11. LO.

1 (Association with cost object) Following is a list of raw materials that might be used in the production of a laptop
computer: touch pad and buttons, glue, network connector, battery, paper towels used by line employees, AC adapter, CD
drive, motherboard, screws, and oil for production machinery. The laptops are produced in the same building and using the
same equipment that produces desktop computers and servers. Classify each raw material as direct or indirect when the cost
object is the
a. laptop.
b. computer production plant.

(a) When the Cost Object is the Laptop

Direct Materials (DM) – Costs that can be directly (easily/economically) traced to the production of a laptop.
Can readily see material in the laptop
Indirect Materials (IM) – Costs that are necessary for production but cannot be directly traced to a single
laptop unit.

(Cost Object/Product/Unit) RAW CLASSIFICATION REASONING

MATERIAL
Touch pad and buttons Direct Essential components specifically
used in laptops.
Glue Indirect Used for assembly but not directly
traceable to each unit.
Network connector Direct A specific part of the laptop that
can be directly assigned.
Battery Direct A necessary component for the
laptop’s operation.
Paper towels used by line Indirect Used for cleaning but not directly
employees part of the laptop.
AC adapter Direct A specific accessory for the
laptop.
CD drive Direct A specific component of the
laptop.
Motherboard Direct A core component of the laptop.
Screws (Best Answer: Indirect ) Essential for assembly, although
small in cost, they are generally
treated as direct.
Oil for production machinery Indirect Used for maintaining equipment,
not part of the laptop.

(b) When the Cost Object is the Computer Production Plant

Here, the plant is the cost object, meaning all materials used in production are considered in terms of their
relation to the entire facility’s operations, rather than a specific product (laptop).
Direct labor hours, machine hours, etc. - appropriate basis for allocating the cost

(Cost Object/Product/Unit) RAW CLASSIFICATION REASONING

MATERIAL
Touch pad and buttons Direct Related to laptop production but
not the plant as a whole.
Glue Direct Used for various products in the
plant, not directly for the plant
itself.
 Network connector Direct Related to laptop production, not
the plant.
Battery Direct A component of a product, not the
facility.
Paper towels used by line Direct A general consumable item in the
employees plant.
AC adapter Direct Part of a product, not related to
plant operations.
CD drive Direct A laptop component, not relevant
to the plant itself.
Motherboard Direct Related to the product, not the
facility.
Screws Direct Used in product assembly, not the
plant.
Oil for production machinery Direct Necessary for maintaining
production equipment in the plant.

***All these costs are conveniently, easily, and economically directly attributable/ traceable to the plant. Cannot
be costed to another manufacturing plant

SUMMARY OF KEY DIFFERENCES

For laptops → Materials directly used in making the laptop are direct, while those used in production but not
traceable to each unit are indirect.
For the production plant → Anything related to the general facility and equipment maintenance is direct,
while product-specific materials become indirect because they do not benefit the entire plant.

12. LO.1 (Association with cost object) Morris & Assoc., owned by Cindy Morris, provides accounting services to clients. The
firm has two accountants (Jo Perkins who performs basic accounting services and Steve Tompkin who performs tax
services) and one office assistant. The assistant is paid on an hourly basis for the actual hours worked. One client the firm
served during April was Vic Kennedy. During April 2010, the following labor time was incurred. Classify the labor time as
direct or indirect based on whether the cost object is (1) Kennedy’s services, (2) tax services provided, or (3) the accounting
firm.
a. Four hours of Perkins’s time in preparing Kennedy’s financial statements
b. Six hours of the assistant’s time in copying Kennedy’s tax materials
c. Three hours of Morris’s time playing golf with Kennedy
d. Eight hours of continuing education paid for by the firm for Tompkin to attend a tax update seminar
e. One hour of the assistant’s time spent at lunch on the day that Kennedy’s tax return was prepared
f. Two hours of Perkins’s time spent with Kennedy and his banker discussing Kennedy’s financial statements
g. One-half hour of Tompkin’s time spent talking to an IRS agent about a deduction taken on Kennedy’s tax return
h. Forty hours of janitorial wages
i. Seven hours of Tompkin’s time preparing Kennedy’s tax return

