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CHAPTER 2 AN INTRODUCTION TO COST TERMS AND PURPOSES 2-1 A cost object is anything for which a separate measurement of costs

is desired. Examples include a product, a service, a project, a customer, a brand category, an activity, and a department. 2-2 Direct costs of a cost object are related to the particular cost object and can be traced to that cost object in an economically feasible (cost-effective way. !ndirect costs of a cost object are related to the particular cost object but cannot be traced to that cost object in an economically feasible (cost-effective way. "ost assignment is a general term that encompasses the assignment of both direct costs and indirect costs to a cost object. Direct costs are traced to a cost object while indirect costs are allocated to a cost object. 2-3 #anagers believe that direct costs that are traced to a particular cost object are more accurately assigned to that cost object than are indirect allocated costs. $hen costs are allocated, managers are less certain whether the cost allocation base accurately measures the resources demanded by a cost object. #anagers prefer to use more accurate costs in their decisions. 2.4 %actors affecting the classification of a cost as direct or indirect include the materiality of the cost in &uestion, available information-gathering technology, design of operations

2.5 A variable cost changes in total in proportion to changes in the related level of total activity or volume. An example is a sales commission that is a percentage of each sales revenue dollar. A fixed cost remains unchanged in total for a given time period, despite wide changes in the related level of total activity or volume. An example is the leasing cost of a machine that is unchanged for a given time period (such as a year regardless of the number of units of product produced on the machine. 2-6 A cost driver is a variable, such as the level of activity or volume, that causally affects total costs over a given time span. A change in the cost driver results in a change in the level of total costs. %or example, the number of vehicles assembled is a driver of the costs of steering wheels on a motor-vehicle assembly line. 2-7 'he relevant range is the band of normal activity level or volume in which there is a specific relationship between the level of activity or volume and the cost in &uestion. "osts are described as variable or fixed with respect to a particular relevant range. 2-8 A unit cost is computed by dividing some amount of total costs (the numerator by the related number of units (the denominator . !n many cases, the numerator will include a fixed cost that will not change despite changes in the denominator. !t is erroneous in those cases to multiply the unit cost by activity or volume change to predict changes in total costs at different activity or volume levels.

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2-9 Manufacturing-sector companies purchase materials and Ashtonnents and convert them into various finished goods, for example automotive and textile companies. Merchandising-sector companies purchase and then sell tangible products without changing their basic form, for example retailing or distribution. Service-sector companies provide services or intangible products to their customers, for example, legal advice or audits. 2.10 #anufacturing companies have one or more of the following three types of inventory* ). Direct materials inventory. Direct materials in stoc+ and awaiting use in the manufacturing process. (. Work-in-process inventory. ,oods partially wor+ed on but not yet completed. Also called work in progress. -. Finished goods inventory. ,oods completed but not yet sold.

2.11 nventoriable costs are all costs of a product that are considered as assets in the balance sheet when they are incurred and that become cost of goods sold when the product is sold. 'hese costs are included in wor+-in-process and finished goods inventory (they are .inventoried/ to accumulate the costs of creating these assets. !eriod costs are all costs in the income statement other than cost of goods sold. 'hese costs are treated as expenses of the accounting period in which they are incurred because they are expected not to benefit future periods (because there is not sufficient evidence to conclude that such benefit exists . Expensing these costs immediately best matches expenses to revenues. 2-12 Direct material costs are the ac&uisition costs of all materials that eventually become part of the cost object (wor+ in process and then finished goods , and can be traced to the cost object in an economically feasible way. Direct manufacturing labor costs include the compensation of all manufacturing labor that can be traced to the cost object (wor+ in process and then finished goods in an economically feasible way. Manufacturing overhead costs are all manufacturing costs that are related to the cost object (wor+ in process and then finished goods , but cannot be traced to that cost object in an economically feasible way. !rime costs are all direct manufacturing costs (direct material and direct manufacturing labor . "onversion costs are all manufacturing costs other than direct material costs. 2-13 #vertime premium is the wage rate paid to wor+ers (for both direct labor and indirect labor in excess of their straight-time wage rates. dle time is a subclassification of indirect labor that represents wages paid for unproductive time caused by lac+ of orders, machine brea+downs, material shortages, poor scheduling, and the li+e. 2-14 A product cost is the sum of the costs assigned to a product for a specific purpose. 0urposes for computing a product cost include pricing and product mix decisions, contracting with government agencies, and preparing financial statements for external reporting under generally accepted accounting principles. (-(

2-15

'hree common features of cost accounting and cost management are* calculating the costs of products, services, and other cost objects obtaining information for planning and control and performance evaluation analy1ing the relevant information for ma+ing decisions ()2 min. Compu !"# $"% !" &'p'& !"# m$"u($) u'!"# u"! )o* *.
(in millions R&#u+$' 386.66 4.66 (9.66 5(.66

2-16 ).

Direct material cost Direct manuf. labor costs #anufacturing overhead costs 'otal manuf. costs %ixed costs allocated at a rate of 3)2# 326# (direct mfg. labor e&ual to 36.-6 per dir. manuf. labor dollar (6.-6 3)8: (8: 4 ;ariable costs <nits produced (millions "ost per unit ('otal manuf. costs = units produced ;ariable manuf. cost per unit (;ariable manuf. costs <nits produced

Sup'&m& 3 45.66 )8.66 94.66 )2-.66

D&+u,& 3 27.66 (8.66 74.66 )8).66

To $+ 3(68.66 26.66 )26.66 968.66

9.46 3)94.(6 )(2 3).((96 3).)428 Sup'&m&

7.46 3)2-.(6 )26 3).67-3).6()(in millions D&+u,&

(.96 345.86 )96 36.827) 36.8966 R&#u+$'

)2.66 3-5).66

To $+

(.

>ased on total manuf. cost per unit (3).((96 )26: 3).67-- )56: 36.827) ((6 "orrect total manuf. costs based on variable manuf. costs plus fixed costs e&ual ;ariable costs (3).)428 )26: 3).6()- )56: 36.89 ((6 %ixed costs 'otal costs

3)4-.86

3(6-.5-

3)99.28

32-(.65

3)77.49

3)59.62

3)96.46

32)(.85 )2.66 32(7.85

'he total manufacturing cost per unit in re&uirement ) includes 3)2 million of indirect manufacturing costs that are fixed irrespective of changes in the volume of output per month, while the remaining variable indirect manufacturing costs change with the production volume. ,iven the unit volume changes for August (6)), the use of total manufacturing cost per unit from the past month at a different unit volume level (both in aggregate and at the individual product level will overestimate total costs of 32-(.65 million in August (6)) relative to the correct total manufacturing costs of 32(7.85 million calculated using variable manufacturing cost per unit times units produced plus the fixed costs of 3)2 million.

