Chapter 3 Solutions
Content
Chapter 3 - Basic Cost Management Concepts
CHAPTER 3: BASIC COST MANAGEMENT CONCEPTS QUESTIONS 3-1
Cost assignment refers to the general case of assigning costs to cost pools or cost objects. When there is a direct and traceable link between the the cost and the cost pool or cost object, then the management accountant traces that cost to the cost pool or cost object. When there is an indirect link between the cost and the cost pool or cost object, then the management accountant uses cost allocation. Cost allocation uses cost drivers to assign the cost.
3-2
Direct costs can be physically identified with and/or traced to the cost object because there there is a direct causal causal link between between them. Indirect Indirect costs cannot cannot be traced to each cost object. object. Direct costs costs for a manufactured manufactured product include include the materials called direct materials! which are part of the product and the labor called direct labor! which is used to assemble the product. Indirect costs include the machinery, plant and other labor necessary to manufacture the product, but which is not directly traceable to the product, such as labor for inspection and supervision.
3-3
"ll direct dire ct costs are variable by definition since they can be directly traced to the cost object, and thus must vary with the cost driver.
3-4
"ll fi#ed costs must be indirect, since the increase in the cost driver or volume of output does not affect the level of fi#ed cost.
3-5
" cost driver is any activity that has the effect effect of changing the level of total cost.
3-
$ariable costs are those for which total cost changes with each change in the cost driver. driver. %i#ed costs costs are the portion of total total cost which remains remains constant constant as the cost driver changes.
3-!
" step&fi#ed cost varies var ies with the cost driver, but in discrete discre te steps. Costs remain re main fi#ed over narrow ranges ranges of the cost driver. 'owever, 'owever, total costs costs increase by a constant constant amount at set intervals. intervals. (#amples (#amples of step&fi#ed step&fi#ed costs are the costs for certain certain clerical tasks, order order filling, and other administrat administrative ive tasks. "t specific specific levels of the cost driver, an additional clerk must be added. )herefore, total costs increase by a constant amount at these points.
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Chapter 3 - Basic Cost Management Concepts
3-"
)he relevant range is the range of the cost driver for which total cost is appro#imately appro#imately linear. linear. )he relevant relevant range is used to provide a useful useful range of activity for the cost driver in which it can be assumed that variable costs will be constant constant per unit of the cost driver. driver. )his is an assumption assumption since the behavior behavior of actual costs is likely to be non&linear see (#hibit *&+! over the range of the cost driver. )he concept of the relevant range allows the management accountant to use the concept of constant unit variable cost for a defined range of operations, even though actual unit variable costs change over the entire range of the cost driver.
3-#
Conversion costs are the sum of direct labor and overhead costs. rime costs are the sum of direct materials and direct labor. labo r.
d enominator! is known. 3-1$ "verage cost can be misleading unless the activity level denominator! -ecause average cost includes a fi#ed cost component, it will be different at each possible activity level. )he term average cost is meaningless if the denominator is unknown. "n increase in volume does not increase total total cost by the amount of the increase in volume multiplied by total unit cost total cost increases by the increase in volume multiplied by the unit variable cost. 3-11
)otal )otal variable costs increase as the cost driver increases. )otal )otal fi#ed costs remain constant as the cost driver increases. "verage variable costs remain constant as the cost driver increases. "verage fi#ed costs decrease as the cost driver increases.
3-12
nit cost is the additional cost that is incurred as the cost driver increases by one unit.
3-13
roduct costs are costs which are capitali0ed as assets, or inventoried. )hey are referred to as manufacturing costs in manufacturing firms and merchandise inve invent ntory ory in merch merchan andi disi sing ng firm firms. s. eri eriod od cost costss are e#pens e#pensed ed as they they are are incurred because there is no e#pectation that they will provide any future benefit to the firm firm.. 1inc 1ince e perio period d costs costs are not not direc directltlyy or indire indirect ctly ly relate related d to the production process, they are sometimes called non&manufacturing costs.
