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# Chapter 2 Cost Terms, Concepts, and Classifications

## 66. Consider the following costs incurred in a recent period:

Direct materials..........................................
Depreciation on factory equipment............
Factory janitors salary...............................
Direct labor................................................
Utilities for factory.....................................
Selling expenses.........................................
Production supervisors salary...................

\$33,000
\$12,000
\$23,000
\$28,000
\$9,000
\$16,000
\$34,000
\$21,000

What was the total amount of the period costs listed above for the period?
A) \$78,000
B) \$71,000
C) \$46,000
D) \$37,000
Solution:
Selling expenses......................................... \$16,000
Total........................................................... \$37,000
67. Using the following data for a recent period, calculate the beginning finished goods
inventory:
Sales...........................................................
Beginning finished goods inventory..........
Cost of goods manufactured......................
Ending finished goods inventory...............
Cost of goods sold......................................
Gross margin..............................................
Net operating income.................................
The beginning finished goods inventory
was:
A) \$24,000
B) \$23,000
C) \$7,000
D) \$12,000

\$40,000
?
\$16,000
\$5,000
?
\$17,000
?
\$10,000

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68.

## The following data are for a recent period's operations:

Beginning finished goods inventory..........
Ending finished goods inventory...............
Sales...........................................................
Gross margin..............................................

\$150,475
\$145,750
\$400,000
\$120,000

## The cost of goods manufactured was:

A) \$115,275
B) \$284,725
C) \$275,275
D) \$124,725
Solution:
Sales Cost of goods sold = Gross margin
\$400,000 Cost of goods sold = \$120,000
Cost of goods sold = \$280,000
Beginning finished
Cost of goods
Ending finished
+

=
goods inventory
manufactured
goods inventory
Cost of goods
\$150,475
+

\$145,750
=
manufactured
Cost of goods manufactured = \$275,275

69.

Cost of goods
sold
\$280,000

## The following data pertain to a recent period's operations:

Sales...........................................................
?
Beginning finished goods inventory..........
\$12,000
Cost of goods manufactured......................
\$36,000
Ending finished goods inventory...............
\$6,000
Cost of goods sold......................................
?
Gross margin.............................................. 40% of Sales
\$10,000
Net operating income.................................
?

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## Chapter 2 Cost Terms, Concepts, and Classifications

Net operating income was:
A) \$18,000
B) \$10,000
C) \$14,000
D) \$46,000
Solution:
Cost of
Beginning finished
=
+
goods sold
goods inventory
Cost of
=
\$12,000
+
goods sold
Cost of goods sold = \$42,000

Cost of goods
manufactured

Ending finished
goods inventory

\$36,000

\$6,000

## Sales Cost of goods sold = Gross margin

Sales \$42,000 = Gross margin
Gross margin = 40% Sales
Sales \$42,000 = 40% Sales
60% Sales = \$42,000
Sales = \$70,000
Gross margin Administrative and selling expenses = Net operating income
Gross margin = 40% Sales
Gross margin = \$28,000
\$28,000 \$10,000 = Net operating income
Net operating income = \$18,000
70. The following inventory balances have been provided for the most recent year:
Beginnin
g
Ending
Raw materials..................... \$21,000 \$15,000
Work in process.................. \$18,000 \$29,000
Finished goods................... \$57,000 \$33,000

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## Chapter 2 Cost Terms, Concepts, and Classifications

The cost of goods manufactured was \$714,000. What was the cost of goods sold?
A) \$738,000
B) \$693,000
C) \$714,000
D) \$733,000

71.
The cost of goods manufactured for October at Toule Manufacturing Corporation was
\$907,000. The following changes occurred in Toule inventory accounts during October:
Decrease in raw materials inventory..........
Decrease in work in process inventory......
Increase in finished goods inventory.........
What was Toule's cost of goods sold for October?
A) \$869,000
B) \$886,000
C) \$928,000

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\$24,000
\$17,000
\$38,000

D)

\$945,000

Solution:

## 72.Gabrio Inc. is a merchandising company. Last month the company's merchandise

purchases totaled \$87,000. The company's beginning merchandise inventory was \$19,000 and
its ending merchandise inventory was \$11,000. What was the company's cost of goods sold
for the month?
A) \$79,000
B) \$87,000
C) \$95,000
D) \$117,000
73. Haala Inc. is a merchandising company. Last month the company's cost of goods sold
was \$68,000. The company's beginning merchandise inventory was \$11,000 and its
ending merchandise inventory was \$17,000. What was the total amount of the
company's merchandise purchases for the month?
A) \$96,000
B) \$62,000
C) \$68,000
D) \$74,000

74.

## Given the following information, calculate the company's manufacturing overhead:

Work in process, ending................. \$8,000
Work in process, beginning............ \$11,000

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## Chapter 2 Cost Terms, Concepts, and Classifications

Cost of goods manufactured.......... \$70,000
Direct labor.................................... \$25,000
Direct materials.............................. \$20,000
A) \$22,000
B) \$25,000
C) \$28,000
D) \$36,000
75. The following data have been provided for the most recent month's operations:
Direct materials.......................................... \$8,000
Direct labor................................................ \$25,000
Total manufacturing costs..........................
?
Beginning work in process inventory........
?
Ending work in process inventory............. \$8,000
Cost of goods manufactured...................... \$45,000
The beginning work in process inventory is:
A) \$11,000
B) \$42,000
C) \$53,000
D) \$37,000

76.
During the month of April, LTP Company incurred \$30,000 of manufacturing
overhead, \$40,000 of direct labor, and purchased \$25,000 of raw materials. Between the
beginning and the end of the month, the raw materials and work in process inventories
decreased by \$4,000 and \$3,000, respectively. The total manufacturing costs used in the
computation of cost of goods manufactured during the month of April was:
A) \$88,000
B) \$91,000
C) \$99,000
D) \$102,000

Solution:
First calculate raw materials used:
Beginning inventory + Purchases

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Ending inventory =

Raw materials

raw materials

raw materials

used

By rearranging:
Purchases

+(

Beginning
inventory raw
materials

Ending
inventory raw
materials

)=

Raw materials
used

## Since raw material inventory decreased by \$4,000, we know that:

Beginning inventory raw materials Ending inventory raw materials = \$4,000
Substituting into equation:
\$25,000 + \$4,000 = Raw materials used
\$29,000 = Raw materials used
Next, solve for total manufacturing costs:
Raw materials
Manufacturing
+ Direct labor +
used
\$29,000
+
\$40,000
+
\$30,000