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2-17 ()2 min. D!'&) - !"%!'&) - (!,&% $"% .$'!$/+& )o* *. ). ?east @ direct, variable %lour- direct, variable 0ac+aging materials @direct (or could be indirect if small and not traced to each unit , variable Depreciation on ovens @indirect, fixed (unless .units of output/ depreciation, which then would be variable Depreciation on mixing machines@indirect, fixed (unless .units of output/ depreciation, which then would be variable Aent on factory building @ indirect, fixed %ire !nsurance on factory building@indirect, fixed %actory utilities @ indirect, probably some variable and some fixed (e.g. electricity may be variable but heating costs may be fixed %inishing department hourly laborers @ direct, variable (or fixed if the laborers are under a union contract #ixing department manager @ indirect, fixed #aterials handlers @depends on how they are paid. !f paid hourly and not under union contract, then indirect, variable. !f salaried or under union contract then indirect, fixed "ustodian in factory @indirect, fixed Bight guard in factory @indirect, fixed #achinist (running the mixing machine @depends on how they are paid. !f paid hourly and not under union contract, then indirect, variable. !f salaried or under union contract then indirect, fixed #achine maintenance personnel @ indirect, probably fixed, if salaried, but may be variable if paid only for time wor+ed and maintenance increases with increased production #aintenance supplies @ indirect, variable "leaning supplies @ indirect, most li+ely fixed since the custodians probably do the same amount of cleaning every night (. !f the cost object is #ixing Department, then anything directly associated with the #ixing Department will be a direct cost. 'his will include* Depreciation on mixing machines #ixing Department manager #aterials handlers (of the #ixing Department #achinist (running the mixing machines #achine #aintenance personnel (of the #ixing Department #aintenance supplies (if separately identified for the #ixing Department Cf course the yeast and flour will also be a direct cost of the #ixing Department, but it is already a direct cost of each +ind of bread produced.

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2-18

()2@(6 min.

C+$**!(!)$ !o" o( )o* *- *&'.!)& *&) o'.

"ost object* Each individual focus group "ost variability* $ith respect to the number of focus groups 'here may be some debate over classifications of individual items, especially with regard to cost variability. Co* I &m A > " D E % , D
a

D o' I D ! ! ! D ! D !

0 o' 1 ; % ;a % ; % ; ;b

Eome students will note that phone call costs are variable when each call has a separate charge. !t may be a fixed cost if "onsumer %ocus has a flat monthly charge for a line, irrespective of the amount of usage. b ,asoline costs are li+ely to vary with the number of focus groups. Dowever, vehicles li+ely serve multiple purposes, and detailed records may be re&uired to examine how costs vary with changes in one of the many purposes served.

2-19

()2@(6 min.

C+$**!(!)$ !o" o( )o* *- m&')2$"%!*!"# *&) o'.

"ost object* ;ideos sold in video section of store "ost variability* $ith respect to changes in the number of videos sold 'here may be some debate over classifications of individual items, especially with regard to cost variability. Co* I &m A > " D E % , D D o' I D ! D D ! ! ! D 0 o' 1 % % ; % % ; % ;

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2-20

()2@(6 min.

C+$**!(!)$ !o" o( )o* *- m$"u($) u'!"# *&) o'.

"ost object* 'ype of car assembled ("orolla or ,eo 0rism "ost variability* $ith respect to changes in the number of cars assembled 'here may be some debate over classifications of individual items, especially with regard to cost variability.
Co* I &m A > " D E % , D D o' I D ! D D D ! D ! 0 o' 1 ; % % % ; ; ; %

2-21 ).

((6 min.

0$'!$/+& )o* *- (!,&% )o* *- o $+ )o* *.


0 6 )2 (( 50 100 150 200 240 300 327.5 350 400 450 2 )6 )2 (6 (9 -6 -(.72 -2 96 92 )2 )2 )2 )2 )2 )5.46 (( (-.46 (7.46 -).46 (( (( (( (( (( (( (( (( (( (( 510 2) -8.86 (( 540 29 -5 (-.26 600 650 86 82 9-.46 97.46 (8.26 (5

M!"u &*3mo" 2 P+$" A 453mo" 26 P+$" 7 453mo" 26 P+$" C 453mo" 26


60 50 40 30 20

s C l a t o T

Plan A Plan B Plan C

10 0 0 100 200 300 400 500 600 Number of long-distance minutes

(. !n each region, Ashton chooses the plan that has the lowest cost. %rom the graph (or from calculations F, we can see that if Ashton expects to use 6@)26 minutes of long-distance each month, she should buy 0lan A: for )26@-(7.2 minutes, 0lan >: and for over -(7.2 minutes, 0lan ". !f Ashton plans to ma+e )66 minutes of long-distance calls each month, she should choose 0lan A: for (96 minutes, choose 0lan >: for 296 minutes, choose 0lan ".
FGet x be the number of minutes when 0lan A and 0lan > have e&ual cost 36.)6x H 3)2 x H 3)2 = 36.)6 per minute H )26 minutes. Get y be the number of minutes when 0lan > and 0lan " have e&ual cost 3)2 I 36.64 (y @ (96 H 3(( 36.64 (y @ (96 H 3(( @ 3)2 H 37 37 = 47.2 y @ (96 H 36.64 y H 47.2 I (96 H -(7.2 minutes

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2-22 ).

()2@(6 min.

0$'!$/+& )o* * $"% (!,&% )o* *.