3-14
Cost of goods manufactured is the cost of the units produced this period and transferred transferred into finished finished good good inventory. inventory. Cost of goods sold sold is the cost of the unit unitss sold sold this perio period. d. Cost Cost of good goodss sold sold will will diff differ er from from cost of good goodss manufactured because of changes in finished goods inventory. If finished goods inventory is very nearly the same from the beginning to the end of the period, then cost of goods sold and cost of goods manufactured will be very nearly the same.
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Chapter 3 - Basic Cost Management Concepts
3-15
)he types of inventory in manufacturing firms are2 3. materials inventory 4. work&in&process inventory *. finished products inventory
3-1
-oth -oth accura accuracy cy and and time timeliline ness ss are are impor importa tant nt attr attrib ibut utes es of cost cost info inform rmat atio ion. n. "ccuracy is important because effective planning and decision making re5uire accurate cost information. )he same is true true for effective decision making.
3-1!
(#ecu (#ecutition onal al cost cost drive drivers rs incl includ ude e empl employ oyee ee empow empower ermen ment, t, desi design gn of the the production process or work place, and management of supplier relationships.
3-1"
1tructural cost drivers include scale, e#perience, technology, and comple#ity
3-1#
Indirect materials include items used in the production process that are not included in the product itself rags and small tools, lubricant for the machines, etc.
3-2$
Indirect labor includes labor that is used in the manufacturing process but cannot be traced to each product as it is produced produced indirect indirect labor includes includes supervision, supervision, inspection by batch, because inspection of each and every product would be a variable cost!, training, etc.
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Chapter 3 - Basic Cost Management Concepts
BRIE% E&ERCISES 3-21
)he answer depends on what you consider the cost object. 1uppose we consider the flight as the cost object, then the variable costs should include fuel and the flight team, and any meals or other products provided to passengers on the flight. If the object is the individual passenger, then the list of variable costs is shorter, since fewer costs are actually caused by the addition of another passenger 6 perhaps only beverages. While the cost of the aircraft and most airline staff would be clearly fi#ed costs for either type of cost object, some types of airline staff, such as baggage handlers and gate attendants might be variable with the flight.
3-22 We start with the cost object, which in this case could be the item of merchandise
sold. )hen the variable costs are the cost of merchandise and the selling costs for the cashiers and restocking. %or a large discount retailer, most other costs will be driven by the number of hours open each week, and the variety of merchandise handled. %or other types of retailers not discounters!, sales commissions might be an applicable variable cost. 3-23 )he cost object for a movie theater could be the number of films being shown, or
the number of screens. )he cost of renting the movie from the film producer is the main cost. )he key driver of revenue not cost! is the number of ticket holders 6 for ticket revenue and also revenue from sales of food and beverages. 1ome costs will also be driven by the number of ticket holders, such as the cost of food and beverages. )he cost of staff is likely to be a step cost, which depends on the e#pected number of ticket holders for each different day in the week, and time of day. 7ther facilities costs are likely to be fi#ed for the number of ticket holders, or number of films being shown. 3-24
)he cost object here is more readily identified 6 the beer product, whether measured in individual bottles or larger 5uantities. )he variable costs will be significant here, including the ingredients that go into the brewing of beer. 7ther costs for the brewery are likely to be fi#ed for this cost object, but there are important activity costs which will vary with, for e#ample, the number of customers/distributors delivery and account management costs!, the number of different types of beer, or the comple#ity of the brewing process for the brewery a brewery that speciali0es in the more e#pensive beers re5uire more costly ingredients, processing time, and different packaging!.