Total manufacturing
costs
=
\$99,000
=

77.
The following information relates to Mako Manufacturing Company for the month of
August:
Cost of goods manufactured
\$78,000
Cost of goods sold
\$82,000
Total manufacturing costs
\$90,000
Cost of goods available for sale
\$95,000
What was the balance in Mako's Finished Goods Inventory account at the end of August?
A)
\$4,000
B)
\$5,000
C)
\$8,000
D)
\$13,000
78. Last year there was no change in either the raw materials or the work in process
beginning and ending inventories. However, finished goods, which had a beginning balance
of \$25,000, increased by \$15,000. If the manufacturing costs incurred totaled \$600,000 during
the year, the cost of goods available for sale must have been:
A) \$585,000
B) \$600,000
C) \$610,000
D) \$625,000
Solution:
Cost of goods

Beginning

Cost of goods

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## Chapter 2 Cost Terms, Concepts, and Classifications

available for sale

finished
goods
inventory

manufactured

Cost of goods
=
\$25,000
+
available for sale
Cost of goods available for sale = \$625,000
79.

\$600,000

A company has provided the following cost data for its most recent accounting

period:
Direct labor
Direct materials
Selling expenses

\$98,000
\$15,000
\$25,000
\$200,000
\$22,000

## What was the cost of goods

manufactured for the period?
Assume there were no beginning
or ending inventories.
A)
\$303,000
B)
\$323,000
C)
\$338,000
D)
\$360,000
80. Last year, Vashanda Corporation incurred the following costs to produce 18,000 units:
Cost of raw materials used......................... \$86,400
Property taxes on factory building............. \$9,000
What should be the cost per unit for the above costs if 20,000 units of product are
produced next year?
A)
B)
C)
D)

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\$4.32
\$0.45
\$4.32
\$0.50
\$4.80
\$0.45
\$4.80
\$0.50

## Chapter 2 Cost Terms, Concepts, and Classifications

Solution:
Variable manufacturing costs:
\$86,400 18,000 = \$4.80
Property taxes are a fixed cost: \$9,000
At 20,000 units, fixed cost per unit = \$9,000 20,000 units = \$0.45 per unit
81.
At a sales volume of 20,000 units, total costs are \$55,000. The company's
variable cost per unit is \$1.50. What should be the total fixed cost at a sales volume of 30,000
units, assuming that is within the relevant range.
A)
\$25,000
B)
\$30,000
C)
\$45,000
D)
Cannot be determined.
Solution:

82.

A mattress manufacturer has provided the following cost data. The cost of fabric,
foam, springs, and lumber is \$68,000. The cost of indirect materials is \$21,000.
Labor cost of assembly workers is \$52,000 and for production supervisors is
\$14,000. How much indirect cost is included in the above costs?
A) \$21,000
B) \$35,000
C) \$89,000
D) \$103,000

83.

## How much sunk cost is represented in the following list?

Annual operating cost............................................
Fixed operating costs other than depreciation.......
Resale value, if sold now.......................................
Original cost of current machine............................

\$80,000
\$14,000
\$25,000
\$68,000

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## Chapter 2 Cost Terms, Concepts, and Classifications

A) \$80,000
B) \$14,000
C) \$25,000
D) \$68,000
Solution:
Only the original cost of the current machine is a sunk cost in the above list.
84. John Adams, an operator of a manufacturing machine, receives time-and-a-half for any
time worked in excess of 40 hours per week. His rate of pay is \$16 per hour. How much
should be charged to direct labor if he worked 48 hours last week and had no idle time?
A) \$768
B) \$640
C) \$832
D) \$192
Solution:
48 hours \$16 per hour = \$768
85.
During the last week in October, Harvey worked a total of 45 hours and had no idle
time. Harvey is paid \$10 per hour for regular time, and is paid time-and-a-half for all hours in
excess of 35 hours per week. Given this information:
A) \$350 should be charged to direct labor
B) \$50 should be charged to manufacturing overhead
C) \$150 should be charged to manufacturing overhead
D) \$500 should be charged to direct labor.
Solution:
\$10 1.5 = \$15 overtime rate
\$15 overtime rate \$10 regular rate = \$5 overtime premium
Total hours Regular work week hours = Overtime hours
45 35 = 10
10 hours \$5 per hour = \$50 amount to be charged to manufacturing overhead

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## Chapter 2 Cost Terms, Concepts, and Classifications

86. Sandra Pietro installs mufflers at Dethtrapp Motorcycle Company. Sandra is paid \$14
per hour and an extra \$7 per hour for every hour over 40 that is worked in a given
week. Last week Sandra worked 50 hours with 2 of these hours correctly classified as
idle time. How much of Sandra's wages last week should be included in manufacturing
A) \$28
B) \$70
C) \$98
D) \$168
Solution:
(50 total hours 40 regular hours) \$7 overtime premium = \$70
2 hours of idle time \$14 per hour = \$28
Total wages to be included in manufacturing overhead = \$70 + \$28 = \$98
Use the following to answer questions 87-90:
Mendoza, Inc. manufactures and sells aluminum dishes for camping and outdoor enthusiasts
through a mail order catalog operation. Large rectangular sheets of aluminum are purchased
by Mendoza. These sheets are cut down into smaller squares and are then fed into a machine
where they are trimmed down into a circular shape. These aluminum circles are then fed into
a stamping machine where they are formed into plates and bowls. After production, the dishes
are shipped to warehouses where they are packed and then shipped to customers.
87.
Which of the following terms could be used to correctly describe the cost of the
aluminum sheets?
A)
fixed cost
B)
period cost
C)
direct cost
D)
conversion cost
88.
A)
B)
C)
D)

Which of the following terms could be used to correctly describe the wages paid to the
machine operator who operates the stamping machine?
direct labor cost
opportunity cost

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## Chapter 2 Cost Terms, Concepts, and Classifications

89.
Which of the following terms could be used to correctly describe the cost of
electricity used to run the stamping machine?
A) variable cost
B) indirect cost
D) all of the above
90. Which of the following terms could be used to correctly describe the straight-line
depreciation cost on the stamping machine?
A) period cost
B) variable cost
C) inventoriable cost
D) both A and C above
Use the following to answer questions 91-93:
A partial listing of costs incurred at Archut Corporation during September appears below:
Direct materials................................................... \$113,000
Utilities, factory..................................................
\$5,000
Indirect labor....................................................... \$25,000
Sales commissions.............................................. \$48,000
Depreciation of production equipment............... \$20,000
Direct labor......................................................... \$129,000
91. The total of the manufacturing overhead costs listed above for September is:
A) \$586,000
B) \$50,000
C) \$292,000
D) \$30,000
92.The total of the product costs listed above for September is:
A) \$292,000
B) \$294,000
C) \$50,000
D) \$586,000

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## Chapter 2 Cost Terms, Concepts, and Classifications

93.The total of the period costs listed above for September is:
A) \$294,000
B) \$344,000
C) \$292,000
D) \$50,000
Use the following to answer questions 94-96:
A partial listing of costs incurred during March at Febbo Corporation appears below:
Factory supplies...............................................
\$9,000
Direct materials................................................ \$126,000
Sales staff salaries............................................ \$30,000
Factory depreciation......................................... \$33,000
Indirect labor.................................................... \$26,000
Marketing......................................................... \$65,000
Direct labor...................................................... \$99,000
94. The total of the period costs listed above for March is:
A) \$68,000
B) \$293,000
C) \$291,000
D) \$223,000
95.