;ariable cost per ton of beach sand mined Eubcontractor 3 46 per ton ,overnment tax 26 per ton 'otal 3)-6 per ton %ixed costs per month 6 to )66 tons of capacity per day )6) to (66 tons of capacity per day (6) to -66 tons of capacity per day H H H 3)26,666 3-66,666 3926,666

(.
'ota l ;a riable " osts "osts 3-66,666 'ota l %ixed 3)26,666 (,266 2,666 'ons #ine d 3572,666 3926,666

3826,666

3-(2,666

7,266

)66

(66

-66

'ons of "ap acity p er Day

'he concept of relevant range is potentially relevant for both graphs. Dowever, the &uestion does not place restrictions on the unit variable costs. 'he relevant range for the total fixed costs is from 6 to )66 tons: )6) to (66 tons: (6) to -66 tons, and so on. $ithin these ranges, the total fixed costs do not change in total. -.
To"* M!"&% p&' D$8 416 (a )46 (b ((6 To"* M!"&% p&' Mo" 2 426 9 416 : 25 9,266 2,266 1!,&% U"! 0$'!$/+& U"! Co* p&' To" Co* p&' To" 436 9 1C ; 426 446 3-66,666 = 9,266 H 388.87 3)-6 3926,666 = 2,266 H 34).4( 3)-6 To $+ U"! Co* p&' To" 456 9 436 < 446 3)58.87 3()).4(

'he unit cost for ((6 tons mined per day is 3()).4(, while for )46 tons it is only 3)58.87. 'his difference is caused by the fixed cost increment from )6) to (66 tons being spread over an increment of 46 tons, while the fixed cost increment from (6) to -66 tons is spread over an increment of only (6 tons.

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2-23 ((6 min. 0$'!$/+& )o* *- (!,&% )o* *- '&+&.$" '$"#&. ). 'he production capacity is 9,)66 jaw brea+ers per month. 'herefore, the current annual relevant range of output is 6 to 9,)66 jaw brea+ers J )( months H 6 to 95,(66 jaw brea+ers. (. "urrent annual fixed manufacturing costs within the relevant range are 3),(66 J )( H 3)9,966 for rent and other overhead costs, plus 35,666 = )6 H 3566 for depreciation, totaling 3)2,-66. 'he variable costs, the materials, are -6 cents per jaw brea+er, or 3)-,846 (36.-6 per jaw brea+er J -,466 jaw brea+ers per month J )( months for the year. -. !f demand changes from -,466 to 7,866 jaw brea+ers per month, or from -,466 J )( H 92,866 to 7,866 J )( H 5),(66 jaw brea+ers per year, Eweetum will need a second machine. Assuming Eweetum buys a second machine identical to the first machine, it will increase capacity from 9,)66 jaw brea+ers per month to 4,(66. 'he annual relevant range will be between 9,)66 J )( H 95,(66 and 4,(66 J )( H 54,966 jaw brea+ers. Assume the second machine costs 35,666 and is depreciated using straight-line depreciation over )6 years and 1ero residual value, just li+e the first machine. 'his will add 3566 of depreciation per year. %ixed costs for next year will increase to 3)8,(66 from 3)2,-66 for the current year I 3566 (because rent and other fixed overhead costs will remain the same at 3)9,966 . 'hat is, total fixed costs for next year e&ual 3566 (depreciation on first machine I 3566 (depreciation on second machine I 3)9,966 (rent and other fixed overhead costs . 'he variable cost per jaw brea+er next year will be 56K J 36.-6 H 36.(7. 'otal variable costs e&ual 36.(7 per jaw brea+er J 5),(66 jaw brea+ers H 3(9,8(9. !f Eweetum decides to not increase capacity and meet only that amount of demand for which it has available capacity (9,)66 jaw brea+ers per month or 9,)66 J )( H 95,(66 jaw brea+ers per year , the variable cost per unit will be the same at 36.-6 per jaw brea+er. Annual total variable manufacturing costs will increase to 36.-6 J 9,)66 jaw brea+ers per month J )( months H 3)9,786. Annual total fixed manufacturing costs will remain the same, 3)2,-66.

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(.(9 ((6 min. Co* %'!.&'* $"% .$+u& )2$!". ). !dentify customer needs (what do smartphone users wantL M Design of products and processes 0erform mar+et research on competing brands M Design of products and processes Design a prototype of the D"0 smartphone M Design of products and processes #ar+et the new design to cell phone companies M #ar+eting #anufacture the D"0 smartphone M 0roduction 0rocess orders from cell phone companies M Distribution 0ac+age the D"0 smartphones M 0roduction Deliver the D"0 smartphones to the cell phone companies M Distribution 0rovide online assistance to cell phone users for use of the D"0 smartphone M "ustomer Eervice #a+e design changes to the D"0 smartphone based on customer feedbac+ M Design of products and processes (. 0$+u& C2$!" C$ &#o'8 A) !.! 8 Co* %'!.&' D&*!#" o( !dentify customer needs Bumber of surveys returned and processed p'o%u) * $"% from competing smartphone users p'o)&**&* 0erform mar+et research on Dours spent researching competing mar+et competing brands brands Bumber of surveys returned and processed from competing smartphone users Design a prototype of the D"0 Engineering hours spent on initial product smartphone design #a+e design changes to the Bumber of design changes smartphone based on customer feedbac+ P'o%u) !o" #anufacture the D"0 smartphones 0ac+age the D"0 smartphones #ar+et the new design to cell phone companies 0rocess orders from cell phone companies Deliver the D"0 smartphones to cell phone companies Cu* om&' S&'.!)& 0rovide on-line assistance to cell phone users for use of the D"0 smartphone #achine hours re&uired to run the production e&uipment Bumber of smartphones shipped by D"0 Bumber of cell phone companies purchasing the D"0 smartphone Bumber of smartphone orders processed Bumber of deliveries made to cell phone companies Bumber of deliveries made to cell phone companies Bumber of smartphones shipped by D"0 "ustomer Eervice hours

M$'=& !"# D!* '!/u !o"

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2-25 ).

()6@)2 min.

Co* %'!.&'* $"% (u") !o"*.

). (. -. 9. 2. 8. 7. (. ). (. -. 9. 2. 8. 7.

1u") !o" Accounting Duman Aesources Data processing Aesearch and development 0urchasing Distribution >illing

R&p'&*&" $ !.& Co* D'!.&' Bumber of transactions processed Bumber of employees Dours of computer processing unit ("0< Bumber of research scientists Bumber of purchase orders Bumber of deliveries made Bumber of invoices sent

1u") !o" Accounting Duman Aesources Data 0rocessing Aesearch and Development 0urchasing Distribution >illing

R&p'&*&" $ !.& Co* D'!.&' Bumber of journal entries made Ealaries and wages of employees Bumber of computer transactions Bumber of new products being developed Bumber of different types of materials purchased Distance traveled to ma+e deliveries Bumber of credit sales transactions

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2-26 ).

((6 min.