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Chapter 3 - Basic Cost Management Concepts
3-25 'ere it is plausible to consider the individual lesson as the cost object. $ariable
costs would include that portion of the trainers8 pay which is based on each lesson the salary portion of the trainers8 pay would be fi#ed for this cost object!. 7ther variable costs could include any materials that are used for each lesson, and perhaps the travel cost to each client, if the company reimburses the trainers for miles traveled. 3-2 94:: ; 93*,<:: &9<:: = 93*,4:: 3-2! 94.+ ; 93: = 934.+ million 3-2" 9++,::: ; 9>?,::: ;944,::: & 93,:::! & 94,::: = 93?*,::: 3-2# 9<::,::: ; 93,+::,::: & 94::,::: = 93,?::,::: cost of goods sold 3-3$ eriod cost includes interest, advertising, and office e#pense2 9<,::: ; 94,@:: ;
93<,::: = 94:,@::
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Chapter 3 - Basic Cost Management Concepts
E&ERCISES 3-31 %'re( 'nd %ee( in t)e Air*ine Ind+(tr, 15 .in/
$ery much like the consumer products industry rocter A Bamble as an e#ample! introduced at the start of the chapter, the airline industry is characteri0ed by a high degree of comple#ity in pricing 6 both fares and fees. 3. It is likely most will argue that the airline industry is a cost leadership industry. ost passengers look for the lowest price ticket and see very little difference between airlines in terms of 5uality, reliability, or service. 7n the other hand, airlines would very much like to build a brand loyaltyE by providing certain free services and customer service. Whether this will work is a good 5uestion for class discussion. 7ne point that should arise in the discussion is to determine whether the airline business is a commodity business. Can a customer differentiate the different carriersF "nother issue is the airlines8 desire for more control over the purchasing of tickets. Could this approach help them develop a brand, or simply add to the comple#ity and frustration of the consumerF 7n the other hand, some travel analysts have 5uestioned the impartiality of the available Web sites passengers use to purchase tickets arguments of this nature could drive the development of new search engines and away from airlines that did not participate in trusted, independent Web search sites. If the number of Web sites increases, as some in the travel industry e#pect, then it is likely to place more price pressure on the airlines and reinforce the commodity view of the industry. 4. )he comple#ity of fees and fares presents a challenge for the consumer, and an opportunity for search sites such as (#pedia to assist passengers in getting the flight they want at the lowest price. %rom the airlines8 point of view, the comple#ity presents an opportunity for revenue growth fees for various services such as checked baggage, priority seating, etc.!. Does the additional comple#ity increase the operating costs of the airlineF
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Chapter 3 - Basic Cost Management Concepts
3-34 C*'((iic'ti0n 0 C0(t( 1$ .in/
3. period 4. product and indirect *. product and indirect <. product and direct @. period the answer is correct, but note that delivery of materials would be included in inventory cost of the materials if the purchaser paid for delivery! +. period K. product and direct ?. period >. product and indirect could be direct if electricity is metered and measured for each product! 3:. period 33. period 34. product and indirect 3*. period 3<. period
3-35 C*'((iic'ti0n 0 C0(t( 1$ .in/
3. direct and variable 4. indirect and fi#ed *. indirect and variable <. indirect and fi#ed @. direct and variable +. indirect and fi#ed K. indirect and variable ?. direct and variable >. indirect and fi#ed 3:. indirect and fi#ed
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Chapter 3 - Basic Cost Management Concepts
3-3 C*'((iic'ti0n 0 C0(t( 1$ .in/
3. direct 4. indirect *. direct <. indirect @. direct +. indirect K. indirect ?. direct >. indirect 3:. indirect 3-3! Actiit, ee*( 'nd C0(t 6rier( 1$ Min/
C0(t O78ect
3
product line or customer 4 product line or customer * product line < product line @ customer order + customer order K customer order ? customer order > each customer 3: customer order 33 not allocated 34
not allocated
C0(t 6rier
trace to product line, or each custom order re5uiring design trace to product line, or each custom order re5uiring testing product line number of purchase orders trace directly to customer trace directly to customer trace directly to customer trace directly to customer trace directly to customer trace directly to customer cannot be traced to product or customer must be allocated using some reasonable method, for e#ample, number of units produced cannot be traced to product or customer must be allocated using some reasonable method, for e#ample, the number of units produced 3-11
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Chapter 3 - Basic Cost Management Concepts
3-3" A*ic'ti0n 0 t)e 6irect C0(t C0ncet in t)e %'()i0n Ind+(tr, 15 .in/
It is always possible, by definition, to trace direct materials and direct labor costs to each unit produced. In some cases, as this one, the most practical approach is to trace the materials and labor costs directly to the batch. )his is convenient both for cost management and pricing, since the batch is often for a single customer. )his is a preview of job costing, which is the topic of the following chapter, chapter <.