96.

The total of the manufacturing overhead costs listed above for March is:
A) \$68,000
B) \$35,000
C) \$516,000
D) \$293,000
The total of the product costs listed above for March is:
A) \$516,000
B) \$68,000
C) \$293,000
D) \$223,000

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## Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 97-98:
Management of Mcgibboney Corporation has asked your help as an intern in preparing some
key reports for November. The beginning balance in the raw materials inventory account was
\$25,000. During the month, the company made raw materials purchases amounting to
\$54,000. At the end of the month, the balance in the raw materials inventory account was
\$37,000. Direct labor cost was \$25,000 and manufacturing overhead cost was \$62,000. The
beginning balance in the work in process account was \$22,000 and the ending balance was
\$23,000. The beginning balance in the finished goods account was \$44,000 and the ending
balance was \$50,000. Selling expense was \$21,000 and administrative expense was \$38,000.
97. The conversion cost for November was:
A) \$116,000
B) \$79,000
C) \$87,000
D) \$129,000
98. The prime cost for November was:
A) \$79,000
B) \$59,000
C) \$67,000
D) \$87,000
Use the following to answer questions 99-101:
Yokum Company has provided the following data for the month of August:
August 1 August 31
Raw materials inventory................
\$8,000
?
Work in process inventory.............
?
\$14,000
Finished goods inventory............... \$25,000
\$35,000
Other Data:
Sales........................................................... \$350,000
Direct labor................................................ \$80,000
Purchase of raw materials.......................... \$94,000
Cost of goods manufactured...................... \$206,000
Raw materials used in production.............. \$87,000
Selling expenses......................................... \$15,000

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99.

A) \$3,000
B) \$11,000
C) \$15,000
D) \$7,000

## 100.The beginning work in process inventory was:

A) \$6,000
B) \$9,000
C) \$15,000
D) \$2,000
101. The cost of goods sold was:
A) \$196,000
B) \$206,000
C) \$211,000
D) \$190,000
Use the following to answer questions 102-105:
The following data (in thousands of dollars) have been taken from the accounting records of
Karling Corporation for the just completed year.
Sales...........................................................
Raw materials inventory, beginning...........
Raw materials inventory, ending................
Purchases of raw materials.........................
Direct labor................................................
Selling expenses.........................................
Work in process inventory, beginning........
Work in process inventory, ending.............
Finished goods inventory, beginning.........
Finished goods inventory, ending..............

\$990
\$40
\$70
\$120
\$200
\$230
\$150
\$140
\$70
\$50
\$120
\$160

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## Chapter 2 Cost Terms, Concepts, and Classifications

102. The cost of the raw materials used in production during the year (in thousands of
dollars) was: \$90
103. The cost of goods manufactured (finished) for the year (in thousands of dollars) was:
\$540
104. The cost of goods sold for the year (in thousands of dollars) was: \$500
105. The net operating income for the year (in thousands of dollars) was: \$200
Use the following to answer questions 106-110:
Mark is an engineer who has designed a telecommunications device. He is convinced that
there is a big potential market for the device. Accordingly, he has decided to quit his present
job and start a company to manufacture and market the device.
106. The salary that Mark earns at his present employ is:
A) a variable cost
B) a fixed cost
C) a product cost
D) an opportunity cost
107. Mark purchased a machine two years ago to make experimental boards. The machine
will be used to manufacture the new board. The cost of this machine is:
A) an opportunity cost
B) a sunk cost
C) a differential cost
D) a period cost
108 . The cost of the raw materials that will be used in manufacturing the computer board is:
A) a sunk cost
B) a fixed cost
C) a period cost
D) a variable cost
109. Rent on the administrative office space is:
A) a variable cost
B) an opportunity cost
C) a period cost
D) a product cost
110. Property taxes on the building that will be purchased to house the manufacturing
facility are:
A) a product cost
B) a variable cost
C) an opportunity cost
D) a period cost

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## Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 111-113:
Vignana Corporation manufactures and sells hand-painted clay figurines of popular sports
heroes. Shown below are some of the costs incurred by Vignana for last year:
Cost of clay used in production.......................................
Wages paid to the workers who paint the figurines.........
Wages paid to the sales managers secretary...................

\$65,000
\$90,000
\$22,000
\$47,000

## 111. What is the total of the direct costs above?

A) \$65,000
B) \$112,000
C) \$155,000
D) \$202,000
112. What is the total of the inventoriable (product) costs above?
A) \$0
B) \$69,000
C) \$155,000
D) \$159,000
113.What is the total of the conversion costs above?
A) \$65,000
B) \$69,000
C) \$90,000
D) \$155,000
Only the wages paid to the works who paint the figurines (\$90,000) are considered to
be conversion costs.
Use the following to answer questions 114-116:
The following selected data for March were taken from Rubenstein Company's financial
statements:
Cost of goods available for sale.................... \$65,000
Cost of goods manufactured......................... \$51,000
Finished goods inventory, ending................. \$10,000
Direct materials used..................................... \$15,000
Sales.............................................................. \$105,000
Direct labor................................................... \$20,000
Work in process inventory, beginning...........
\$0

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## Chapter 2 Cost Terms, Concepts, and Classifications

114. The gross margin was: \$50,000
115. The beginning finished goods inventory was: \$14,000
116. The ending work in process inventory was: 4,000
Use the following to answer questions 117-118:
At a sales volume of 20,000 units, Choice Corporation's sales commissions (a cost that is
variable with respect to sales volume) total \$132,000.
117. To the nearest whole dollar, what should be the total sales commissions at a sales
volume of 18,400 units? (Assume that this sales volume is within the relevant range.)
A) \$126,720
B) \$132,000
C) \$121,440
D) \$143,478
Solution:
\$132,000 20,000 = \$6.60 per unit
18,400 units \$6.60 = \$121,440
118. To the nearest whole cent, what should be the average sales commission per unit at a
sales volume of 18,500 units? (Assume that this sales volume is within the relevant range.)
A) \$6.60
B) \$6.87
C) \$7.17
D) \$7.14
Solution:
\$132,000 20,000 = \$6.60 per unit average cost
Use the following to answer questions 119-120:
At a sales volume of 38,000 units, Tirri Corporation's property taxes (a cost that is fixed with
respect to sales volume) total \$733,400.
119.To the nearest whole dollar, what should be the total property taxes at a sales volume of
37,200 units? (Assume that this sales volume is within the relevant range.)
A) \$725,680
B) \$733,400
C) \$749,172
D)
\$717,960
Solution:
Fixed costs do not change with changes in volume; therefore, fixed costs will total
\$733,400 at a sales volume of 37,200 units.