To $+ )o* * $"% u"! )o* *

Num/&' o( $ &"%&&* 0 ;ariable cost per person (35 caterer charge @ 32 student door fee 39 %ixed "osts 3),866 ;ariable costs (number of attendees J variable cost per person 6 'otal costs (fixed I variable 3),866

100 39 3),866 966 3(,666

200 39 3),866 466 3(,966

300 39 3),866 ),(66 3(,466

400 39 3),866 ),866 3-,(66

500 39 3),866 (,666 3-,866

600 39 3),866 (,966 39,666

Fixed, Variable and Total Cost of Graduation Party


5000 4000

Costs ($)

3000 2000 1000 0 0 100 200 300 400 500 600

Fixed co sts Variable co sts To tal co st

Number of attendees

(.
Num/&' o( $ &"%&&* 'otal costs (fixed I variable "osts per attendee (total costs number of attendees 0 3),866 100 3(,666 3(6.66 200 3(,966 3)(.66 300 3(,466 35.-400 3-,(66 3 4.66 500 3-,866 3 7.(6 600 39,666 3 8.87

As shown in the table above, for )66 attendees the total cost will be 3(,666 and the cost per attendee will be 3(6. -. As shown in the table in re&uirement (, for 266 attendees the total cost will be 3-,866 and the cost per attendee will be 37.(6.

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9. <sing the calculations shown in the table in re&uirement (, we can construct the cost-perattendee graph shown below*
25 Cost !er ttendee ($) 20 15 10 5 0 0 100 200 300 Num ber of 400 ttendees 500 600 700

As president of the student association re&uesting a grant for the party, you should not use the per unit calculations to ma+e your case. 'he person ma+ing the grant may assume an attendance of 266 students and use a low number li+e 37.(6 per attendee to calculate the si1e of your grant. !nstead, you should emphasi1e the fixed cost of 3),866 that you will incur even if no students or very few students attend the party, and try to get a grant to cover as much of the fixed costs as possible as well as a variable portion to cover as much of the 39 variable cost to the student association for each person attending the party. 2-27 ((2 min. To $+ $"% u"! )o* - %&)!*!o" m$=!"#. ).
$70,000 $60,000 $50,000 $40,000 $30,000 $20,000
Total Man !a"t rin# Costs Variable Costs Fixed Costs

s C g i r c f u n " l a t o T

$10,000 $0 0 5,000 Num ber of Flanges 10,000

Bote that the production costs include the 3(4,666 of fixed manufacturing costs but not the 3)6,666 of period costs. 'he variable cost is 3) per flange for materials, and 3(.46 per flange (3(4 per hour divided by )6 flanges per hour for direct manufacturing labor for a total of 3-.46 per flange.

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(. 'he inventoriable (manufacturing cost per unit for 2,666 flanges is 3-.46 J 2,666 I 3(4,666 H 397,666 Average (unit cost H 397,666 = 2,666 units H 35.96 per unit. 'his is below %loraNs selling price of 3)6 per flange. Dowever, in order to ma+e a profit, ,ayleNs ,lasswor+s also needs to cover the period (non-manufacturing costs of 3)6,666, or 3)6,666 = 2,666 H 3( per unit. 'hus total costs, both inventoriable (manufacturing and period (non-manufacturing , for the flanges is 35.96 I 3( H 3)).96. ,ayleNs ,lasswor+s cannot sell below %loraNs price of 3)6 and still ma+e a profit on the flanges. Alternatively, At %loraNs price of 3)6 per flange* Aevenue 3)6 J 2,666 ;ariable costs 3-.46 J 2,666 %ixed costs Cperating loss

H H

326,666 )5,666 -4,666 3 (7,666

,ayleNs ,lasswor+s cannot sell below 3)6 per flange and ma+e a profit. At %loraNs price of 3)6 per flange, the company has an operating loss of 37,666. -. !f ,ayleNs ,lasswor+s produces )6,666 units, then total inventoriable cost will be* ;ariable cost (3-.46 J )6,666 I fixed manufacturing costs, 3(4,666 H total manufacturing costs, 388,666. Average (unit inventoriable (manufacturing cost will be 388,666 = )6,666 units H 38.86 per flange <nit total cost including both inventoriable and period costs will be (388,666 I3)6,666 = )6,666 H 37.86 per flange, and ,ayleNs ,lasswor+s will be able to sell the flanges for less than %lora and still ma+e a profit. Alternatively, At %loraNs price of 3)6 per flange* Aevenue 3)6 J )6,666 ;ariable costs 3-.46 J )6,666 %ixed costs Cperating income

H H

3)66,666 -4,666 -4,666 3 (9,666

,ayleNs ,lasswor+s can sell at a price below 3)6 per flange and still ma+e a profit. 'he company earns operating income of 3(9,666 at a price of 3)6 per flange. 'he company will earn operating income as long as the price exceeds 37.86 per flange. 'he reason the unit cost decreases significantly is that inventoriable (manufacturing fixed costs and fixed period (nonmanufacturing costs remain the same regardless of the number of units produced. Eo, as ,ayleNs ,lasswor+s produces more units, fixed costs are spread over more units, and cost per unit decreases. 'his means that if you use unit costs to ma+e decisions about pricing, and which product to produce, you must be aware that the unit cost only applies to a particular level of output.

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2-28

((6@-6 min.

I".&" o'!$/+& )o* * .&'*u* p&'!o% )o* *.

). Manufacturing-sector companies purchase materials and components and convert them into different finished goods. Merchandising-sector companies purchase and then sell tangible products without changing their basic form. Service-sector companies provide services or intangible products to their customersMfor example, legal advice or audits. Cnly manufacturing and merchandising companies have inventories of goods for sale. (. nventoriable costs are all costs of a product that are regarded as an asset when they are incurred and then become cost of goods sold when the product is sold. 'hese costs for a manufacturing company are included in wor+-in-process and finished goods inventory (they are .inventoried/ to build up the costs of creating these assets. !eriod costs are all costs in the income statement other than cost of goods sold. 'hese costs are treated as expenses of the period in which they are incurred because they are presumed not to benefit future periods (or because there is not sufficient evidence to conclude that such benefit exists . Expensing these costs immediately best matches expenses to revenues. -. (a 0errier mineral water purchased for resale by EafewayMinventoriable cost of a merchandising company. !t becomes part of cost of goods sold when the mineral water is sold. (b Electricity used for lighting at ,E refrigerator assembly plantMinventoriable cost of a manufacturing company. !t is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good. (c Depreciation on ,oogleNs computer e&uipment used to update directories of web sites Mperiod cost of a service company. ,oogle has no inventory of goods for sale and, hence, no inventoriable cost. (d Electricity used to provide lighting for EafewayNs store aislesMperiod cost of a merchandising company. !t is a cost that benefits the current period and it is not traceable to goods purchased for resale. (e Depreciation on ,ENs assembly testing e&uipmentMinventoriable cost of a manufacturing company. !t is part of the manufacturing overhead that is included in the manufacturing cost of a refrigerator finished good. (f Ealaries of EafewayNs mar+eting personnelMperiod cost of a merchandising company. !t is a cost that is not traceable to goods purchased for resale. !t is presumed not to benefit future periods (or at least not to have sufficiently reliable evidence to estimate such future benefits . (g 0errier mineral water consumed by ,oogleNs software engineersMperiod cost of a service company. ,oogle has no inventory of goods for sale and, hence, no inventoriable cost. (h Ealaries of ,oogleNs mar+eting personnelMperiod cost of a service company. ,oogle has no inventory of goods for sale and, hence, no inventoriable cost.