LABOR TIME (1) KENNEDY’S (2) TAX (3) THE REASONING

SERVICES SERVICES ACCOUNTING
 PROVIDED FIRM
a. Four hours of Direct Indirect DirectIndirect Perkins worked
Perkins’s time in (None/Wala directly on
preparing lang)None Kennedy’s financial
Kennedy’s financial statements.
statements
b. Six hours of the Direct Indirect DirectIndirect The assistant’s
assistant’s time in time is directly
copying Kennedy’s attributable to
tax materials Kennedy’s
engagement.
c. Three hours of Indirect IndirectNone DirectIndirect This is more of a
Morris’s time business
playing golf with development or
Kennedy client relations
activity, not a direct
service.
d. Eight hours of Indirect Indirect DirectDirect This benefits the
continuing firm as a whole, not
education for a specific client or
Tompkin to attend service.
a tax update
seminar
e. One hour of the Indirect Indirect DirectIndirect Lunch breaks are
assistant’s time not considered
spent at lunch on direct labor for any
the day Kennedy’s cost object.
tax return was
prepared
f. Two hours of Direct Indirect DirectIndirect Perkins was
Perkins’s time actively working on
spent with Kennedy Kennedy’s
and his banker engagement.
discussing
Kennedy’s financial
statements
g. One-half hour of Direct Direct DirectIndirect This is directly
Tompkin’s time related to
spent talking to an Kennedy’s tax
IRS agent about a services.
deduction taken on
Kennedy’s tax
return
h. Forty hours of Indirect Indirect DirectDirect Janitorial wages
janitorial wages are general
overhead costs for
the firm.
i. Seven hours of Direct Direct DirectIndirect Tompkin’s work
Tompkin’s time was directly on
preparing Kennedy’s tax
Kennedy’s tax return, making it
return direct for both cost
objects.

*** None: Wala lang

KEY TAKEAWAYS
Direct costs → Easily traceable to the cost object (client services or tax services).
Indirect costs → Related to firm-wide operations, not a specific client or service.
For the accounting firm as a cost object, expenses like janitorial wages and continuing education are direct
because they support the overall firm operations.

19. LO.2 & LO.3 (Cost behavior and classification) Indicate whether each of the following items is a variable (V), fixed (F), or
mixed (M) cost and whether it is a product/service (PT) or period (PD) cost. If some items have alternative answers, indicate
the alternatives and the reasons for them.
a. Wages of factory maintenance workers
b. Wages of forklift operators who move finished goods from a central warehouse to the outbound loading dock
c. Insurance premiums paid on the headquarters of a manufacturing company
d. Cost of labels attached to shirts made by a company
e. Property taxes on a manufacturing plant
f. Paper towels used in factory restrooms
g. Salaries of office assistants in a law firm
h. Freight costs of acquiring raw material from suppliers
i. Computer paper used in an accounting firm
j. Cost of wax to make candles
k. Freight-in on a truckload of furniture purchased for resale

ITEM COST BEHAVIOR (V, F, COST TYPE (PT, PD) REASONING

M)
a. Wages of factory F (Fixed) PT (Product) Maintenance wages do
maintenance workers’ not vary with production
levels but are necessary
for production.
b. Wages of forklift F (Fixed) PD (Period) Since the goods are
operators moving already finished, this is a
finished goods to distribution cost (part of
outbound loading dock selling expenses, not
manufacturing).
c. Insurance premiums F (Fixed) PD (Period) Insurance is a fixed cost
paid on manufacturing unrelated to production
headquarters volume, and HQ costs
are period expenses.
d. Cost of labels V (Variable) PT (Product) The cost depends on the
attached to shirts number of shirts
produced, making it a
direct material cost.
e. Property taxes on a F (Fixed) PT (Product) Property taxes do not
manufacturing plant vary with production
levels but are part of
 manufacturing overhead.
f. Paper towels used in M (Mixed) PT (Product) There is a base
factory restrooms consumption level
(fixed), but usage may
increase with production
activity.
g. Salaries of office F (Fixed) PD (Period) Office salaries are
assistants in a law firm administrative costs that
do not fluctuate with the
number of clients.
h. Freight costs of V (Variable) PT (Product) Freight-in costs depend
acquiring raw materials on the volume of raw
materials purchased and
are included in inventory
costs.
i. Computer paper used M (Mixed) PD (Period) A portion of usage is
in an accounting firm fixed (basic office
needs), but variable if
printing increases with
client workload.
j. Cost of wax to make V (Variable) PT (Product) The cost increases with
candles the number of candles
produced, making it a
direct material.
k. Freight-in on a V (Variable) PT (Product) This cost is tied to
truckload of furniture inventory acquisition and
purchased for resale directly affects the cost
of goods sold.

*Fixed cost – will remain the same as long as the activity level is still within the relevant range (no. of units)
ALTERNATIVE ANSWERS & CLARIFICATIONS
(f) Paper towels in factory restrooms:
Could be Fixed (F) if the factory has a standard supply contract.
Could be Mixed (M) if usage varies significantly with production levels.
(i) Computer paper in an accounting firm:
Could be Fixed (F) if the firm purchases a set amount monthly.
Could be Mixed (M) if usage varies significantly based on the number of clients.

23. LO.4 (Company type) Indicate whether each of the following terms is associated with a manufacturing (Mfg.), a retailing or
merchandising (Mer.), or a service (Ser.) company. There can be more than one correct answer for each term.
a. Depreciation—factory equipment
b. Prepaid rent c. Auditing fees expense
d. Merchandise inventory
e. Sales salaries expense
f. Finished goods inventory
g. Cost of services rendered
h. Cost of goods sold
i. Direct labor wages

Here’s the classification of each term based on the type of company: Manufacturing (Mfg.),
Merchandising/Retail (Mer.), or Service (Ser.)