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## Chapter 2 Cost Terms, Concepts, and Classifications

120. To the nearest whole cent, what should be the average property tax per unit at a sales
volume of 37,300 units? (Assume that this sales volume is within the relevant range.)
A) \$19.30
B) \$19.66
C) \$19.72
D) \$19.48
Solution:
\$733,400 37,300 units = \$19.66 per unit (rounded)
Use the following to answer questions 170-171:
Leas Corporation staffs a helpline to answer questions from customers. The costs of operating
the helpline are variable with respect to the number of calls in a month. At a volume of 25,000
calls in a month, the costs of operating the helpline total \$452,500.
170. To the nearest whole dollar, what should be the total cost of operating the helpline
costs at a volume of 23,900 calls in a month? (Assume that this call volume is within
the relevant range.)
A) \$442,545
B) \$452,500
C) \$473,326
D) \$432,590
Solution:
\$452,500 25,000 calls = \$18.10 per call
\$18.10 per call 23,900 calls = \$432,590
171. To the nearest whole cent, what should be the average cost of operating the helpline
per call at a volume of 25,300 calls in a month? (Assume that this call volume is
within the relevant range.)
A) \$18.93
B) \$18.00
C) \$17.89
D) \$18.10
Solution:
\$452,500 25,000 calls = \$18.10 per call (average)

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## Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 121-122:
Batterson Corporation leases its corporate headquarters building. This lease cost is fixed with
respect to the company's sales volume. In a recent month in which the sales volume was
28,000 units, the lease cost was \$697,200.
121. To the nearest whole dollar, what should be the total lease cost at a sales volume of
29,200 units in a month? (Assume that this sales volume is within the relevant range.)
A) \$712,140
B) \$697,200
C) \$727,080
D) \$668,548
Solution:
Fixed costs do not change with changes in volume; therefore, fixed costs will total
\$697,200 at all sales levels within the relevant range.
122. To the nearest whole cent, what should be the average lease cost per unit at a sales
volume of 26,400 units in a month? (Assume that this sales volume is within the
relevant range.)
A) \$25.66
B) \$24.90
C) \$23.88
D) \$26.41
Solution:
\$697,200 26,400 units = \$26.41 (rounded)
Use the following to answer questions 123-124:
The following cost data pertain to the operations of Ladwig Department Stores, Inc., for the
month of December.
Corporate legal office salaries...............................................
Shoe Department cost of sales--Brentwood Store................
Store managers salary--Brentwood Store............................
Shoe Department sales commissions--Brentwood Store......
Store utilities--Brentwood Store...........................................
Shoe Department managers salary--Brentwood Store.........
Central warehouse lease cost................................................
Janitorial costs--Brentwood Store.........................................

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\$68,000
\$66,000
\$86,000
\$10,000
\$5,000
\$11,000
\$3,000
\$3,000
\$11,000

## Chapter 2 Cost Terms, Concepts, and Classifications

The Brentwood Store is just one of many stores owned and operated by the company. The
Shoe Department is one of many departments at the Brentwood Store. The central warehouse
serves all of the company's stores.
124. What is the total amount of the costs listed above that are direct costs of the
Shoe Department?
A) \$66,000
B) \$74,000
C) \$106,000
D) \$71,000
Shoe Department cost of salesBrentwood Store.................
Shoe Department sales commissionsBrentwood Store.......
Shoe Department Managers SalaryBrentwood Store........
Total direct costs...................................................................

\$66,000
5,000
3,000
\$74,000

125. What is the total amount of the costs listed above that are NOT direct costs of the
Brentwood Store?
A) \$74,000
B) \$32,000
C) \$157,000
D) \$86,000
Solution:
Corporate legal office salaries....................
Central warehouse lease cost.....................
Total...........................................................

\$ 68,000
86,000
3,000
\$157,000

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## Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 126-128:
A trucking business is considering whether to give up its local delivery routes or to expand its
long haul (over 100 miles) operations.
126.In this decision, the original cost of any of the trucks that it currently owns can best be
described as a(n):
A) opportunity cost
B) conversion cost
C) sunk cost
D) differential (incremental) cost
127. In this decision, the wage costs of the additional drivers that will have to be hired for
the long haul operations can best be described as a(n):
A) opportunity cost
C) sunk cost
D) differential (incremental) cost
128. In this decision, the lost income from the local delivery routes given up can best be
described as a(n):
A) opportunity cost
B) conversion cost
C) sunk cost
D) differential (incremental) cost
Use the following to answer questions 129-131:
Dominik Corporation purchased a machine 5 years ago for \$527,000 when it launched
product M08Y. Unfortunately, this machine has broken down and cannot be repaired. The
machine could be replaced by a new model 310 machine costing \$545,000 or by a new model
240 machine costing \$450,000. Management has decided to buy the model 240 machine. It
has less capacity than the model 310 machine, but its capacity is sufficient to continue making
product M08Y. Management also considered, but rejected, the alternative of dropping product
M08Y and not replacing the old machine. If that were done, the \$450,000 invested in the new
machine could instead have been invested in a project that would have returned a total of
\$532,000.

2-28

## Chapter 2 Cost Terms, Concepts, and Classifications

129. In making the decision to buy the model 240 machine rather than the model 310
machine, the differential cost was:
A) \$95,000
B) \$5,000
C) \$77,000
D) \$18,000
Solution:
Model 310 cost...............................
Model 240 cost...............................
Differential cost..............................