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2-29 )a.

((6 min.

Compu !"# )o* o( #oo%* pu')2$*&% $"% )o* o( #oo%* *o+%. M$'.!" D&p$' m&" S o'& S)2&%u+& o( Co* o( >oo%* Pu')2$*&% 1o' 2& ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6 3)22,666 7,666 )8(,666 39,666 8,666 )6,666 3)2(,666

0urchases Add transportation-in Deduct* 0urchase returns and allowances 0urchase discounts "ost of goods purchased )b.

M$'.!" D&p$' m&" S o'& S)2&%u+& o( Co* o( >oo%* So+% 1o' 2& ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6 3 (7,666 )2(,666 )75,666 -9,666 3)92,666

>eginning merchandise inventory )O)O(6)) "ost of goods purchased (see above "ost of goods available for sale Ending merchandise inventory )(O-)O(6)) "ost of goods sold (.

M$'.!" D&p$' m&" S o'& I")om& S $ &m&" ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6 3(46,666 )92,666 )-2,666 3-7,666 )7,666 9-,666 9,666 )6),666 3 -9,666

Aevenues "ost of goods sold (see above ,ross margin Cperating costs #ar+eting, distribution, and customer service costs <tilities ,eneral and administrative costs #iscellaneous costs 'otal operating costs Cperating income

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2-30 )a.

((6 min.

Co* o( #oo%* pu')2$*&%- )o* o( #oo%* *o+%- $"% !")om& * $ &m&" . Mo" #om&'8 R& $!+ Ou +& S o'&* S)2&%u+& o( Co* o( >oo%* Pu')2$*&% 1o' 2& ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6 3(86,666 )6,666 (76,666 3)),666 5,666 (6,666 3(26,666

0urchases Add freightMin Deduct* 0urchase returns and allowances 0urchase discounts "ost of goods purchased )b.

Mo" #om&'8 R& $!+ Ou +& S o'&* S)2&%u+& o( Co* o( >oo%* So+% 1o' 2& ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6 3 92,666 (26,666 (52,666 2(,666 3(9-,666

>eginning merchandise inventory )O)O(6)) "ost of goods purchased (see above "ost of goods available for sale Ending merchandise inventory )(O-)O(6)) "ost of goods sold (.

Mo" #om&'8 R& $!+ Ou +& S o'&* I")om& S $ &m&" ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6 3-(6,666 (9-,666 77,666 3(9,666 9,(66 (,666 -(,666 8(,(66 3 )9,466

Aevenues "ost of goods sold (see above ,ross margin Cperating costs #ar+eting and advertising costs >uilding depreciation Ehipping of merchandise to customers ,eneral and administrative costs 'otal operating costs Cperating income

(-)8

2-31

((6 min.

1+o@ o( I".&" o'!$/+& Co* *.

(All numbers below are in millions . ). Direct materials inventory )6O)O(6)) Direct materials purchased Direct materials available for production Direct materials used Direct materials inventory )6O-)O(6)) (. 'otal manufacturing overhead costs Eubtract* ;ariable manufacturing overhead costs %ixed manufacturing overhead costs for Cctober (6)) -. 'otal manufacturing costs Eubtract* Direct materials used (from re&uirement ) 'otal manufacturing overhead costs Direct manufacturing labor costs for Cctober (6)) 9. $or+-in-process inventory )6O)O(6)) 'otal manufacturing costs $or+-in-process available for production Eubtract* "ost of goods manufactured (moved into %, $or+-in-process inventory )6O-)O(6)) 2. %inished goods inventory )6O)O(6)) "ost of goods manufactured (moved from $!0 "ost of finished goods available for sale in Cctober (6)) 8. %inished goods available for sale in Cctober (6)) (from re&uirement 2 Eubtract* "ost of goods sold %inished goods inventory )6O-)O(6)) 3 )62 -82 976 (-42 42 926 ((82 )42

3 3 3

3 ),8)6 (-42 (926 3 772 3 (-6 ),8)6 ),496 (),886 3 )46 3 )-6 ),886 3 ),756

3 ),756 (),776 3 (6

(-)7

2-32
).

(-6@96 min.

Co* o( #oo%* m$"u($) u'&%.


C$"*&)o Comp$"8 S)2&%u+& o( Co* o( >oo%* M$"u($) u'&% ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6

Direct materials cost >eginning inventory, Panuary ), (6)) 3 ((,666 0urchases of direct materials 72,666 "ost of direct materials available for use 57,666 Ending inventory, December -), (6)) (8,666 Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs !ndirect manufacturing labor )2,666 0lant insurance 5,666 DepreciationMplant building Q e&uipment )),666 Aepairs and maintenanceMplant 9,666 'otal indirect manufacturing costs #anufacturing costs incurred during (6)) Add beginning wor+-in-process inventory, Panuary ), (6)) 'otal manufacturing costs to account for Deduct ending wor+-in-process inventory, December -), (6)) "ost of goods manufactured (to !ncome Etatement (. C$"*&)o Comp$"8 I")om& S $ &m&" ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6

3 7),666 (2,666

-5,666 )-2,666 (),666 )28,666 (6,666 3)-8,666

Aevenues "ost of goods sold* >eginning finished goods, Panuary ), (6)) "ost of goods manufactured "ost of goods available for sale Ending finished goods, December -), (6)) "ost of goods sold ,ross margin Cperating costs* #ar+eting, distribution, and customer-service costs ,eneral and administrative costs 'otal operating costs Cperating income

3-66,666 3 )4,666 )-8,666 )29,666 (-,666 )-),666 )85,666 5-,666 (5,666 )((,666 3 97,666

(-)4

2-33

(-6@96 min.

Co* o( #oo%* m$"u($) u'&%- !")om& * $ &m&" - m$"u($) u'!"# )omp$"8.