3-3# 6irect M'n+'ct+rin9 '70r: %ied 0r 'ri'7*e; 1$ .in/
)he effect of the policy on cost is that labor e#pense, while fi#ed in total e#penditure, is in reality a variable e#pense. Habor is fle#ible and can be moved from job to job or plant to plant as demand dictates that is, labor cost at the plant level fluctuates with demand at each plant, while total labor cost at the firm stays fi#ed. )hus, instead of incurring a fi#ed cost for labor, the company8s total labor costs are fle#ible and vary with demand, as part& time labor is added when needed. 1ource2 Clara "sbury, In the Workplace, Gobs orph to 1uit Japid ace of Change,E The Wall Street Journal , arch 44, 4::4, p3.
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Chapter 3 - Basic Cost Management Concepts
3-4$ Aer'9e 'nd T0t'* C0(t( 15 .in/
3. )otal cost2 9 3,@:: fi#ed cost of space rental! ; 3,@:: variable cost of refreshments = 93@ # 3::! 9 *,::: "verage cost2 9*,:::/3:: people = 9*:.:: per person 4. )otal cost2 9 3,@:: fi#ed cost of space rental! ; *,::: variable cost of refreshments = 93@ # 4::! 9 <,@:: "verage cost2 9<,@::/4:: people = 944.@: per person *. "verage costs decrease as attendance increases because the fi#ed cost component to total costs is now spread over 3:: e#tra people. %i#ed cost per person2 93,@::/3:: people = 93@ 93,@::/4:: = 9 K.@: Decrease in fi#ed cost per person 9 K.@: "verage cost for 3:: people & Decrease per person in fi#ed costs "verage cost for 4:: people
9*:.:: K.@: 9 44.@:
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Chapter 3 - Basic Cost Management Concepts
3-41 C0(t C*'((iic'ti0n 0r 6'nce St+di0 15 .in/
3. While a variety of possible cost objects are possible for the dance studio, the most reasonable choice is the studio since management8s goal is to analy0e the profitability of the studios. 4. 1tudios as the cost object 3. a,c 4. a,c *. a,c <. a,c @. a,c +. b,c K. a,c ?. a,d 7r, Hessons as the cost object 3. a,d 4. b,d *. b,d <. b,d @. b,d +. b,d K. b,d ?. b,d
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Chapter 3 - Basic Cost Management Concepts
3-42 Re*e'nt R'n9e 2$ .in/
)his e#ercise is intended to develop the student8s appreciation of the comple#ities in cost determination and the importance of considering foreign e#change effects when doing business abroad. 3. )he volume&based costs include2 a. %i#ed costs2 administrative costs of management in "ustin and aris and the 3+ marketing and customer service locations b. $ariable costs2 the royalties paid for the images sold, the cost of computer operations personnel, the purchase of small servers as needed c. 1tep costs2 purchase of larger computer servers as needed when demand increases, facilities costs including lease or depreciation e#pense, insurance, maintenance, security, etc.
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Chapter 3 - Basic Cost Management Concepts
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Chapter 3 - Basic Cost Management Concepts
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Chapter 3 - Basic Cost Management Concepts
3-5"c0ntin+ed -1/
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CHAPTER 3: BASIC COST MANAGEMENT CONCEPTS QUESTIONS 3-1
Cost assignment refers to the general case of assigning costs to cost pools or cost objects. When there is a direct and traceable link between the the cost and the cost pool or cost object, then the management accountant traces that cost to the cost pool or cost object. When there is an indirect link between the cost and the cost pool or cost object, then the management accountant uses cost allocation. Cost allocation uses cost drivers to assign the cost.