\$545,000
450,000
\$ 95,000

130. In making the decision to buy the model 240 machine rather than the model 310
machine, the sunk cost was:
A) \$545,000
B) \$450,000
C) \$527,000
D) \$532,000
Solution:
The original cost of \$527,000 is a sunk cost.
131. In making the decision to invest in the model 240 machine, the opportunity cost was:
A) \$545,000
B) \$450,000
C) \$532,000
D) \$527,000
Solution:
The opportunity cost is the proceeds from the project that would have yielded \$532,000.
Use the following to answer questions 132-135
(Appendix 2A) Debra works on the assembly line of a manufacturing company where she
installs a component part for one of the company's products. She is paid \$16 per hour for
regular time and time and a half for all work in excess of 40 hours per week.
132. Debra works 42 hours during a week in which there was no idle time. The allocation
of Debra's wages for the week between direct labor cost and manufacturing overhead
cost would be:
A)
\$664
\$24
B)
\$688
\$0
C)
\$640
\$48
D)
\$672
\$16

2-29

## Chapter 2 Cost Terms, Concepts, and Classifications

Solution:
Total wages for the week:
Regular time: 40 hours \$16 per hour..................
Overtime: 2 hours \$24 per hour..........................
Total wages................................................................
Allocation of total wages:
Direct labor: 42 hours \$16 per hour....................
Manufacturing overhead: 2 hours \$8 per hour....
Total wages................................................................

\$640
48
\$688
\$672
16
\$688

133. Debra works 43 hours in a given week but is idle for 4 hours during the week due to
equipment breakdowns. The allocation of Debra's wages for the week between direct labor
cost and manufacturing overhead cost would be:
A)
\$712
\$0
B)
\$688
\$24
C)
\$624
\$88
D)
\$640
\$72
Solution:
Total wages for the week:
Regular time: 40 hours \$16 per hour..................
Overtime: 3 hours \$24 per hour..........................
Total wages................................................................
Allocation of total wages:
Direct labor: 39 hours \$16 per hour....................
Idle time: 4 hours \$16 per hour.......................
Overtime premium: 3 hours \$8 per hour.........
Total wages................................................................

134.

2-30

\$640
72
\$712
\$624
\$64
24

88
\$712

Debra's employer offers fringe benefits that cost the company \$3 for each hour of

## Chapter 2 Cost Terms, Concepts, and Classifications

employee time (both regular and overtime). During a given week, Debra works 42 hours but
is idle for 3 hours due to material shortages. The company treats all fringe benefits as part of
manufacturing overhead. The allocation of Debra's wages and fringe benefits for the week
between direct labor cost and manufacturing overhead would be:
A)
\$688
\$126
B)
\$624
\$190
C)
\$672
\$142
D)
\$640
\$174
Solution:
Total wages and fringe benefits for the week:
Regular time: 40 hours \$16 per hour..................
Overtime: 2 hours \$24 per hour..........................
Fringe benefits: 42 hours \$3 per hour.................
Total wages and fringe benefits..........................
Allocation of wages and fringe benefits:
Direct labor: 39 hours \$16 per hour....................
Idle time: 3 hours \$16 per hour.......................
Overtime premium: 2 hours \$8 per hour.........
Fringe benefits: 42 hours \$3 per hour..............
Total wages and fringe benefits.................................

\$640
48
126
\$814
\$624
\$ 48
16
126

190
\$814

135. Debra's employer offers fringe benefits that cost the company \$3 for each hour of
employee time (both regular and overtime). During a given week, Debra works 42 hours but
is idle for 3 hours due to material shortages. The company treats all fringe benefits relating to
direct labor as added direct labor cost and the remainder as part of manufacturing overhead.
The allocation of Debra's wages and fringe benefits for the week between direct labor cost
A)
\$688
\$126
B)
\$624
\$190
C)
\$741
\$73
D)
\$672
\$142
Solution:

## Allocation of wages and fringe benefits:

Direct labor:
Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

2-31

## Chapter 2 Cost Terms, Concepts, and Classifications

Wage cost: 39 hours \$16 per hour...................
Fringe benefits: 39 hours \$3 per hour..............
Idle time: 3 hours \$16 per hour.......................
Overtime premium: 2 hours \$8 per hour.........
Fringe benefits: 3 hours \$3 per hour................
Total wages and fringe benefits..............................

\$624
117
48
16
9

\$741

73
\$814

## Use the following to answer questions 136-139:

(Appendix 2A) Larry is a quality inspector on the assembly line of a manufacturing company.
He is paid \$16 per hour for regular time and time and a half for all work in excess of 40 hours
per week. He is classified as a direct labor worker.
136. Larry works 44 hours during a week in which there was no idle time. The allocation of
Larry's wages for the week between direct labor cost and manufacturing overhead cost would
be:
A)
\$736
\$0
B)
\$640
\$96
C)
\$704
\$32
D)
\$688
\$48
Solution:
Total wages for the week:
Regular time: 40 hours \$16 per hour..................
Overtime: 4 hours \$24 per hour..........................
Total wages................................................................
Allocation of total wages:
Direct labor: 44 hours \$16 per hour....................
Manufacturing overhead: 4 hours \$8 per hour....
Total wages................................................................

2-32

\$640
96
\$736
\$704
32
\$736

## Chapter 2 Cost Terms, Concepts, and Classifications

137. Larry works 45 hours in a given week but is idle for 4 hours during the week due to
equipment breakdowns. The allocation of Larry's wages for the week between direct
labor cost and manufacturing overhead cost would be:
A)
\$656
\$104
B)
\$760
\$0
C)
\$720
\$40
D)
\$640
\$120
Solution:
Total wages for the week:
Regular time: 40 hours \$16 per hour..................
Overtime: 5 hours \$24 per hour..........................
Total wages................................................................
Allocation of total wages:
Direct labor: 41 hours \$16 per hour....................
Idle time: 4 hours \$16 per hour.......................
Overtime premium: 5 hours \$8 per hour.........
Total wages................................................................

\$640
120
\$760
\$656
\$64
40

104
\$760

138. Larry's employer offers fringe benefits that cost the company \$5 for each hour of
employee time (both regular and overtime). During a given week, Larry works 45 hours but is
idle for 4 hours due to material shortages. The company treats all fringe benefits as part of
manufacturing overhead. The allocation of Larry's wages and fringe benefits for the week
between direct labor cost and manufacturing overhead would be:
A)
\$760
\$225
B)
\$640
\$345
C)
\$656
\$329
D)
\$720
\$265
Solution:
Total wages and fringe benefits for the week:
Regular time: 40 hours \$16 per hour..................
Overtime: 5 hours \$24 per hour..........................
Fringe benefits: 45 hours \$5 per hour.................
Total wages and fringe benefits..........................
Allocation of wages and fringe benefits:
Direct labor: 41 hours \$16 per hour....................