P!&%mo" Co'po'$ !o" S)2&%u+& o( Co* o( >oo%* M$"u($) u'&% ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6

Direct materials costs >eginning inventory, Panuary ), (6)) 3 82,666 0urchases of direct materials )(4,666 "ost of direct materials available for use )5-,666 Ending inventory, December -), (6)) -9,666 Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs !ndirect manufacturing labor 94,666 !ndirect materials )9,666 0lant insurance (,666 DepreciationMplant building Q e&uipment (),666 0lant utilities )(,666 Aepairs and maintenanceMplant 4,666 E&uipment lease costs -(,666 'otal indirect manufacturing costs #anufacturing costs incurred during (6)) Add beginning wor+-in-process inventory, Panuary ), (6)) 'otal manufacturing costs to account for Deduct ending wor+-in-process inventory, December -), (6)) "ost of goods manufactured (to !ncome Etatement P!&%mo" Co'po'$ !o" I")om& S $ &m&" ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6 Aevenues "ost of goods sold* >eginning finished goods, Panuary ), (6)) "ost of goods manufactured "ost of goods available for sale Ending finished goods, December -), (6)) "ost of goods sold ,ross margin Cperating costs* #ar+eting, distribution, and customer-service costs ,eneral and administrative costs 'otal operating costs Cperating income

3)25,666 )68,666

)-7,666 96(,666 4-,666 942,666 7(,666 39)-,666

3866,666 3)(-,666 9)-,666 2-8,666 )6(,666 9-9,666 )88,666 8(,666 -9,666 58,666 3 76,666

(-)5

2-34

((2@-6 min.

I")om& * $ &m&" $"% *)2&%u+& o( )o* o( #oo%* m$"u($) u'&%.

Ho@&++ Co'po'$ !o" I")om& S $ &m&" (o' 2& ?&$' E"%&% D&)&m/&' 31- 2011 4!" m!++!o"*6 Aevenues "ost of goods sold >eginning finished goods, Pan. ), (6)) "ost of goods manufactured (below "ost of goods available for sale Ending finished goods, Dec. -), (6)) ,ross margin #ar+eting, distribution, and customer-service costs Cperating income 3526 3 76 892 7)2 22

886 (56 (96 3 26

Ho@&++ Co'po'$ !o" S)2&%u+& o( Co* o( >oo%* M$"u($) u'&% (o' 2& ?&$' E"%&% D&)&m/&' 31- 2011 4!" m!++!o"*6 Direct materials costs >eginning inventory, Pan. ), (6)) 0urchases of direct materials "ost of direct materials available for use Ending inventory, Dec. -), (6)) Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs !ndirect manufacturing labor 0lant supplies used 0lant utilities Depreciation@@plant and e&uipment 0lant supervisory salaries #iscellaneous plant overhead #anufacturing costs incurred during (6)) Add beginning wor+-in-process inventory, Pan. ), (6)) 'otal manufacturing costs to account for Deduct ending wor+-in-process, Dec. -), (6)) "ost of goods manufactured 3 )2 -(2 -96 (6 3-(6 )66 86 )6 -6 46 2 -2

((6 896 )6 826 2 3892

(-(6

2-35

()2@(6 min.

I" &'p'& $ !o" o( * $ &m&" * 4)o" !"u$ !o" o( 2-326.

). 'he schedule in (--9 can become a Echedule of "ost of ,oods #anufactured and Eold simply by including the beginning and ending finished goods inventory figures in the supporting schedule, rather than directly in the body of the income statement. Bote that the term cost of goods manufactured refers to the cost of goods brought to completion (finished during the accounting period, whether they were started before or during the current accounting period. Eome of the manufacturing costs incurred are held bac+ as costs of the ending wor+ in process: similarly, the costs of the beginning wor+ in process inventory become a part of the cost of goods manufactured for (6)). (. 'he sales managerNs salary would be charged as a mar+eting cost as incurred by both manufacturing and merchandising companies. !t is basically an operating cost that appears below the gross margin line on an income statement. !n contrast, an assemblerNs wages would be assigned to the products wor+ed on. 'hus, the wages cost would be charged to $or+-in-0rocess and would not be expensed until the product is transferred through %inished ,oods !nventory to "ost of ,oods Eold as the product is sold. -. 'he direct-indirect distinction can be resolved only with respect to a particular cost object. %or example, in defense contracting, the cost object may be defined as a contract. 'hen, a plant supervisor wor+ing only on that contract will have his or her salary charged directly and wholly to that single contract. 9. Direct materials used H 3-(6,666,666 = ),666,666 units H 3-(6 per unit Depreciation on plant e&uipment H 346,666,666 = ),666,666 units H 346 per unit

2. Direct materials unit cost would be unchanged at 3-(6 per unit. Depreciation cost per unit would be 346,666,666 = ),(66,666 H 388.87 per unit. 'otal direct materials costs would rise by (6K to 3-49,666,666 (3-(6 per unit J ),(66,666 units , whereas total depreciation would be unaffected at 346,666,666. 8. <nit costs are averages, and they must be interpreted with caution. 'he 3-(6 direct materials unit cost is valid for predicting total costs because direct materials is a variable cost: total direct materials costs indeed change as output levels change. Dowever, fixed costs li+e depreciation must be interpreted &uite differently from variable costs. A common error in cost analysis is to regard all unit costs as oneMas if all the total costs to which they are related are variable costs. "hanges in output levels (the denominator will affect total variable costs, but not total fixed costs. ,raphs of the two costs may clarify this point: it is safer to thin+ in terms of total costs rather than in terms of unit costs.

(-()

2-36

((2@-6 min.

I")om& * $ &m&" $"% *)2&%u+& o( )o* o( #oo%* m$"u($) u'&%. C$+&"%$' Co'po'$ !o" I")om& S $ &m&" (o' 2& ?&$' E"%&% D&)&m/&' 31- 2011 4!" m!++!o"*6

Aevenues "ost of goods sold >eginning finished goods, Pan. ), (6)) "ost of goods manufactured (below "ost of goods available for sale Ending finished goods, Dec. -), (6)) ,ross margin #ar+eting, distribution, and customer-service costs Cperating income (loss

3-22 3 97 ((4 (72 ))

(89 5) 59 3 (-

C$+&"%$' Co'po'$ !o" S)2&%u+& o( Co* o( >oo%* M$"u($) u'&% (o' 2& ?&$' E"%&% D&)&m/&' 31- 2011 4!" m!++!o"*6 Direct material costs >eginning inventory, Pan. ), (6)) Direct materials purchased "ost of direct materials available for use Ending inventory, Dec. -), (6)) Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs 0lant supplies used 0roperty taxes on plant 0lant utilities !ndirect manufacturing labor costs Depreciation@@plant and e&uipment #iscellaneous manufacturing overhead costs #anufacturing costs incurred during (6)) Add beginning wor+-in-process inventory, Pan. ), (6)) 'otal manufacturing costs to account for Deduct ending wor+-in-process inventory, Dec. -), (6)) "ost of goods manufactured (to income statement 3 -( 49 ))8 4 3)64 9( 9 ( 5 (7 8 )2

8())4 (-) 3((4

(-((

2-37 ).