3-2
Direct costs can be physically identified with and/or traced to the cost object because there there is a direct causal causal link between between them. Indirect Indirect costs cannot cannot be traced to each cost object. object. Direct costs costs for a manufactured manufactured product include include the materials called direct materials! which are part of the product and the labor called direct labor! which is used to assemble the product. Indirect costs include the machinery, plant and other labor necessary to manufacture the product, but which is not directly traceable to the product, such as labor for inspection and supervision.
3-3
"ll direct dire ct costs are variable by definition since they can be directly traced to the cost object, and thus must vary with the cost driver.
3-4
"ll fi#ed costs must be indirect, since the increase in the cost driver or volume of output does not affect the level of fi#ed cost.
3-5
" cost driver is any activity that has the effect effect of changing the level of total cost.
3-
$ariable costs are those for which total cost changes with each change in the cost driver. driver. %i#ed costs costs are the portion of total total cost which remains remains constant constant as the cost driver changes.
3-!
" step&fi#ed cost varies var ies with the cost driver, but in discrete discre te steps. Costs remain re main fi#ed over narrow ranges ranges of the cost driver. 'owever, 'owever, total costs costs increase by a constant constant amount at set intervals. intervals. (#amples (#amples of step&fi#ed step&fi#ed costs are the costs for certain certain clerical tasks, order order filling, and other administrat administrative ive tasks. "t specific specific levels of the cost driver, an additional clerk must be added. )herefore, total costs increase by a constant amount at these points.
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Chapter 3 - Basic Cost Management Concepts
3-"
)he relevant range is the range of the cost driver for which total cost is appro#imately appro#imately linear. linear. )he relevant relevant range is used to provide a useful useful range of activity for the cost driver in which it can be assumed that variable costs will be constant constant per unit of the cost driver. driver. )his is an assumption assumption since the behavior behavior of actual costs is likely to be non&linear see (#hibit *&+! over the range of the cost driver. )he concept of the relevant range allows the management accountant to use the concept of constant unit variable cost for a defined range of operations, even though actual unit variable costs change over the entire range of the cost driver.
3-#
Conversion costs are the sum of direct labor and overhead costs. rime costs are the sum of direct materials and direct labor. labo r.
d enominator! is known. 3-1$ "verage cost can be misleading unless the activity level denominator! -ecause average cost includes a fi#ed cost component, it will be different at each possible activity level. )he term average cost is meaningless if the denominator is unknown. "n increase in volume does not increase total total cost by the amount of the increase in volume multiplied by total unit cost total cost increases by the increase in volume multiplied by the unit variable cost. 3-11
)otal )otal variable costs increase as the cost driver increases. )otal )otal fi#ed costs remain constant as the cost driver increases. "verage variable costs remain constant as the cost driver increases. "verage fi#ed costs decrease as the cost driver increases.
3-12
nit cost is the additional cost that is incurred as the cost driver increases by one unit.
3-13
roduct costs are costs which are capitali0ed as assets, or inventoried. )hey are referred to as manufacturing costs in manufacturing firms and merchandise inve invent ntory ory in merch merchan andi disi sing ng firm firms. s. eri eriod od cost costss are e#pens e#pensed ed as they they are are incurred because there is no e#pectation that they will provide any future benefit to the firm firm.. 1inc 1ince e perio period d costs costs are not not direc directltlyy or indire indirect ctly ly relate related d to the production process, they are sometimes called non&manufacturing costs.
3-14
Cost of goods manufactured is the cost of the units produced this period and transferred transferred into finished finished good good inventory. inventory. Cost of goods sold sold is the cost of the unit unitss sold sold this perio period. d. Cost Cost of good goodss sold sold will will diff differ er from from cost of good goodss manufactured because of changes in finished goods inventory. If finished goods inventory is very nearly the same from the beginning to the end of the period, then cost of goods sold and cost of goods manufactured will be very nearly the same.