TERM MANUFACTURING MERCHANDISING SERVICE (SER.) REASONING

(MFG.) (MER.)
a. Depreciation— ✅ Yes ❌ No ❌ No Only manufacturing
factory equipment companies use
factory equipment.
b. Prepaid rent ✅ Yes ✅ Yes ✅ Yes All types of
businesses can
have prepaid rent
for office,
warehouse, or
factory space.
c. Auditing fees ✅ Yes ✅ Yes ✅ Yes All companies may
expense incur auditing fees
for financial
reporting or
compliance.
d. Merchandise ❌ No ✅ Yes ❌ No Only
inventory merchandising/retail
businesses hold
merchandise
inventory for resale.
e. Sales salaries ✅ Yes ✅ Yes ✅ Yes All businesses may
expense have sales teams,
though their
structure may differ.
f. Finished goods ✅ Yes ❌ No ❌ No Only manufacturers
inventory have finished goods
inventory before
selling them.
g. Cost of services ❌ No ❌ No ✅ Yes Only service
rendered companies have
this since they
provide services
rather than goods.
h. Cost of goods ✅ Yes ✅ Yes ❌ No Only manufacturers
sold (COGS) and merchandisers
deal with physical
products and
inventory.
i. Direct labor ✅ Yes ❌ No ✅ Yes Applies to
wages manufacturers
(factory workers)
and service firms
(billable
employees).
KEY TAKEAWAYS
Manufacturing (Mfg.) → Has factory-related costs (e.g., factory depreciation, finished goods inventory,
direct labor wages).
Merchandising (Mer.) → Focuses on buying and selling inventory (e.g., merchandise inventory, COGS).
Service (Ser.) → Primarily sells services, so terms like "cost of services rendered" apply.

41. LO.2 (Cost behavior) Mason Company’s cost structure contains a number of diff erent cost behavior patterns. Following
are descriptions of several different costs; match these to the appropriate graphs. On each graph, the vertical axis represents
cost and the horizontal axis represents level of activity or volume. Identify, by letter, the graph that illustrates each of the
following cost behavior patterns. Each graph can be used more than once.

1. Cost of raw material, where the cost decreases by $0.06 per unit for each of the first 150 units purchased,
after which it remains constant at $2.75 per unit.
2. City water bill, which is computed as follows: first 750,000 gallons or less, $1,000 flat fee; next 15,000
gallons, $0.002 per gallon used; next 15,000 gallons, $0.005 per gallon used; next 15,000 gallons, $0.008 per
gallon used; and so on.
3. Salaries of maintenance workers, assuming one maintenance worker is needed for every 1,000 hours or
less of machine time.
4. Electricity rate structure—a flat fixed charge of $250 plus a variable cost after 150,000 kilowatt hours are
used.
5. Depreciation of equipment using the straight-line method.
6. Rent on a machine that is billed at $1,000 for up to 500 hours of machine time. After 500 hours of machine
time, an additional charge of $1 per hour is paid up to a maximum charge of $2,500 per period.
7. Rent on a factory building donated by the county; the agreement provides for a monthly rental of $100,000
less $1 for each labor hour worked in excess of 200,000 hours. However, a minimum rental payment of
$20,000 must be made each month. 8. Cost of raw material used.
9. Rent on a factory building donated by the city with an agreement providing for a fixed-fee payment unless
250,000 labor hours are worked, in which case no rent needs to be paid.
 COSTS GRAPH REASONING
Cost of raw material with a Graph H (This represents a cost that
decreasing per-unit cost until 150 initially decreases at a diminishing
units, then constant rate and then flattens out.)

City water bill with tiered pricing Graph D (This represents a step-cost
based on usage levels pattern, where cost increases at
specific usage thresholds.)
Salaries of maintenance workers, Graph D (This follows a step-cost pattern,
with one worker per 1,000 hours as new workers are hired after
of machine time reaching a threshold.)
Electricity rate with a fixed charge Graph K (This represents a mixed cost,
plus a variable cost after 150,000 where there is a base cost, then a
kWh gradual increase in cost after a
certain point.)
Depreciation of equipment using Graph E (This represents a fixed cost that
the straight-line method does not change with activity
levels.)
Machine rent billed at $1,000 up to Graph L (This represents a cost that
500 hours, then $1 per additional increases in steps but has an
hour up to $2,500 max upper limit.)
Factory rent with a decreasing fee Graph K (This represents a cost that
per labor hour worked but with a decreases up to a point but then
minimum payment of $20,000 remains fixed.)
Cost of raw material used Graph F (This represents a linear variable
(assumed to be purely variable) cost, increasing with activity.)
Factory rent that is either a fixed Graph J (This represents a discontinuous
amount or eliminated if labor fixed cost, dropping to zero when
hours exceed 250,000 the condition is met.)

Graph L (This represents a cost that increases in steps but has an upper limit.)

Factory rent with a decreasing fee per labor hour worked but with a minimum payment of $20,000
Graph K (This represents a cost that decreases up to a point but then remains fixed.)

Cost of raw material used (assumed to be purely variable)

Graph F (This represents a linear variable cost, increasing with activity.)

Factory rent that is either a fixed amount or eliminated if labor hours exceed 250,000
Graph J (This represents a discontinuous fixed cost, dropping to zero when the condition is met.)