()2@(6 min. T&'m!"o+o#8- !" &'p'& $ !o" o( * $ &m&" * 4)o" !"u$ !o" o( 2-346. Direct materials used Direct manufacturing labor costs 0rime costs Direct manufacturing labor costs !ndirect manufacturing costs "onversion costs 3)64 million 9( million 3)26 million 3 9( million 8- million 3)62 million 3 5 (7 8 )2 )64 9( 9 ( 3()3 59

(.

!nventoriable costs (in millions for ?ear (6)) 0lant utilities !ndirect manufacturing labor DepreciationMplant and e&uipment #iscellaneous manufacturing overhead Direct materials used Direct manufacturing labor 0lant supplies used 0roperty tax on plant 'otal inventoriable costs 0eriod costs (in millions for ?ear (6)) #ar+eting, distribution, and customer-service costs

-. Design costs and AQD costs may be regarded as product costs in case of contracting with a governmental agency. %or example, if the Air %orce negotiated to contract with Goc+heed to build a new type of supersonic fighter plane, design costs and AQD costs may be included in the contract as product costs. 9. Direct materials used H 3)64,666,666 = (,666,666 units H 329 per unit Depreciation on plant and e&uipment H 38,666,666 = (,666,666 units H 3- per unit

2. Direct materials unit cost would be unchanged at 3)64. Depreciation unit cost would be 38,666,666 = -,666,666 H 3( per unit. 'otal direct materials costs would rise by 26K to 3)8(,666,666 (329 per unit J -,666,666 units . 'otal depreciation cost of 38,666,666 would remain unchanged. 8. !n this case, e&uipment depreciation is a variable cost in relation to the unit output. 'he amount of e&uipment depreciation will change in direct proportion to the number of units produced. (a Depreciation will be 3( million (( million J 3) when ( million units are produced. (b Depreciation will be 3- million (- million J 3) when - million units are produced.

(-(-

2-38 ).(a

((6 min. A$/o' )o* - o.&' !m& $"% !%+& !m&. 'otal cost of hours wor+ed at regular rates 99 hours J 3(6 per hour 9- hours J 3(6 per hour 94 hours J 3(6 per hour 98 hours J 3(6 per hour #inus idle time (-.2 hours J 3(6 per hour (8.9 hours J 3(6 per hour (2.4 hours J 3(6 per hour (( hours J 3(6 per hour 'otal idle time Direct manufacturing labor costs 3 446 486 586 5(6 -,8(6 76 )(4 ))8 96 -29 3-,(88 3 -29 3 96 -6 )86 86 -(6 3 8)6

(b !dle time H )7.7 hours J 3(6 per hour H (c Cvertime and holiday premium. $ee+ )* Cvertime (99 @ 96 hours J 0remium, 3)6 per hour $ee+ (* Cvertime (9- @ 96 hours J 0remium, 3)6 per hour $ee+ -* Cvertime (94 @ 96 hours J 0remium, 3(6 per hour $ee+ 9* Cvertime (98 @ 96 hours J 0remium, 3)6 per hour $ee+ 9* Doliday 4 hours J ( days J 0remium, 3(6 per hour 'otal overtime and holiday premium (d 'otal earnings in December Direct manufacturing labor costs !dle time Cvertime and holiday premium 'otal earnings

3-,(88 -29 8)6 39,(-6

(. !dle time caused by regular machine maintenance, slow order periods, or unexpected mechanical problems is an indirect cost of the product because it is not related to a specific product. Cvertime premium caused by the heavy overall volume of wor+ is also an indirect cost because it is not related to a particular job that happened to be wor+ed on during the overtime hours. !f, however, the overtime is the result of a demanding .rush job,/ the overtime premium is a direct cost of that job.

(-(9

2-39 ). (. -.

(-6@96 min.

M!**!"# '&)o'%*- )ompu !"# !".&" o'8 )o* *.

%inished goods inventory, -O-)O(6)) H 3()6,666 $or+-in-process inventory, -O-)O(6)) H 3)56,666 Direct materials inventory, -O-)O(6)) H 342,666

'his problem is not as easy as it first appears. 'hese answers are obtained by wor+ing from the +nown figures to the un+nowns in the schedule below. 'he basic relationships between categories of costs are* #anufacturing costs added during the period (given 3496,666 "onversion costs (given 3886,666 Direct materials used H #anufacturing costs added @ "onversion costs H 3496,666 @ 3886,666 H 3)46,666 "ost of goods manufactured H Direct #aterials <sed J 9 H 3)46,666 J 9 H 37(6,666 S)2&%u+& o( Compu $ !o"* Direct materials, -O)O(6)) (given 3 (2,666 Direct materials purchased (given (96,666 Direct materials available for use (82,666 Direct materials, -O-)O(6)) -H 42,666 Direct materials used )46,666 "onversion costs (given 886,666 #anufacturing costs added during the period (given 496,666 Add wor+ in process, -O)O(6)) (given 76,666 #anufacturing costs to account for 5)6,666 Deduct wor+ in process, -O-)O(6)) (H )56,666 "ost of goods manufactured (9 J 3)46,666 7(6,666 Add finished goods, -O)O(6)) -(6,666 "ost of goods available for sale ),696,666 Deduct finished goods, -O-)O(6)) )H ()6,666 "ost of goods sold (46K J 3),6-7,266 34-6,666 Eome instructors may wish to place the +ey amounts in a $or+ in 0rocess '-account. 'his problem can be used to introduce students to the flow of costs through the general ledger (amounts in thousands *
Direct #aterials (2 (96 42 $or+ in 0rocess >! 76 D# used "C,# 7(6 (496@886 )46 "onversion 886 'o account for 5)6 E! )56 %inished ,oods -(6 7(6 "C,E 4-6 "ost of ,oods Eold 4-6

>!

Available for sale E!