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Chapter 3 - Basic Cost Management Concepts
3-15
)he types of inventory in manufacturing firms are2 3. materials inventory 4. work&in&process inventory *. finished products inventory
3-1
-oth -oth accura accuracy cy and and time timeliline ness ss are are impor importa tant nt attr attrib ibut utes es of cost cost info inform rmat atio ion. n. "ccuracy is important because effective planning and decision making re5uire accurate cost information. )he same is true true for effective decision making.
3-1!
(#ecu (#ecutition onal al cost cost drive drivers rs incl includ ude e empl employ oyee ee empow empower ermen ment, t, desi design gn of the the production process or work place, and management of supplier relationships.
3-1"
1tructural cost drivers include scale, e#perience, technology, and comple#ity
3-1#
Indirect materials include items used in the production process that are not included in the product itself rags and small tools, lubricant for the machines, etc.
3-2$
Indirect labor includes labor that is used in the manufacturing process but cannot be traced to each product as it is produced produced indirect indirect labor includes includes supervision, supervision, inspection by batch, because inspection of each and every product would be a variable cost!, training, etc.
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Chapter 3 - Basic Cost Management Concepts
BRIE% E&ERCISES 3-21
)he answer depends on what you consider the cost object. 1uppose we consider the flight as the cost object, then the variable costs should include fuel and the flight team, and any meals or other products provided to passengers on the flight. If the object is the individual passenger, then the list of variable costs is shorter, since fewer costs are actually caused by the addition of another passenger 6 perhaps only beverages. While the cost of the aircraft and most airline staff would be clearly fi#ed costs for either type of cost object, some types of airline staff, such as baggage handlers and gate attendants might be variable with the flight.
3-22 We start with the cost object, which in this case could be the item of merchandise
sold. )hen the variable costs are the cost of merchandise and the selling costs for the cashiers and restocking. %or a large discount retailer, most other costs will be driven by the number of hours open each week, and the variety of merchandise handled. %or other types of retailers not discounters!, sales commissions might be an applicable variable cost. 3-23 )he cost object for a movie theater could be the number of films being shown, or
the number of screens. )he cost of renting the movie from the film producer is the main cost. )he key driver of revenue not cost! is the number of ticket holders 6 for ticket revenue and also revenue from sales of food and beverages. 1ome costs will also be driven by the number of ticket holders, such as the cost of food and beverages. )he cost of staff is likely to be a step cost, which depends on the e#pected number of ticket holders for each different day in the week, and time of day. 7ther facilities costs are likely to be fi#ed for the number of ticket holders, or number of films being shown. 3-24
)he cost object here is more readily identified 6 the beer product, whether measured in individual bottles or larger 5uantities. )he variable costs will be significant here, including the ingredients that go into the brewing of beer. 7ther costs for the brewery are likely to be fi#ed for this cost object, but there are important activity costs which will vary with, for e#ample, the number of customers/distributors delivery and account management costs!, the number of different types of beer, or the comple#ity of the brewing process for the brewery a brewery that speciali0es in the more e#pensive beers re5uire more costly ingredients, processing time, and different packaging!.
3-' © 2013 by McGraw-Hill Edcation! "his is proprietary material solely #or athori$ed instrctor se! %ot athori$ed #or sale or distribtion in any manner! "his docment may not be copied& scanned& dplicated& #orwarded& distribted& or posted on a website& in whole or part!