\$640
120
225
\$985
\$656

2-33

## Chapter 2 Cost Terms, Concepts, and Classifications

Idle time: 4 hours \$16 per hour.......................
Overtime premium: 5 hours \$8 per hour.........
Fringe benefits: 45 hours \$5 per hour..............
Total wages and fringe benefits.................................

\$ 64
40
225

329
\$985

139. Larry's employer offers fringe benefits that cost the company \$5 for each hour of
employee time (both regular and overtime). During a given week, Larry works 45 hours but is
idle for 4 hours due to material shortages. The company treats all fringe benefits relating to
direct labor as added direct labor cost and the remainder as part of manufacturing overhead.
The allocation of Larry's wages and fringe benefits for the week between direct labor cost and
A)
B)
C)
D)

\$720
\$265
\$861
\$124
\$760
\$225
\$656
\$329

Solution:
Allocation of wages and fringe benefits:
Direct labor:
Wage cost: 41 hours \$16 per hour...................
Fringe benefits: 41 hours \$5 per hour..............
Idle time: 4 hours \$16 per hour.......................
Overtime premium: 5 hours \$8 per hour.........
Fringe benefits: 4 hours \$5 per hour................
Total wages and fringe benefits..............................

2-34

\$656
205
64
40
20

\$861

124
\$985

## Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 140-141:
(Appendix 2B) Circle K Toys, Inc. manufactures toys and children's clothing and sells these
products to retail outlets. The following costs were incurred in performing quality activities at
Circle K during the year:
Product recall activities..........................................
Quality training activities.......................................
Quality improvement activities..............................
Warranty claim activities.......................................
Quality inspection and testing activities................
Rework activities...................................................
Quality data collection and reporting activities.....

\$370,000
\$240,000
\$154,000
\$109,000
\$61,000
\$38,000
\$15,000

## 140. What is the total of the prevention costs for Circle K?

A) \$394,000
B) \$409,000
C) \$455,000
D) \$470,000
Solution:
Quality training activities....................................... \$240,000
Quality improvement activities.............................. 154,000
Quality data collection and reporting activities.....
15,000
Total prevention costs............................................ \$409,000
141. What is the total of the internal failure costs for Circle K?
A) \$53,000
B) \$99,000
C) \$517,000
D) \$38,000
Solution:
Rework activities. . .

\$38,000

2-35

## Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 142-145
(Appendix 2B) Ean Company's quality cost report is to be based on the following data:
Quality circles..................................................................
Downtime caused by quality problems...........................
Debugging software errors..............................................
Statistical process control activities.................................
Test and inspection of in-process goods..........................
Final product testing and inspection................................
Cost of field servicing and handling complaints.............
Product recalls.................................................................
Maintenance of test equipment........................................

\$57,000
\$98,000
\$98,000
\$68,000
\$24,000
\$66,000
\$87,000
\$72,000
\$75,000

142. What would be the total prevention cost appearing on the quality cost report?
A) \$143,000
B) \$125,000
C) \$81,000
D) \$129,000
Solution:
Quality circles........................................................ \$ 57,000
Statistical process control activities.......................
68,000
Total prevention costs............................................ \$125,000
143. What would be the total appraisal cost appearing on the quality cost report?
A) \$141,000
B) \$165,000
C) \$90,000
D) \$164,000
Solution:
Test and inspection of in-process goods................ \$ 24,000
Final product testing and inspection......................
66,000
Maintenance of test equipment..............................
75,000
Total appraisal cost................................................. \$165,000

2-36

## Chapter 2 Cost Terms, Concepts, and Classifications

144. What would be the total internal failure cost appearing on the quality cost report?
A) \$185,000
B) \$196,000
C) \$173,000
D) \$170,000
Solution:
Downtime caused by quality problems.................. \$ 98,000
Debugging software errors.....................................
98,000
Total internal failure cost....................................... \$196,000
145.

What would be the total external failure cost appearing on the quality cost report?
A) \$170,000
B) \$645,000
C) \$159,000
D) \$355,000

Solution:
Cost of field servicing and handling complaints.... \$ 87,000
Product recalls........................................................
72,000
Total external failure cost....................................... \$159,000
Use the following to answer questions146-149:
(Appendix 2B) Fagel Company's quality cost report is to be based on the following data:
Disposal of defective products........................................
Supervision of testing and inspection activities..............
Statistical process control activities.................................
Cost of field servicing and handling complaints.............
Re-entering data because of keying errors......................
Warranty repairs and replacements..................................
Supplies used in testing and inspection...........................
Quality circles..................................................................
Downtime caused by quality problems...........................

\$42,000
\$73,000
\$78,000
\$53,000
\$46,000
\$87,000
\$89,000
\$27,000
\$14,000

## 146.What would be the total prevention cost appearing

on the quality cost report?
A) \$105,000
B) \$80,000
C) \$151,000
D) \$116,000

2-37

## Chapter 2 Cost Terms, Concepts, and Classifications

Solution:
Statistical process control activities.................................
Quality circles..................................................................
Total prevention cost........................................................

\$ 78,000
27,000
\$105,000

147.What would be the total appraisal cost appearing on the quality cost report?
A) \$115,000
B) \$135,000
C) \$267,000
D) \$162,000
Solution:
Supervision of testing and inspection activities.............. \$ 73,000
Supplies used in testing and inspection...........................
89,000
Total appraisal cost.......................................................... \$162,000
148. What would be the total internal failure cost appearing on the quality cost report?
A) \$129,000
B) \$67,000
C) \$115,000
D) \$102,000
Solution:
Disposal of defective products........................................ \$ 42,000
Re-entering data because of keying errors......................
46,000
Downtime caused by quality problems...........................
14,000
Total internal failure cost................................................. \$102,000
149.What would be the total external failure cost appearing on the quality cost report?
A) \$509,000
B) \$242,000
C) \$101,000
D) \$140,000
Solution:
Cost of field servicing and handling complaints.............
Warranty repairs and replacements..................................
Total external failure cost................................................

2-38

\$ 53,000
87,000
\$140,000

## Chapter 2 Cost Terms, Concepts, and Classifications

Use the following to answer questions 150-153:
(Appendix 2B) Faust Company's quality cost report is to be based on the following data:
Quality engineering.........................................................
Quality circles..................................................................
Supervision of testing and inspection activities..............
Net cost of scrap..............................................................
Test and inspection of in-process goods..........................
Liability arising from defective products........................
Warranty repairs and replacements..................................
Debugging software errors..............................................
150

\$68,000
\$35,000
\$72,000
\$76,000
\$6,000
\$3,000
\$56,000
\$68,000
\$19,000

What would be the total prevention cost appearing on the quality cost report?
A) \$107,000
B) \$41,000
C) \$140,000
D) \$103,000

Solution:
Quality engineering.........................................................
Quality circles..................................................................
Total prevention cost........................................................

