ACYMAG1

Exercise Set #1
Term 1, AY2020-2021
Source: Hansen, D.R. and Mowen, M.M. (2015). Cornerstones of Cost Management, 3rd edition. Mason,
OH: South Western Cengage Learning.

INSTRUCTIONS:
1. Use Spreadsheet/Excel program.
2. Use one worksheet tab per exercise number and rename the tabs accordingly (ex. 1-1).
3. You may use the formula function.
4. It is recommended to use “Accounting” as the number format.
5. Include peso sign accordingly.
6. Unless necessary, do not include decimal points for amounts.
7. Rule and double-rule amounts as needed.
8. Answer chronologically.
9. Separate the item number with the answer/solution. Thus, the first column is the
requirement number/s, while the second column will be the answer or start of solution.
10. Solutions in good form are required for all problems, unless otherwise specified.

RUBRIC FOR ASSESSMENT:

CRITERIA EXEMPLARY SATISFACTORY DEVELOPING BEGINNING RATING
(97-100) (80-96) (70-79) (Below 70)
Completeness The student solves The student The student The student
[90%] all problems assigned solves all of the solves majority does not solve
and presents all problems but not all of the majority of the
solutions in good assigned. problems problems
accounting form. assigned. assigned.
Neatness and The student solves The student The student The student
Orderliness problems in an solves problems somewhat solves does not solve
[10%] orderly manner and in an orderly problems in an problems in an
labels all amounts manner. orderly manner. orderly
and solutions. manner.
TOTAL:

EXERCISE 1. Multiple Choice. Write the CAPITAL LETTER of the best answer.

1. Selected information concerning the operations of a company for the year ended December
31 is as follows: Units produced, 20,000; Units sold, 18,000; Direct materials used, ₱80,000;
Direct labor incurred, ₱40,000; and Factory overhead, ₱74,000.

Work in process inventories at the beginning and end of the year were zero. Beginning
inventory of finished goods was ₱9,650 (for 1,000 units). Cost of goods sold was ₱174,600.
What was the company’s finished goods inventory cost at December 31?
A. ₱98,050
B. ₱29,100
C. ₱29,050
D. ₱40,600
2. Starling Co. manufactures one product with a selling price of ₱18 and variable cost of ₱12.
Starling’s total annual fixed costs are ₱38,400. If operating income last year was ₱28,800,
what was the number of units Starling sold?
A. 4,800
B. 5,600
C. 6,400
D. 11,200

3. Which of the following costs would decrease if production levels were increased within the
relevant range?
A. Total fixed costs
B. Total variable costs
C. Variable costs per unit
D. Fixed costs per unit

4. The regression analysis results for ABC Co. are shown as y = 90x + 45. The standard error
(Se) is 30, and coefficient of determination (R2) is 0.81. The budget calls for production of
100 units. What is ABC’s estimate of total costs?
A. ₱3,090
B. ₱4,590
C. ₱9,045
D. ₱11,200

5. An increase in production levels within a relevant range most likely would result in
A. Increasing the total cost
B. Decreasing the total fixed cost
C. Increasing the variable cost per unit
D. Decreasing the variable cost per unit

6. A delivery company is implementing a system to compare the costs of purchasing and

operating different vehicles in its fleet. Truck 415 is driven 125,000 miles per year at a
variable cost of ₱0.13 per mile. Truck 415 has a capacity of 28,000 pounds and delivers
250 full loads per year. What amount is the truck’s delivery cost per pound?
A. ₱0.00163 per pound
B. ₱0.58036 per pound
C. ₱0.00232 per pound
D. ₱1.72000 per pound

7. Which of the following costing methods will yield the lowest inventory value?
A. Absorption
B. Hybrid
C. Process
D. Variable
EXERCISE 2. Classify each of the following actions as either being associated with the financial
accounting information system (FS) or the cost management information system (CMS):

1. Determining the total compensation of the CEO of a public company

2. Issuing a quarterly earnings report
3. Determining the unit product cost using time-driven activity-based costing
4. Calculating the number of units that must be sold to break even
5. Preparing a required report for the SEC
6. Preparing a sales budget
7. Using cost and revenue information to decide whether to keep, or drop, a product line
8. Preparing an annual statement of financial position that conforms to generally accepted
accounting principles (GAAP)
9. Using cost and revenue information to decide whether to invest in a new production
system or not
10. Reducing costs by improving the overall quality of a product
11. Using a debt-equity ratio and liquidity ratios from a balance sheet to assess the
likelihood of bankruptcy
12. Using a public company’s financial statements to decide whether or not to buy its stock

EXERCISE 3. The job responsibilities of three employees of Ruido Speakers, Inc., are
described below. You are to identify (1) Kaylin, (2) Joseph, and (3) Leo as line or staff, and
explain your reasons.