Chapter 3 - Basic Cost Management Concepts
3-25 'ere it is plausible to consider the individual lesson as the cost object. $ariable
costs would include that portion of the trainers8 pay which is based on each lesson the salary portion of the trainers8 pay would be fi#ed for this cost object!. 7ther variable costs could include any materials that are used for each lesson, and perhaps the travel cost to each client, if the company reimburses the trainers for miles traveled. 3-2 94:: ; 93*,<:: &9<:: = 93*,4:: 3-2! 94.+ ; 93: = 934.+ million 3-2" 9++,::: ; 9>?,::: ;944,::: & 93,:::! & 94,::: = 93?*,::: 3-2# 9<::,::: ; 93,+::,::: & 94::,::: = 93,?::,::: cost of goods sold 3-3$ eriod cost includes interest, advertising, and office e#pense2 9<,::: ; 94,@:: ;
93<,::: = 94:,@::
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Chapter 3 - Basic Cost Management Concepts
E&ERCISES 3-31 %'re( 'nd %ee( in t)e Air*ine Ind+(tr, 15 .in/
$ery much like the consumer products industry rocter A Bamble as an e#ample! introduced at the start of the chapter, the airline industry is characteri0ed by a high degree of comple#ity in pricing 6 both fares and fees. 3. It is likely most will argue that the airline industry is a cost leadership industry. ost passengers look for the lowest price ticket and see very little difference between airlines in terms of 5uality, reliability, or service. 7n the other hand, airlines would very much like to build a brand loyaltyE by providing certain free services and customer service. Whether this will work is a good 5uestion for class discussion. 7ne point that should arise in the discussion is to determine whether the airline business is a commodity business. Can a customer differentiate the different carriersF "nother issue is the airlines8 desire for more control over the purchasing of tickets. Could this approach help them develop a brand, or simply add to the comple#ity and frustration of the consumerF 7n the other hand, some travel analysts have 5uestioned the impartiality of the available Web sites passengers use to purchase tickets arguments of this nature could drive the development of new search engines and away from airlines that did not participate in trusted, independent Web search sites. If the number of Web sites increases, as some in the travel industry e#pect, then it is likely to place more price pressure on the airlines and reinforce the commodity view of the industry. 4. )he comple#ity of fees and fares presents a challenge for the consumer, and an opportunity for search sites such as (#pedia to assist passengers in getting the flight they want at the lowest price. %rom the airlines8 point of view, the comple#ity presents an opportunity for revenue growth fees for various services such as checked baggage, priority seating, etc.!. Does the additional comple#ity increase the operating costs of the airlineF
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Chapter 3 - Basic Cost Management Concepts
3-34 C*'((iic'ti0n 0 C0(t( 1$ .in/
3. period 4. product and indirect *. product and indirect <. product and direct @. period the answer is correct, but note that delivery of materials would be included in inventory cost of the materials if the purchaser paid for delivery! +. period K. product and direct ?. period >. product and indirect could be direct if electricity is metered and measured for each product! 3:. period 33. period 34. product and indirect 3*. period 3<. period
3-35 C*'((iic'ti0n 0 C0(t( 1$ .in/
3. direct and variable 4. indirect and fi#ed *. indirect and variable <. indirect and fi#ed @. direct and variable +. indirect and fi#ed K. indirect and variable ?. direct and variable >. indirect and fi#ed 3:. indirect and fi#ed
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Chapter 3 - Basic Cost Management Concepts
3-3 C*'((iic'ti0n 0 C0(t( 1$ .in/
3. direct 4. indirect *. direct <. indirect @. direct +. indirect K. indirect ?. direct >. indirect 3:. indirect 3-3! Actiit, ee*( 'nd C0(t 6rier( 1$ Min/
C0(t O78ect
3
product line or customer 4 product line or customer * product line < product line @ customer order + customer order K customer order ? customer order > each customer 3: customer order 33 not allocated 34
not allocated
C0(t 6rier
trace to product line, or each custom order re5uiring design trace to product line, or each custom order re5uiring testing product line number of purchase orders trace directly to customer trace directly to customer trace directly to customer trace directly to customer trace directly to customer trace directly to customer cannot be traced to product or customer must be allocated using some reasonable method, for e#ample, number of units produced cannot be traced to product or customer must be allocated using some reasonable method, for e#ample, the number of units produced 3-11
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Chapter 3 - Basic Cost Management Concepts
3-3" A*ic'ti0n 0 t)e 6irect C0(t C0ncet in t)e %'()i0n Ind+(tr, 15 .in/
It is always possible, by definition, to trace direct materials and direct labor costs to each unit produced. In some cases, as this one, the most practical approach is to trace the materials and labor costs directly to the batch. )his is convenient both for cost management and pricing, since the batch is often for a single customer. )his is a preview of job costing, which is the topic of the following chapter, chapter <.