\$ 68,000
35,000
\$103,000

151. What would be the total appraisal cost appearing on the quality cost report?
A) \$78,000
B) \$181,000
C) \$81,000
D) \$74,000
Solution:
Supervision of testing and inspection activities..............
Test and inspection of in-process goods..........................
Total appraisal cost..........................................................
152.

\$72,000
6,000
\$78,000

What would be the total internal failure cost appearing on the quality cost report?
A)
\$71,000
B) \$163,000
C) \$74,000
D) \$132,000

2-39

## Chapter 2 Cost Terms, Concepts, and Classifications

Solution:
Net cost of scrap.............................
Debugging software errors.............
Total internal failure cost...............

\$ 76,000
68,000
19,000
\$163,000

153. What would be the total external failure cost appearing on the quality cost report?
A) \$222,000
B) \$403,000
C) \$79,000
D) \$59,000
Solution:
Liability arising from defective products........................
\$ 3,000
Warranty repairs and replacements..................................
56,000
Total external failure cost................................................
\$59,000
Essay Questions
154. The information below relates to Guzzardi Manufacturing Company. (Assume that all
raw materials are direct materials.):
Purchases of raw materials......................... \$362,000
Direct labor cost......................................... \$207,000
Selling costs (total).................................... \$61,000
Raw materials inventory, beginning........... \$37,000
Work in process inventory, beginning........ \$19,000
Finished goods inventory, beginning......... \$62,000
Raw materials inventory, ending................ \$44,000
Work in process inventory, ending.............
\$3,000
Finished goods inventory, ending.............. \$77,000
Required:
What is Guzzardi's cost of goods sold?
Ans:
Finished goods inventory, beginning..............................
Goods available for sale..................................................
Deduct: Finished goods inventory, ending......................
Cost of goods sold...........................................................
2-40

\$ 62,000
1,353,000
1,415,000
77,000
\$1,338,000

## Chapter 2 Cost Terms, Concepts, and Classifications

155. Mary Tappin, an assistant Vice President at Galaxy Toys, was disturbed to find on her
desk a memo from her boss, Gary Resnick, to the controller of the company. The memo
appears below:
Galaxy Toys Internal Memo
Sept 15
To: Harry Wilson, Controller
Fm: Gary Resnick, Executive Vice President
As you know, we won't start recording many sales until October when stores start
accepting shipments from us for the Christmas season. Meanwhile, we are producing
flat-out and are building up our finished goods inventories so that we will be ready to
ship next month.
Unfortunately, we are in a bind right now since it looks like the net income for the
quarter ending on Sept 30 is going to be pretty awful. This may get us in trouble with
the bank since they always review the quarterly financial reports and may call in our
loan if they don't like what they see. Is there any possibility that we could change the
classification of some of our period costs to product costs--such as the rent on the
finished goods warehouse?
Please let me know as soon as possible. The President is pushing for results.
Mary didn't know what to do about the memo. It wasn't intended for her, but its
contents were alarming.
Required:
a. Why has Gary Resnick suggested reclassifying some period costs as product costs?
b. Why do you think Mary was alarmed about the memo?
Ans:
a. Gary Resnick has suggested reclassifying some period costs as product costs since
the company is building up large finished goods inventories in anticipation of the
Christmas selling season. Product costs are inventoried and flow through to the
income statement only when products are sold. Period expenses, in contrast, flow
directly to the income statement. Since most of the finished goods inventories will
be held over to the next quarter, reclassifying period costs as product costs will
effectively defer recognition of expenses until next quarter and therefore will
improve the current quarter's net operating income.

2-41

## Chapter 2 Cost Terms, Concepts, and Classifications

b. Mary Tappin is probably alarmed by both the economic situation the company
finds itself in and by the apparent willingness of top management to bend the rules.
Improperly reclassifying costs is an indication that top management does not feel
like it has to play by the rules or be honest in its dealings with the bank. With such
loose ethical standards, Mary may wonder what other things they are doing that
are unethical and/or illegal.
156.

A partial listing of costs incurred at Boylen Corporation during March appears below:
Direct materials................................................................ \$181,000
Utilities, factory............................................................... \$10,000
Sales commissions........................................................... \$69,000
Indirect labor.................................................................... \$32,000
Depreciation of production equipment............................ \$28,000
Direct labor...................................................................... \$120,000
Required:
a. What is the total amount of product cost listed above?. \$371,000
b. What is the total amount of period cost listed above? \$292,000

157. Marquess Corporation has provided the following partial listing of costs incurred
during May:
Marketing salaries
\$39,000
Property taxes, factory
\$8,000
\$102,000
Sales commissions
\$73,000
Indirect labor
\$31,000
Direct materials
\$197,000
\$145,000
Depreciation of production
equipment
\$39,000
Required:
Direct labor
\$78,000
a.
What is the total amount
of product cost listed above? \$353,000
b. What is the total amount of period cost listed above?359,000.

2-42

## Chapter 2 Cost Terms, Concepts, and Classifications

158. Classify the following costs for an auto manufacturer as either direct materials, direct
labor, manufacturing overhead, or period costs.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.

## Steel used in automobiles Direct Materials

Assembly department employee wages Direct Labor
Utility costs used in executive building Period Costs
Travel costs used by sales personnel Period Costs
Cost of shipping goods to customers Period Costs
Property taxes on assembly plant Manufacturing Overhead
Glass used in automobiles Direct Materials
Depreciation on assembly plant Manufacturing Overhead
CEO's salary Period Costs
Depreciation on executive building Period Costs
Salary of marketing executive Period Costs
Tires installed on automobiles Direct Materials

159. In December, Vollick Corporation had sales of \$245,000, selling expenses of \$23,000,
and administrative expenses of \$26,000. The cost of goods manufactured was
\$190,000. The beginning balance in the finished goods inventory account was \$59,000
and the ending balance was \$56,000.
Required:
Prepare an Income Statement in good form for December.
Income Statement
Sales....................................................................
\$245,000
Cost of goods sold:..............................................
Beginning finished goods inventory................ \$ 59,000
Add: Cost of goods manufactured................... 190,000
Goods available for sale................................... 249,000
Deduct: Ending finished goods inventory.......
56,000 193,000
Gross margin.......................................................
52,000
Selling expenses..................................................
23,000
26,000
49,000
Net operating income..........................................
\$ 3,000

2-43

## Chapter 2 Cost Terms, Concepts, and Classifications

160. The following data were taken from the cost records of Morrey Company for last year:
Depreciation, factory...................... \$60,000
Indirect labor.................................. \$100,000
Utilities, factory............................. \$40,000
Insurance, factory........................... \$10,000
Lubricants for machines................. \$15,000
Direct labor.................................... \$200,000
Purchases of raw materials............. \$150,000
Inventories at the beginning and at the end of the year were as follows:

Raw materials.....................
Work in process..................
Finished goods...................

