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CHAPTER 2
DISCUSSION QUESTIONS
2-1
2-2
Chapter 2
Q2-7.
Q2-8.
Q2-9.
Q2-10.
Q2-11.
Chapter 2
Q2-12. The challenge posed by the increased interest in nonfinancial performance measures is
to define the cost accountants role broadly
enough to include more measures that are
not preceded by dollar signs and that are not
tied to the financial accounting system.
Q2-13. Costs are most commonly classified based on
their relationship to
(a) the product (a single batch, lot, or unit of
the good or service);
(b) the volume of activity;
(c) the manufacturing departments, processes, cost centers, or other subdivisions;
(d) the accounting period;
(e) a proposed decision, action, or evaluation.
Q2-14. Indirect materials are those materials needed
for the completion of the product but whose
consumption is either so small or so complex
that their treatment as direct materials would
not be feasible. For example, nails used to
make the product are indirect materials.
Q2-15. Indirect labor, in contrast to direct labor, is
labor expended that does not affect the construction or the composition of the finished
product. For example, the labor of custodians
is indirect labor.
Q2-16. (a) A service department is one that is not
directly engaged in production, but
renders a particular type of service for the
benefit of other departments. Examples
of service departments are receiving,
storerooms, maintenance, timekeeping,
payroll, and cafeteria.
(b) Producing departments classify their
share of service department expenses as
indirect overhead expenses.
Q2-17. (a) Capital expenditures are intended to
benefit more than one accounting period.
The expenditures should therefore be
recorded by a charge to an asset account
for allocation to the periods benefited.
Revenue expenditures benefit the
operations of the current period only.
They should be recorded by charges to
the appropriate expense accounts.
(b) If a capital expenditure is improperly classified as an expense, assets, retained
earnings, and income for the period will
be understated. In future periods, income
will be overstated by any amount that
would have been amortized had the
expenditure been properly capitalized.
Assets and retained earnings will be
understated on future balance sheets by
2-3
2-4
Chapter 2
Chapter 2
2-5
EXERCISES
E2-1
(1)
(2)
(3)
(4)
$6 + $3 = $9 prime cost
$3 + $1 = $4 variable conversion cost
$6 + $3 + $1 = $10 variable manufacturing cost
$1,000 fixed + ($10 500) = $6,000
E2-2
(1)
(2)
(3)
(4)
E2-3
First Method:
Sales ($19,950,000 85%) ................................
Less: Variable costs ($11,571,000 85%) ...... $9,835,350
Fixed costs .............................................
7,623,000
Operating loss....................................................
Second Method:
1st Step:
Variable costs $11, 571, 000
20A sales $19,950,000
1.
2.
3.
4.
5.
6.
7.
8.
d
b
b
a
f
e
c
f
17,458,350
$ (500,850)
2nd Step:
Sales ($19,950,000 85%)................................ $16,957,500
Less: Variable costs ($16,957,500 .58) ........ $ 9,835,350
Fixed costs .............................................
7,623,000
Operating loss....................................................
E2-4
$16,957,500
17,458,350
$ (500,850)
2-6
E2-5
E2-6
Chapter 2
$600,000 (given)
300,000 (given)
$300,000
$400,000 (given)
300,000 (calculated above)
$100,000
The amount of factory overhead cost per blade is $300, calculated as follows:
Total manufacturing cost ..............................
Less conversion cost ....................................
Equals direct material cost ...........................
$1,000 (given)
400 (given)
$ 600
$ 400 (given)
100 (calculated above)
$ 300
$1,000 (given)
800 (given)
$ 200
$ 400 (given)
200 (calculated above)
$ 200
Chapter 2
E2-8
2-7
$3,000 (given)
2,000 (given)
$1,000
$2,000 (given)
500 (calculated above)
$1,500
E2-9
(1)
(2)
It implies that cash-paying customers are paying a part of the cost of the banks
fees for processing credit card transactions, because these fees are paid by the
merchant who then recovers them in the form of slightly higher prices for all
merchandise.
(3)
The competitive implications are that the prices paid by cash customers are too
high to be competitive with the prices charged by merchants who deal only in
cash, and the prices paid by customers using bank credit cards are too low to
reflect all the costs of a credit sale.
(4)
The reason for not reducing all prices and charging extra for the use of a credit
card is because of the psychological effect of an extra charge. To customers, it
sounds like a penalty, as if the merchant wants to discourage the use of bank
credit cards. A discount for cash customers has a positive connotation, even if
prices marked on merchandise are higher to begin with. Raising all prices and
offering a cash discount yields the same net revenue as leaving prices alone and
charging extra for using a bank credit card, but the former method feels better to
the customer than the latter.