Kaylin Hepworth, production manager, is responsible for production of the plastic casing in
which the speaker components are placed. She supervises the line workers, helps develop the
production schedule, and is responsible for meeting the production budget. She also takes an
active role in reducing production costs.

Joseph Henson, plant manager, supervises all personnel in the plant. Kaylin and the other
production managers report directly to Joseph. Joseph is in charge of all that takes place in the
plant, including production, logistics, personnel, and accounting. He helps develop the plant’s
production budgets and is responsible for controlling plant costs.

Leo Tidwell, plant controller, is responsible for all of the accounting functions within the plant.
He supervises three cost accounting managers and four staff accountants. He is responsible for
preparing all cost of production reports. For example, he prepares periodic performance reports
that compare actual costs with budgeted costs. He helps explain and interpret the reports and
provides advice to the plant manager on how to control costs.
EXERCISE 4. Wyandotte Company provided the following information for the last calendar
year: Beginning inventory of Direct materials, ₱25,900; Beginning inventory of Work in process,
₱44,700; Ending inventory of Direct materials, ₱18,000; and Ending inventory of Work in
process, ₱22,700. During the year, direct materials purchases amounted to ₱256,900, direct
labor cost was ₱176,000, and overhead cost was ₱308,400. There were 40,000 units produced.

1. Calculate the total cost of direct materials used in production.

2. Calculate the cost of goods manufactured.
3. Calculate the unit manufacturing cost.
4. Of the unit manufacturing cost calculated, ₱6.62 is direct materials and ₱7.71 is
overhead. What is the prime cost per unit?
5. In relation to #4, what is the conversion cost per unit?

EXERCISE 5. Lakeesha Barnett owns and operates a package mailing store in a college town.
Her store, Send It Packing, helps customers wrap items and send them via UPS, FedEx, and the
USPS. Send It Packing also rents mailboxes to customers by the month. In May, purchases of
materials (stamps, cardboard boxes, tape, Styrofoam peanuts, bubble wrap, etc.) equaled
₱11,450; the beginning inventory of materials was ₱1,050, and the ending inventory of
materials was ₱950. Payments for direct labor during the month totaled ₱25,570. Overhead
incurred was ₱18,130 (including rent, utilities, and insurance, as well as payments of ₱14,050 to
UPS and FedEx for the delivery services sold). Since Send It Packing is a franchise, Lakeesha
owes a monthly franchise fee of 5 percent of sales. She spent ₱2,750 on advertising during the
month. Other administrative costs (including accounting and legal services and a trip to Dallas
for training) amounted to ₱3,650 for the month. Revenues for May were ₱102,100.

1. What was the cost of materials used for packaging and mailing services during May?
2. What was the prime cost for May?
3. What was the conversion cost for May?
4. What was the total cost of services for May?
5. Prepare an income statement for May.
6. Of the overhead incurred, is any of it direct? Indirect? Explain.
EXERCISE 6. Spencer Company produced 200,000 cases of sports drinks during the past
calendar year. Each case of 1-liter bottles sells for ₱36. Spencer had 2,500 cases of sports
drinks in finished goods inventory at the beginning of the year. At the end of the year, there
were 11,500 cases of sports drinks in finished goods inventory. Spencer’s accounting records
provide the following:
Purchases of direct materials: ₱2,350,000
Direct materials inventory, January 1: ₱290,000
Direct materials inventory, December 31: ₱112,000
Direct labor: ₱1,100,000
Indirect labor: ₱334,000
Depreciation, factory building: ₱525,000
Depreciation, factory equipment: ₱416,000
Property taxes on factory: ₱65,000
Utilities, factory: ₱150,000
Insurance on factory: ₱200,000
Salary, sales supervisor: ₱85,000
Commissions, salespersons: ₱216,000
Advertising: ₱500,000
General administration: ₱390,000
Work-in-process inventory, January 1: ₱450,000
Work-in-process inventory, December 31: ₱750,000
Finished goods inventory, January 1: ₱107,500
Finished goods inventory, December 31: ₱488,750

1. Prepare a cost of goods manufactured statement.

2. Compute the cost of producing one case of sports drink last year.
3. Prepare an income statement on an absorption-costing basis.