),696 ()6

(-(2

2-40

(-6 min.

Comp'&2&"*!.& p'o/+&m o" u"! )o* *- p'o%u) )o* *.

). !f ( pounds of direct materials are used to ma+e each unit of finished product, )(-,666 units J ( lbs., or (98,666 lbs. were used at 36.86 per pound of direct materials (3)97,866 = (98,666 lbs. . ('he direct material costs of 3)97,866 are direct materials used, not purchased. 'herefore, the ending inventory of direct materials is (,966 lbs. 36.86 H 3),996. (. Direct materials costs Direct manufacturing labor costs 0lant energy costs !ndirect manufacturing labor costs Cther indirect manufacturing costs "ost of goods manufactured Average unit manufacturing cost* %inished goods inventory in units* M$"u($) u'!"# Co* * (o' 123-000 u"! * 0$'!$/+& 1!,&% To $+ 3)97,866 3 @ 3)97,866 -4,966 @ -4,966 (,666 @ (,666 )9,666 )5,666 --,666 )),666 )9,666 (2,666 3()-,666 3--,666 3(98,666 3(98,666 = )(-,666 units H 3(.66 per unit 3(8,666 (given H 3(.66 per unit H )-,666 units

-.

<nits sold in (6)) H H Eelling price in (6)) H H

>eginning inventory I 0roduction @ Ending inventory 6 I )(-,666 @)-,666 H ))6,666 units 3259,666 = ))6,666 32.96 per unit

9. D&".&' O((!)& EBu!pm&" I")om& S $ &m&" ?&$' E"%&% D&)&m/&' 31- 2011 4!" 2ou*$"%*6 Aevenues ())6,666 units sold J 32.96 "ost of units sold* >eginning finished goods, Pan. ), (6)) "ost of goods manufactured "ost of goods available for sale Ending finished goods, Dec. -), (6)) ,ross margin Cperating costs* #ar+eting, distribution, and customer-service costs Administrative costs Cperating income 3259,666 3 6 (98,666 (98,666 (8,666 )78,666 28,666

((6,666 -79,666 (-(,666 3)9(,666

(-(8

Bote* Although not re&uired, the full set of unit variable costs is*
Direct materials cost Direct manufacturing labor cost 0lant energy cost !ndirect manufacturing labor cost Cther indirect manufacturing cost #ar+eting, distribution, and customer-service costs 3).(66 6.-)( 6.6)8 6.))9 6.645 3).69) per unit sold H 3).7-) per manufactured unit

(-(7

2-41 ).

((6-(2 min. C+$**!(!)$ !o" o( )o* *C & 2!)*. $arehousing costs per unit H $arehousing costs <nits produced 3-, (26, 666 = 3)8.(2 per unit. H (66, 666 units

!f the 3-,(26,666 is treated as period costs, the entire amount would be expensed during the year as incurred. !f it is treated as a product cost, it would be .uniti1ed/ at 3)8.(2 per unit and expensed as each unit of the product is sold. 'herefore, if only )46,666 of the (66,666 units are sold, only 3(,5(2,666 (3)8.(2 per unit J )46,666 units of the 3-,(26,666 would be expensed in the current period. 'he remaining 3-,(26,666 @ 3(,5(2,666 H 3-(2,666 would be inventoried on the balance sheet until a later period when the units are sold. 'he value of finished goods inventory can also be calculated directly to be 3-(2,666 (3)8.(2 per unit J (6,666 units . (. Bo. $ith respect to classifying costs as product or period costs, this determination is made by ,enerally Accepted Accounting 0rinciples (,AA0 . !t is not something that can be justified by the plant manager or plant controller. Even though these costs are in fact related to the product, they are not direct costs of manufacturing the product. ,AA0 re&uires that research and development, as well as all costs related to warehousing and distribution of goods be classified as period costs, and be expensed in the period they are incurred. -. Ecott Dewitt would improve his personal bonus and ta+e-home pay by )6K J 3-(2,666 H 3-(,266

9. 'he controller should not reclassify costs as product costs just so the plant can reap shortterm benefits, including the increase in DewittNs personal year-end bonus. Aesearch and development costs, costs related to the shipping of finished goods and costs related to warehousing finished goods are all period costs under generally accepted accounting principles, and must be treated as such. "hanging this classification on Cld $orldNs financial statements would violate generally accepted accounting principles and would li+ely be considered fraudulent. 'he idea of costs being classified as product costs versus period costs is to properly reflect on the income statement those costs that are directly related to manufacturing (costs incurred to transform one asset, direct materials into another asset, finished goods and to properly reflect on the balance sheet those costs that will provide a future benefit (inventory . 'he controller should not be intimidated by Dewitt. Dewitt stands to personally benefit from the reclassification of costs. 'he controller should insist that he must adhere to generally accepted accounting principles so as not to submit fraudulent financial statements to corporate head&uarters. !f Dewitt insists on the reclassification, the controller should raise the issue with the chief financial officer after informing Dewitt that he is doing so. !f, after ta+ing all these steps, there is continued pressure to modify the numbers, the controller should consider resigning from the company rather than engage in unethical behavior.

(-(4

2-42

((6@(2 min.

1!"%!"# u"="o@" $mou" *. C$*& 1 3 -(,666 , A (6,766 ! 3 )),-66 , 3 4,666 , -,666 , 7,666 , )4,666 ! 6, )4,666 ! 6, 3 )4,666 ! 3 9,666 , )4,666 ! ((,666 ! 7),-66 ! 3 (6,766 ! C$*& 2 3-),466 , (6,666 , C 3)),466 ! 3 )(,666 , 2,666 , D 8,266 ! (-,266 ! 466 , (9,-66 ! -,666 , 3 (),-66 ! 3 9,666 , (),-66 ! (2,-66 ! 2,-66 , 3 (6,666 ,

Get , H given, ! H inferred Etep )* <se gross margin formula Aevenues "ost of goods sold ,ross margin Etep (* <se schedule of cost of goods manufactured formula Direct materials used Direct manufacturing labor costs !ndirect manufacturing costs #anufacturing costs incurred Add beginning wor+ in process, )O) 'otal manufacturing costs to account for Deduct ending wor+ in process, )(O-) "ost of goods manufactured Etep -* <se cost of goods sold formula >eginning finished goods inventory, )O) "ost of goods manufactured "ost of goods available for sale Ending finished goods inventory, )(O-) "ost of goods sold %or case ), do steps ), (, and - in order. %or case (, do steps ), -, and then (.

(-(5

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