3-3# 6irect M'n+'ct+rin9 '70r: %ied 0r 'ri'7*e; 1$ .in/
)he effect of the policy on cost is that labor e#pense, while fi#ed in total e#penditure, is in reality a variable e#pense. Habor is fle#ible and can be moved from job to job or plant to plant as demand dictates that is, labor cost at the plant level fluctuates with demand at each plant, while total labor cost at the firm stays fi#ed. )hus, instead of incurring a fi#ed cost for labor, the company8s total labor costs are fle#ible and vary with demand, as part& time labor is added when needed. 1ource2 Clara "sbury, In the Workplace, Gobs orph to 1uit Japid ace of Change,E The Wall Street Journal , arch 44, 4::4, p3.
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Chapter 3 - Basic Cost Management Concepts
3-4$ Aer'9e 'nd T0t'* C0(t( 15 .in/
3. )otal cost2 9 3,@:: fi#ed cost of space rental! ; 3,@:: variable cost of refreshments = 93@ # 3::! 9 *,::: "verage cost2 9*,:::/3:: people = 9*:.:: per person 4. )otal cost2 9 3,@:: fi#ed cost of space rental! ; *,::: variable cost of refreshments = 93@ # 4::! 9 <,@:: "verage cost2 9<,@::/4:: people = 944.@: per person *. "verage costs decrease as attendance increases because the fi#ed cost component to total costs is now spread over 3:: e#tra people. %i#ed cost per person2 93,@::/3:: people = 93@ 93,@::/4:: = 9 K.@: Decrease in fi#ed cost per person 9 K.@: "verage cost for 3:: people & Decrease per person in fi#ed costs "verage cost for 4:: people
9*:.:: K.@: 9 44.@:
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Chapter 3 - Basic Cost Management Concepts
3-41 C0(t C*'((iic'ti0n 0r 6'nce St+di0 15 .in/
3. While a variety of possible cost objects are possible for the dance studio, the most reasonable choice is the studio since management8s goal is to analy0e the profitability of the studios. 4. 1tudios as the cost object 3. a,c 4. a,c *. a,c <. a,c @. a,c +. b,c K. a,c ?. a,d 7r, Hessons as the cost object 3. a,d 4. b,d *. b,d <. b,d @. b,d +. b,d K. b,d ?. b,d
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Chapter 3 - Basic Cost Management Concepts
3-42 Re*e'nt R'n9e 2$ .in/
)his e#ercise is intended to develop the student8s appreciation of the comple#ities in cost determination and the importance of considering foreign e#change effects when doing business abroad. 3. )he volume&based costs include2 a. %i#ed costs2 administrative costs of management in "ustin and aris and the 3+ marketing and customer service locations b. $ariable costs2 the royalties paid for the images sold, the cost of computer operations personnel, the purchase of small servers as needed c. 1tep costs2 purchase of larger computer servers as needed when demand increases, facilities costs including lease or depreciation e#pense, insurance, maintenance, security, etc.
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Chapter 3 - Basic Cost Management Concepts
3-5" C0(t 0 G00d M'n+'ct+red 'nd Inc0.e St'te.ent 4$ .in/ 3-3' © 2013 by McGraw-Hill Edcation! "his is proprietary material solely #or athori$ed instrctor se! %ot athori$ed #or sale or distribtion in any manner! "his docment may not be copied& scanned& dplicated& #orwarded& distribted& or posted on a website& in whole or part!
Chapter 3 - Basic Cost Management Concepts
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Chapter 3 - Basic Cost Management Concepts
3-5"c0ntin+ed -1/
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