EXERCISE 7. Allright Test Design Company creates, produces, and sells Internet-based CPA
and CMA review courses for individual use. Davis Webber, head of human resources, is
convinced that question development employees must have strong analytical and problem-
solving skills. He asked Andrea Benson, controller for Allright Test Design, to help develop
problems for use in screening applicants before they are interviewed. One of the problems
Andrea developed is based on the following data for a mythical company (Mythic, Inc.) for the
previous year:
• Conversion cost was ₱140,000 and was four times the prime cost.
• Direct materials used in production equaled ₱5,000.
• Cost of goods manufactured was ₱154,000.
• Ending work in process is 40 percent of the cost of beginning work in process.
• There are no beginning or ending inventories for direct materials.
• Cost of goods sold was 110 percent of cost of goods manufactured.
• Beginning finished goods inventory was ₱22,400.

1. Using the above information, prepare a cost of goods manufactured statement.

2. Using the above information, prepare a cost of goods sold statement.
EXERCISE 8. Classify the following costs of activity inputs as variable, fixed, or mixed.

1. Flu vaccine
2. Salaries, equipment, and materials used for moving materials in a factory
3. Forms used to file insurance claims
4. Salaries, forms, and postage associated with purchasing
5. Printing and postage for advertising circulars
6. Equipment, labor, and parts used to repair and maintain production equipment
7. Power to operate sewing machines in a clothing factory
8. Wooden cabinets enclosing audio speakers
9. Advertising
10. Sales commissions
11. Fuel for a delivery van
12. Depreciation on a warehouse
13. Depreciation on a forklift used to move partially completed goods
14. X-ray film used in the radiology department of a hospital
15. Rental car provided for a client

EXERCISE 9. Shirrell Blackthorn is the accountant for several pizza restaurants based in a tri-
city area. The president of the chain wanted some help with budgeting and cost control, so
Shirrell decided to analyze the accounts for the past year. She divided the accounts into four
different categories, depending on whether they appeared to be primarily fixed or to vary with
one of three different drivers. Food and wage costs appeared to vary with the total sales
dollars. Delivery costs varied with the number of miles driven (workers were required to use
their own cars and were reimbursed for miles driven). A group of other costs, including
purchasing, materials handling, and purchases of kitchen equipment, dishes, and pans,
appeared to vary with the number of different product types (e.g., pizza, salad, and lasagna).
Shirrell came up with the following monthly averages:
Food and wage costs: ₱175,000
Delivery costs: ₱18,000
Other costs: ₱9,520
Fixed costs: ₱255,000
Sales revenue: ₱560,000
Delivery mileage in miles: 8,000
Number of product types: 14

1. Calculate the average variable rate for the following costs: food and wages, delivery
costs, and other costs.
2. Form an equation for total cost based on the fixed costs and your results from
Requirement 1.
3. The president is considering expanding the restaurant menu and plans to add one new
offering to the menu. According to the cost equation, what is the additional monthly
cost for the new menu offering?
EXERCISE 10. Deepa Dalal opened a free-standing radiology clinic. She had anticipated that
the costs for radiological tests would be primarily fixed, but she found that costs increased with
the number of tests performed. Costs for this service over the past nine months are as follows:
Month Radiology Tests Total Cost
January 2,800 ₱133,500
February 2,600 135,060
March 3,100 175,000
April 3,500 170,600
May 3,400 176,900
June 3,700 186,600
July 3,840 174,450
August 4,100 195,510
September 3,450 185,300

1. Prepare a scattergraph based on the preceding data. Does there appear to be a linear
relationship between the cost of radiology service and the number of tests?
2. Compute the cost formula for radiology services using the high-low method.
3. Calculate the predicted cost of radiology services for October for 3,500 tests using the
formula found in #2.
4. Compute the cost formula for radiology services using the method of least squares.
5. Using the formula computed in #4, what is the predicted cost of radiology services for
October for 3,500 appointments?
6. What does the coefficient of determination tell you about the formula computed in #4?

EXERCISE 11. Friendly Bank is attempting to determine the cost behavior of its small business
lending operations. One of the major activities is the application activity. Two possible activity
drivers have been mentioned: application hours (number of hours to complete the application)
and number of applications. The bank controller has accumulated the following data:
Month Application Costs Application Hours Number of Applications
February ₱ 7,700 2,000 70
March 7,650 2,100 50
April 10,052 3,000 50
May 9,400 2,700 60
June 9,584 3,000 20
July 8,480 2,500 40
August 8,550 2,400 60
September 9,735 2,900 50
October 10,500 3,000 90

1. Estimate a regression equation with application hours as the only independent variable.
If the bank forecasts 2,600 application hours for next month, what will be the budgeted
application cost?
2. Estimate a regression equation with number of applications as the only independent
variable. If the bank forecasts 80 applications for next month, what will be the
budgeted application cost?
3. Which of the two regression equations do you think does a better job of predicting
application costs? Explain.
EXERCISE 12. Bordner Company manufactures HVAC (heating, ventilation, and air
conditioning) systems for commercial buildings. For each new design, Bordner faces a 90
percent learning rate. On average, the first unit of a new design takes 600 hours. Direct labor
is paid ₱25 per hour.