2-8
Chapter 2
E2-10
(1)
(2)
JTRSs repair prices include an allocation of the cost of picking up and delivering tractors, in addition to the cost of the repairs, administrative costs, marketing costs, and profit. Competitors repair prices reflect only the cost of the
repairs, administrative and marketing costs, and profit. Competitors should be
able to price their repair services lower, because they do not have to reflect
pickup and delivery costs in repair prices.
E2-11
(1)
Direct labor...................................................................................... $ 2
Variable factory overhead..............................................................
5
Fixed factory overhead ..................................................................
4
Conversion cost.............................................................................. $11
(2)
(3)
(4)
Chapter 2
2-9
E2-11 (Concluded)
(5)
(6)
The data indicate the bookcases are made of lumber, and some examples of the
indirect materials used in making wooden bookcases would be glue, sandpaper,
and nails.
(7)
= 1 prime cost
= prime cost.
Prime cost.........................................................................
Less direct material cost.................................................
Direct labor cost...............................................................
$15,000
12,000 (given)
$ 3,000
2-10
Chapter 2
E2-13 APPENDIX
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Chapter 2
2-11
CASES
C2-1
(1)
$8.00
1.40
$6.60
$2.00
.80
$1.20
The manager is treating the menu item as the cost object, for example, one
glass of orange juice.
(4)
The refinement of the definition of cost object that would result in the planned
profit margin is the use of two different kinds of cost object, the item and the
delivery, which can be priced separately at $.80 and $2.40, respectively.
2-12
Chapter 2
C2-1 (Concluded)
(5)
For an order consisting of four glasses of orange juice, the profit margin will be
75%, calculated as follows:
Revenues:
($.80 4) ...........................
+ ($2.40 1) .........................
$3.20
2.40
$5.60
$.80
.60
1.40
$4.20
($.80 1) ...........................
+ ($2.40 1) .........................
$ .80
2.40
$3.20
$.20
.60
.80
$2.40
The food service managers plan allocates the delivery costs over an arbitrarily
selected number of items (two). This plan would result in higher-than-planned
profit margin percentages on room service orders that contain more than two
items, as demonstrated in the answer to requirement (1). Prices on these orders
would be higher than those of a competitor who traces costs more carefully to
cost objects and sets prices accordingly. The plan would also result in lowerthan-planned profit margins on room service orders containing only one item,
as demonstrated in the answer to requirement (2). Prices on these orders would
be lower than what is needed to achieve the target profitability.
Chapter 2
2-13
C2-2
(1)
The cost objects for which some amount of cost is identified in the case, and the
amount of cost identified for each, are:
(a) A new product variation, Zeggo (which means all units of Zeggo ever to be
produced), $250,000.
(b) A batch of Zeggo, $1,000.
(c) A unit of Zeggo, $5 + $10 = $15. (Notice the $10 indirect cost amount includes
all indirect production costs, so it must include the $1 amount stated in the
problem, along with an allocation or averaging of the $1,000-per-batch setup
costs, a share of the $250,000 cost amount, and a share of any other indirect
manufacturing costs. It would be double-counting to add the $1 and arrive
at a total of $16 per unit.)
(2)
The other items mentioned in the case that could serve as cost objects, and a
purpose each one could serve, are:
(a) CCN Company, which is the relevant cost object when external financial
statements are prepared.
(b) The assembly line on which Zeggo and other products are to be produced.
This cost object would be relevant in a decision on whether to discontinue
production of all the products produced on the particular line, or a decision
to shut down the line and shift its production to other lines due to a reduction in customer orders.
(3)
The total cost expected to result from producing the first batch of 300 units of
Zeggo is:
Cost accounted for as direct cost of a unit ......
$
5
Cost treated as indirect by the CCN system ....
1
$
6
300 units
$1,800
Add: setup cost ...................................................
1,000
Total cost ..............................................................
$2,800
(4)
The cost expected to result from producing one more unit of Zeggo is
$5 + $1 = $6.
(5)
For the first batch of 300 units, the CCN cost accounting system will report a
cost of:
($5 direct cost + $10 indirect cost allocation) 300 units = $15 300 = $4,500
2-14
Chapter 2
C2-2 (Concluded)
(6)
For the one additional unit, the CCN cost accounting system will report a cost of
$5 + $10 = $15
(7)
The additional costs allocated by the CCN accounting system are of two types:
(a) Costs caused by activities other than the production of product units. Two
examples of these activities are mentioned in the problem: setting up the
assembly line and perfecting new product variations. Other activities would
include maintaining the assembly line and the department, ordering and
inspecting raw materials, training newly hired workers, maintaining a cost
accounting system, and expediting rush orders. (These are related to total
volume in the long run; therefore, most accounting systems classify them as
variable overhead, but they are unrelated to the production of a single unit
or batch of product.)
(b) Fixed costs that are incurred regardless of whether activities are carried out,
such as plant depreciation, insurance, and property taxes. These are the
costs of having capacity, not of using it.