Cost Accounting Hilton 15

71.Mighty Muffler, Inc., operates an automobile service facility. The table below shows the cost
incurred during a month when 600 mufflers were replaced.

Number of Muffler Replacements

500 600 700
Total costs:
Fixed costs A $ 8,400 C
Variable costs B 6,000 D
Total costs E $14,400 F

Cost per muffler replacement:

Fixed cost G H I
Variable cost J K L
Total cost per muffler replacement M N O

Required:

Fill in the missing amounts, labeled A through O, in the table.

LO: 8 Type: A
Answer:

Number of Muffler Replacements

500 600 700
Total costs:
Fixed costs $ 8,400.00 $ 8,400.00 $ 8,400.00
Variable costs 5,000.00 6,000.00 7,000.00
Total costs $13,400.00 $14,400.00 $15,400.00

Cost per muffler replacement:

Fixed cost $ 16.80 $ 14.00 $ 12.00
Variable cost 10.00 10.00 10.00
Total cost per muffler replacement $ 26.80 $ 24.00 $ 22.00

Explanatory notes:

A and C each equal $8,400, since fixed costs do not vary with activity.

J, K, and L each equal $10 ($6,000 ÷ 600), since variable cost per replacement remains

constant.

B equals $5,000 (500 x $10)

D equals $7,000 (700 x $10)

G equals $16.80 ($8,400 ÷ 500)

H equals $14.00 ($8,400 ÷ 600)

I equals $12.00 ($8,400 ÷ 700)

Fixed and Variable Cost Behavior

72. Global Systems began business on January 1 of the current year, producing a single product that
is popular with home builders. Demand was very strong, allowing the company to sell its entire
manufacturing output of 80,000 units. The following unit costs were incurred:

Manufacturing costs:
Direct materials $15
Direct labor 8
Variable overhead 11
Fixed overhead 6
Selling and administrative costs:
Variable 5
Fixed 2

Global anticipates an increase in productive output to 100,000 units and sales of 95,000 units in
the next accounting period. The company uses appropriate drivers to determine cost behavior
and estimates.

Required:

A. Assuming that present cost behavior patterns continue, compute the total expected costs in
the upcoming accounting period.
B. George Levy is about to prepare a graph that shows the unit cost behavior for variable
selling and administrative cost. If the graph’s horizontal axis is volume and the vertical axis
is dollars, briefly describe what George’s graph should look like.
C. Determine whether the following costs are variable or fixed in terms of behavior:
1. Yearly lease payments for a state-of-the-art cutting machine.
2. A fee paid to a consultant who provided advice about quality issues. The fee was based
on the number of consulting hours provided.
3. Cost of an awards dinner for "star" salespeople.

LO: 7, 8 Type: A, N

Answer:

Direct materials (100,000 x $15) $1,500,000

Direct labor (100,000 x $8) 800,000
Variable overhead (100,000 x $11) 1,100,000
Fixed overhead (80,000 x $6) 480,000
Variable selling and administrative (95,000 x $5) 475,000
Fixed selling and administrative (80,000 x $2) 160,000
Total costs $4,515,000

The variable selling and administrative costs are constant at $5 per unit. Thus, the graph is
a straight, horizontal line.

Fixed
Variable
Variable
Elements of Financial Statements, Cost Behavior

73. KC Manufacturing, which began operations on January 1 of the current year, produces an
industrial scraper that sells for $325 per unit. Information related to the current year's activities
follows.

Number of scrapers produced 20,000

Number of scrapers sold 17,000
Variable costs per unit:
Direct materials $25
Direct labor 35
Manufacturing overhead 60
Annual fixed costs:
Manufacturing overhead $400,000
Selling and administrative 140,000

KC carries its finished-goods inventory at the average unit cost of production. There was no
work in process at year-end.

Required:

A. Compute the company's average unit cost of production.

B. Determine the cost of the December 31 finished-goods inventory.
C. Compute the company's cost of goods sold.
D. If next year's production increases to 23,000 units and general cost behavior patterns do not
change, what is the likely effect on:
1. The direct-labor cost of $35 per unit? Why?
2. The fixed manufacturing overhead cost of $400,000? Why?

LO: 5, 6, 8 Type: A

Answer:

A. Fixed manufacturing overhead per unit:

$400,000  20,000 scrapers produced = $20
 Average unit manufacturing cost:
Direct materials $ 25
Direct labor 35
Variable manufacturing overhead 60
Fixed manufacturing overhead 20
Average unit cost $140

B. Production (units) 20,000

Sales (units) 17,000
Ending finished-goods inventory (units) 3,000

3,000 units x $140 = $420,000

 C. Finished goods, Jan. 1 $ ---       
Add: Cost of goods manufactured (20,000 units x $140) 2,800,000
Cost of goods available for sale $2,800,000
Deduct: Finished goods, Dec. 31 420,000
Cost of goods sold $2,380,000

D. 1. No change. Direct labor is a variable cost, and the cost per unit will remain constant.
2. No change. Despite the increase in the number of units produced, this is a fixed cost,
which remains the same in total.

