2b. None of the manufacturing costs should be treated as indirect costs when the cost object is the Manufacturing Department.
- Assume the cost object is the company’s various sales representatives. Furthermore, assume that the company spent $82,800 of its total fixed selling expense on advertising and the remainder of the total fixed selling expense comprised the fixed portion of the company’s sales representatives’ compensation.
- When the company sells 23,000 units, what is the total direct selling expense that can be readily traced to individual sales representatives? (Round per unit value to 2 decimal places.)
- When the company sells 23,000 units, what is the total indirect selling expense that cannot be readily traced to individual sales representatives?
3a. Sales commissions per unit 2.10 Number of units sold 23,000 Total sales commission 48,300 Fixed portion of sales representatives’ compensation 23,000 Total direct selling expense 71,300 3b. The total indirect selling expense 82,800 Explanation:
3a. The first step in calculating the total direct selling expense is to determine the fixed portion of the sales representatives’ compensation as follows:
Fixed selling expense per unit (a) 4.60 Number of units sold (b) 23,000 Total fixed selling expense (a) × (b) 105,800 Total fixed selling expense (a) 105,800 Advertising expenditures (b) 82,800 Total fixed portion of the sales representatives’ compensation (a) − (b) 23,000 3b. The total indirect selling expense that cannot be traced to individual sales representatives is $82,800. The advertising expenditures cannot be traced to specific sales representatives.
The Alpine House, Inc., is a large retailer of snow skis. The company assembled the information shown below for the quarter ended March 31:
| Amount | |
|---|---|
| Sales | 1,080,000 |
| Selling price per pair of skis | 400 |
| Variable selling expense per pair of skis | 45 |
| Variable administrative expense per pair of skis | 19 |
| Total fixed selling expense | 135,000 |
| Total fixed administrative expense | 120,000 |
| Beginning merchandise inventory | 75,000 |
| Total fixed administrative expense | 120,000 |
| Ending merchandise inventory | 105,000 |
| Merchandise purchases | 285,000 |
Required:
- Prepare a traditional income statement for the quarter ended March 31.
- Prepare a contribution format income statement for the quarter ended March 31.
- What was the contribution margin per unit?
Solution
- Prepare a traditional income statement for the quarter ended March 31.
The Alpine House, Inc. Traditional Income Statement Sales 1,080,000 Cost of goods sold 255,000 Gross margin 825,000 Selling and administrative expenses: Selling expenses 256,500 Administrative expenses 171,300 427,800 Net operating income 397,200 Explanation:
Cost of goods sold: ($75,000 + $285,000 − $105,000) = $255,000
Selling expenses: (($45 per unit × 2,700 pairs of skis*) + $135,000) = $256,500
Administrative expenses: (($19 per unit × 2,700 pairs of skis) + $120,000) = $171,300
*$1,080,000 sales ÷ $400 per pairs of skis = 2,700 pairs of skis.
- Prepare a contribution format income statement for the quarter ended March 31.
The Alpine House, Inc. Contribution Format Income Statement Sales 1,080,000 Variable expenses: Cost of goods sold 255,000 Selling expenses 121,500 Administrative expenses 51,300 427,800 Contribution margin 652,200 Fixed expenses: Selling expenses 135,000 Administrative expenses 120,000 255,000 Net operating income 397,200 Explanation:
Selling expenses: ($45 per unit × 2,700 pairs of skis) = $121,500
Administrative expenses: ($19 per unit × 2,700 pairs of skis) = $51,300
- What was the contribution margin per unit? (Round your final answer to nearest whole dollar.)
Contribution margin per unit $242 Explanation:
Since 2,700 pairs of skis were sold and the contribution margin totaled $652,200 for the quarter, the contribution margin per unit was $242 ($652,200 ÷ 2,700 pair of skis = $242 per pair of skis).
Classify each cost as being either variable or fixed with respect to the number of units produced and sold. Also classify each cost as either a period or a product cost.
| Cost Classifications for: | |||
|---|---|---|---|
| Cost Item | Predicting Cost Behavior | Preparing Financial Statements | |
| 1. | Hamburger buns in a Wendy’s restaurant. | Variable cost | Product cost |
| 2. | Advertising by a dental office. | Fixed cost | Period cost |
| 3. | Apples processed and canned by Del Monte. | Variable cost | Product cost |
| 4. | Shipping canned apples from a Del Monte plant to customers. | Variable cost | Period cost |
| 5. | Insurance on a Bausch & Lomb factory producing contact lenses. | Fixed cost | Product cost |
| 6. | Insurance on Nucor’s corporate headquarters. | Fixed cost | Period cost |
| 7. | Salary of a supervisor overseeing production of printers at Ricoh. | Fixed cost | Product cost |
| 8. | Commissions paid to automobile salespersons. | Variable cost | Period cost |
| 9. | Depreciation of factory lunchroom facilities at a General Electric plant. | Fixed cost | Product cost |
| 10. | Steering wheels installed in Tesla electric vehicles. | Variable cost | Product cost |