6.
Decision significance
The P50.00 cost is relevant because it can be compared with the price of
other fabrics of similar quality to select the best alternative. The P40.00 cost is
irrelevant.
7. Managerial influence
The cost of the fabric to be acquired is a controllable cost since Ms. Cabrera
has the authority to make production decisions.
8. Others
The fabric is an out-of-pocket cost associated until producing additional skirts
which will involve cash outlay in its acquisition.
REVIEW QUESTIONS, EXERCISES AND PROBLEMS
I. Questions
1. Define cost object and give three examples.
2. Define cost assignment, cost tracing, and cost allocation. How are these terms
related?
3. Describe two areas that cost reduction efforts frequently focus on.
4. Describe how service - merchandising-, and manufacturing-sector companies
differ from each other.
5. Distinguish between capitalized costs and non capitalized costs. Give an example
of each from the service, merchandising and manufacturing- sector companies differ
from each other.
6. Define product costs. Describe three different purposes for computing product
costs.
7. What is meant by the phrase "different costs for different purposes”?
8. Distinguish between fixed costs and variable costs.
9. List three direct costs of the food and beverage department in a hotel. List three
indirect costs of the department.
10. Why is the cost of idle time treated as manufacturing overhead?
11. Which of the following costs are likely to be controllable by the chief of nursing in
a hospital?
a. Cost of medication administered.
b. Cost of overtime paid to nurses due to scheduling errors.
c. Cost of depreciation of hospital beds.
12. Distinguish between product and period costs.
13. What is the most important difference between a manufacturing firm and a
service industry firm, with regard to the classification of costs as product costs or
period costs?
14. Why are product costs also called inventoriable costs?
15. Define the terms sunk cost and differential cost.
16. Indicate whether each of the following costs is a direct cost or an indirect cost of
the restaurant in a hotel.
a. Cost of food served.
b. Chef's salary and fringe benefits.
c. Part of the cost of maintaining the grounds around the hotel, which is
allocated to the restaurant.
d. Part of the cost of advertising the hotel, which is allocated to the restaurant.
17. What are the two properties of a relevant cost?
18. List and briefly describe the three types of product costs.
19. List and briefly describe the three types of manufacturing inventories.
20. Describe how the income statement of a manufacturing company differs from the
income statement of a merchandising company.
21. Why is manufacturing overhead considered an indirect cost of a unit of product?
22. Martha Angeles is employed by Angels Company. Last week she worked 34
hours assembling one of the company's products and was idle 6 hours due to
material shortages. Angels' employees are engaged at their workstations for a
normal 40-hour week. Ms. Angeles is paid P15 per hour. Allocate her earnings
between direct labor cost and manufacturing overhead cost.
23. Jonas Oscar operates a stamping machine on the assembly line of Dynasty
Manufacturing Company. Last week Mr. Oscar worked 45 hours. His basic wage rate
is P14 per hour, with time and a half for overtime (time worked in excess of 40 hours
per week). Allocate Mr. Oscar's wages for the week between direct labor cost and
manufacturing overhead cost.
II. Exercises
Exercise 1 (Schedule of Cost of Goods Manufactured and Sold; Income
Statement)
Amazing Aluminum Company, a manufacturer of recyclable soda cans, had the
following inventory balances at the beginning and end of 20X1:
Inventory Classification January 1, 20X1 December 31, 20X1
Raw material P 60,000 P 70,000
Work in process 120,000 115,000
Finished goods 150,000 165,000
During 20X1, the company purchased P250,000 of raw material and spent P400,000
on direct labor. Manufacturing overhead costs were as follows:
Indirect material................................................................................P 10,000
Indirect labor .................................................................................... 25,000
Depreciation on plant and equipment………………….....…………. 100,000
Utilities ….…………………………..…………………...……………… 25,000
Other ............................................................................................... 30,000
Sales revenue was P1,105,000 for the year. Selling and administrative expenses for
the year amounted to P110,000. The firm's tax rate is 40 percent.
Required:
1. Prepare a schedule of cost of goods manufactured.
2. Prepare a schedule of cost of goods sold.
3. Prepare an income statement.
Exercise 2
For each of the following costs incurred in a manufacturing operation, indicate
whether the costs would be fixed or variable (F or V) and whether they would be
period costs or product costs (P or R, respectively) under full-absorption costing.
a. Transportation-in costs on materials purchased,
b. Assembly-line worker's wages.
c. Property taxes on work in process inventories.
d. Salaries of top executives in the company.
e. Overtime premium for assembly workers.
f. Sales commissions.
g. Sales personnel office rental.
h. Production supervisory salaries.
i. Controller's office supplies.
j. Executive office heat and air conditioning.
k. Executive office security personnel.
l. Supplies used in assembly work.
m. Factory heat and air conditioning.
n. Power to operate factory equipment.
o. Depreciation on furniture for sales staff.
p. Varnish used for finishing products.
q. Marketing personnel health insurance.
r. Packaging materials for finished products.
s. Salary of the quality control manager who checks work on the
assembly line.
t. Assembly-line workers' dental insurance.
Exercise 3 (Cost Classifications; Manufacturer)
Daisy Ryan Shirt Shop manufactures T-shirts and decorates them with custom
designs for retail sale on the premises. Several costs incurred by the company are
listed below. For each cost, indicate which of the following classifications best
describes the cost. More than one classification may apply to the same cost item.
Cost Classifications
a. Variable b. Fixed
c. Period h. Research and development
d. Product i. Direct material
e. Administrative j. Direct labor
f. Selling k. Manufacturing overhead
g. Manufacturing
Cost Items
1. Cost of fabric used in T-shirts.
2. Wages of shirtmakers.
3. Cost of new sign in front of retail T-shirt shop.
4. Wages of the employee who repairs the firm's sewing machines.
5. Cost of electricity used in the sewing department.
6. Wages of T-shirt designers and painters.
7. Wages of sales personnel.
8. Depreciation on sewing machines.
9. Rent on the building. Part of the building's first floor is used to make and paint T-
shirts. Part of it is used for the retail sales shop. The second floor is used for
administrative offices and storage of raw material and finished goods.
10. Cost of daily advertisements in local media.
11. Wages of designers who experiment with new fabrics, paints, and T-shirt
designs.
12. Cost of hiring a pilot to fly along the beach pulling a banner advertising the shop
13. Salary of the owner's secretary.
14. Cost of repairing the gas furnace.
15. Cost of insurance for the production employees.