Economic Characteristics of Costs

74. The following terms are used to describe various economic characteristics of costs:

Opportunity cost Differential cost

Out-of-pocket cost Marginal cost

Sunk cost Average cost

Required:

Choose one of the preceding terms to characterize each of the amounts described below. Each
term may be used only once.

A. The cost of including one extra child in a day-care center.

B. The cost of merchandise inventory purchased five years ago. The goods are now obsolete.
C. The cost of feeding 300 children in a public school cafeteria is $450 per day, or $1.50 per
child per day. What economic term describes this $1.50 cost?
D. The management of a high-rise office building uses 3,000 square feet of space in the
building for its own administrative functions. This space could be rented for $30,000. What
economic term describes this $30,000 of lost rental revenue?
E. The cost of building an automated assembly line in a factory is $700,000; a manually
operated assembly line would cost $250,000. What economic term is used to describe the
$450,000 variation between these two amounts?
F. Refer to the preceding question and assume that the firm is currently building the assembly
line for $700,000. What economic term is used to describe the $700,000 construction cost?
LO: 10 Type: N

Answer:

A. Marginal cost
B. Sunk cost
C. Average cost
D. Opportunity cost
E. Differential cost
F. Out-of-pocket cost
DISCUSSION QUESTIONS

Product Costs and Period Costs

75. Madison Corporation has a single facility that it uses for manufacturing, sales, and
administrative activities. Should the company's building depreciation charge be expensed in its
entirety or is a different accounting procedure appropriate? Explain.

LO: 2 Type: N

Answer:

The company's depreciation charge is, in part, a period cost and, in part, a product cost. The
portion that relates to selling and administrative activities should be expensed when incurred.
In contrast, the portion that relates to manufacturing should be attached to the goods
produced, with the costs now inventoried on the balance sheet.

36.If a company sells goods that cost $70,000 for $82,000, the firm will:

A. reduce Finished-Goods Inventory by $70,000.

B. reduce Finished-Goods Inventory by $82,000.

C. report sales revenue on the balance sheet of $82,000.

D. reduce Cost of Goods Sold by $70,000.

E. follow more than one of the above procedures.

Answer: A LO: 2, 5 Type: A

37. Selto Manufacturing recently sold goods that cost $35,000 for $45,000 cash. The journal entries
to record this transaction would include:

A. a credit to Work-in-Process Inventory for $35,000.

B. a debit to Sales Revenue for $45,000.

C. a credit to Profit on Sale for $10,000.

D. a debit to Finished-Goods Inventory for $35,000.

E. a credit to Sales Revenue for $45,000.

 Answer: E LO: 2, 5 Type: A

38. A computer manufacturer recently shipped several laptops to a customer (cost: $25,000) and
billed the customer $30,000. Which of the following options correctly expresses the accounts
that are debited and credited to record this transaction?

A. Debits: Accounts Receivable, Finished-Goods Inventory; credits: Sales Revenue, Cost of

Goods Sold.

B. Debits: Accounts Receivable, Cost of Goods Sold; credits: Sales Revenue, Finished-Goods
Inventory.

C. Debits: Sales Revenue, Cost of Goods Sold; credits: Accounts Receivable, Finished-Goods
Inventory.

D. Debits: Sales Revenue, Finished-Goods Inventory; credits: Accounts Receivable, Cost of

Goods Sold.

E. Debits: Accounts Receivable; credits: Finished-Goods Inventory, Profit on Sale.

Answer: B LO: 5 Type: A

39. Barney Company applies manufacturing overhead by using a predetermined rate of 200% of
direct labor cost. The data that follow pertain to job no. 764:

Direct material cost $55,000

Direct labor cost 40,000

If Barney adds a 40% markup on total cost to generate a profit, which of the following choices
depicts a portion of the accounting needed to record the sale of job no. 764?

Account Debited Amount

A. Cost of Goods Sold $175,000
B. Cost of Goods Sold $245,000
C. Finished-Goods Inventory $175,000
D. Finished-Goods Inventory $245,000
E. Sales Revenue $245,000
Answer: A LO: 5 Type: A
40. Armada Company applies manufacturing overhead by using a predetermined rate of 150% of
direct labor cost. The data that follow pertain to job no. 831:

Direct material cost $72,000

Direct labor cost 38,000

If Armada adds a 30% markup on total cost to generate a profit, which of the following choices
depicts a portion of the accounting needed to record the sale of job no. 831?

Account Debited Amount

A. Accounts Receivable $167,000
B. Accounts Receivable $217,100
C. Finished-Goods Inventory $167,000
D. Finished-Goods Inventory $217,100
E. Sales Revenue $217,100

Answer: B LO: 5 Type: A