1. Set up a table with columns showing: the cumulative number of units, cumulative
average time per unit in hours, and cumulative total time in hours. Show results by row
for total production of one unit, two units, four units, eight units, and sixteen units.
(Round hour answers to two significant digits.)
2. What is the total labor cost if Bordner makes the following number of units: one, four,
six- teen? What is the average peso cost per system for the following number of
systems: one, four, or sixteen?
3. Using the logarithmic function, set up a table with columns showing: the cumulative
number of units, cumulative average time per unit in hours, cumulative total time in
hours, and the time for the last unit. Show results by row for each of units one through
eight. (Round answers to two significant digits.)

EXERCISE 13. Thames Assurance Company sells a variety of life and health insurance
products. Recently, Thames developed a long-term care policy for sale to members of
university and college alumni associations. Thames estimated that the sale and service of this
type of policy would be subject to a 90 percent cumulative average-time learning curve model.
Each unit consists of 350 policies sold. The first unit is estimated to take 1,000 hours to sell
and service.

1. Set up a table with columns for cumulative number of units, cumulative average time
per unit in hours, and the cumulative total time in hours. Complete the table for 1, 2, 4,
8, 16, and 32 units.
2. Suppose that Thames revises its assumption to an 80 percent learning curve. How will
this affect the amount of time needed to sell and service eight units?
3. How do you suppose that Thames estimates the percent learning rate?

EXERCISE 14. Snyder Company produced 90,000 units during its first year of operations and
sold 87,000 at ₱21.80 per unit. The company chose practical activity—at 90,000 units—to
compute its predetermined overhead rate. Manufacturing costs are as follows: Direct materials,
₱540,000; Direct labor, ₱99,000; Expected and actual variable overhead, ₱369,000; and
Expected and actual fixed overhead, ₱468,000.

1. Calculate (a) unit cost and (b) cost of finished goods inventory under absorption costing.
2. Calculate (a) unit cost and (b) cost of finished goods inventory under variable costing.
3. What is the peso amount that would be used to report the cost of finished goods
inventory to external parties. Why?
EXERCISE 15. Flaherty, Inc., has just completed its first year of operations. The unit costs on
a normal costing basis are as follows: Direct materials (4 lbs. @ ₱1.50), ₱6.00; Direct labor (0.5
hour @ ₱18), ₱9.00; Variable overhead (0.5 hour @ ₱6), ₱3.00; and Fixed overhead (0.5 hour
@ ₱9): ₱4.50. Variable selling and administrative costs is ₱2 per unit, while fixed selling and
administrative costs is ₱238,000.

During the year, the company had the following activity: Units produced, 24,000; Units sold,
21,300; Unit selling price, ₱36; and Direct labor hours worked, 12,000.

Actual fixed overhead was ₱12,000 less than budgeted fixed overhead. Budgeted variable
overhead was ₱5,000 less than the actual variable overhead. The company used an expected
actual activity level of 12,000 direct labor hours to compute the predetermined overhead rates.
Any overhead variances are closed to Cost of Goods Sold.

1. Compute the unit cost using (a) absorption costing and (b) variable costing.
2. Prepare an absorption-costing income statement.
3. Prepare a variable-costing income statement.
4. Reconcile the difference between the two income statements.

EXERCISE 16. During its first year of operations, Snobegon, Inc. produced 40,000 plastic
snow scoops. Snow scoops are oversized shovel-type scoops that are used to push snow away.
Unit sales were 38,200 scoops. Fixed overhead was applied at ₱0.75 per unit produced. Fixed
overhead was underapplied by ₱2,900. This fixed overhead variance was closed to Cost of
Goods Sold. There was no variable overhead variance. The results of the year’s operations are
as follows (on an absorption-costing basis):
Sales (38,200 units @ ₱20) ₱764,000
Less: Cost of goods sold 546,260
Gross margin ₱217,740
Less: Selling and administrative expenses (all fixed) 184,500
Operating income ₱ 33,240

1. What is the cost of the ending inventory under absorption costing?

2. What is the cost of the ending inventory under variable costing?
3. Prepare a variable-costing income statement. Reconcile the difference between the two
income figures.