Beginnin
g Ending
\$10,000 \$20,000
\$25,000 \$5,000
\$30,000 \$50,000

Required:
Prepare a schedule of cost of goods manufactured in good form.
Morrey Company
Schedule of Cost of Goods Manufactured
Direct materials:
Raw materials inventory, beginning................ \$ 10,000
Add: Purchases of raw materials..................... 150,000
Raw materials available for use....................... 160,000
Deduct: Raw materials inventory, ending........
20,000
Raw materials used in production....................
Direct labor.........................................................
Depreciation, factory.......................................
60,000
Indirect labor.................................................... 100,000
Utilities, factory...............................................
40,000
Insurance, factory.............................................
10,000
Lubricants for machines...................................
15,000
Total manufacturing costs...................................
Add: Work in process inventory, beginning........
Deduct: Work in process inventory, ending........

2-44

\$140,000
200,000

225,000
565,000
25,000
590,000
5,000

## Chapter 2 Cost Terms, Concepts, and Classifications

Cost of Goods Manufactured..............................
161. .A number of costs and measures of activity are listed below.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.

\$585,000

Cost Description
Cost of vaccine used at a clinic
Building rent at a taco shop
Salary of production manager at a snowboard manufacturer
Cost of electricity for production equipment at a snowboard
manufacturer
Ferry captains salary on a regularly scheduled passenger
ferry
Cost of glue used in furniture production
Janitorial wages at a snowboard manufacturer
Depreciation on factory building at a snowboard
manufacturer
Cost of advertising at a snowboard company
Cost of shipping bags of fertilizer to a customer at a
chemical plant

## Garrison/Noreen/Brewer, Managerial Accounting, Twelfth Edition

Possible Measure of
Activity
Dollar sales
Snowboards produced
Snowboards produced
Number of passengers
Units produced
Snowboards produced
Snowboards produced
Snowboards sold
Bags shipped

2-45

## Chapter 2 Cost Terms, Concepts, and Classifications

Required:
For each item above, indicate whether the cost is MAINLY fixed or variable with
respect to the possible measure of activity listed next to it.
Ans:
1.
2.
3.

## Cost of vaccine used at a clinic; Vaccines administered; Variable

Building rent at a taco shop; Dollar sales; Fixed
Salary of production manager at a snowboard manufacturer; Snowboards
produced; Fixed
4.
Cost of electricity for production equipment at a snowboard manufacturer;
Snowboards produced; Variable
5.
Ferry captain's salary on a regularly scheduled passenger ferry; Number of
passengers; Fixed
6.
Cost of glue used in furniture production; Units produced; Variable
7.
Janitorial wages at a snowboard manufacturer; Snowboards produced;
Fixed
8.
Depreciation on factory building at a snowboard manufacturer;
Snowboards produced; Fixed
9.
Cost of advertising at a snowboard company; Snowboards sold; Fixed
10.
Cost of shipping bags of fertilizer to a customer at a chemical plant; Bags
shipped; Variable
AACSB: Analytic AICPA BB: Critical Thinking
LO: 5 Level: Easy

2-46

162.

## A number of costs are listed below.

Cost Description
1. Wages of carpenters on a home building site
2. Cost of wiring used in making a personal computer
3. Managers salary at a hotel run by a chain of hotels
4. Managers salary at a hotel run by a chain of hotels
5. Cost of aluminum mast installed in a yacht at a yacht
manufacturer
6. Monthly lease cost of X-ray equipment at a hospital
7. Cost of screws used to secure wood trim in a yacht at a
yacht manufacturer
8. Cost of electronic navigation system installed in a yacht at a
yacht manufacturer
9. Cost of a replacement battery installed in a car at the auto
repair shop of an automobile dealer
10. Cost of a measles vaccine administered at an outpatient
clinic at a hospital

Cost Object
A particular home
A particular personal
computer
A particular hotel guest
The particular hotel
A particular yacht
Department
A particular yacht
A particular yacht
The auto repair shop
A particular patient

Required:
For each item above, indicate whether the cost is direct or indirect with respect to the
cost object listed next to it.
Ans:
1. Wages of carpenters on a home building site; A particular home; Direct
2. Cost of wiring used in making a personal computer; A particular personal
computer; Indirect
3. Manager's salary at a hotel run by a chain of hotels; A particular hotel guest;
Indirect
4. Manager's salary at a hotel run by a chain of hotels; The particular hotel; Direct
5. Cost of aluminum mast installed in a yacht at a yacht manufacturer; A particular
yacht; Direct
6. Monthly lease cost of X-ray equipment at a hospital; The Radiology (X-Ray)
Department; Direct
7. Cost of screws used to secure wood trim in a yacht at a yacht manufacturer; A
particular yacht; Indirect
8. Cost of electronic navigation system installed in a yacht at a yacht manufacturer; A
particular yacht; Direct

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## Chapter 2 Cost Terms, Concepts, and Classifications

9. Cost of a replacement battery installed in a car at the auto repair shop of an
automobile dealer; The auto repair shop; Direct
10. Cost of a measles vaccine administered at an outpatient clinic at a hospital; A
particular patient; Direct
163. .A direct labor worker at Ude Corporation is paid \$24 per hour for regular time and time
and a half for all work in excess of 40 hours per week. This employee works 44 hours
during a week in which there was no idle time.
Required:
Determine how much of the worker's wages for the week would be classified as direct
labor cost and how much would be classified as manufacturing overhead cost. Show
Ans:
Direct labor: \$24 per hour 44 hour = \$1,056
Overtime premium: \$12 per hour 4 hours = \$48
164. A direct labor worker at Bodreau Corporation is paid \$14 per hour for regular time and
time and a half for all work in excess of 40 hours per week. This employee works 48
hours in a given week but is idle for 4 hours during the week due to equipment
breakdowns.
Required:
Determine how much of the worker's wages for the week would be classified as direct
labor cost and how much would be classified as manufacturing overhead cost. Show
Ans:
Direct labor:
\$14 per hour 44 hours...................................... \$616
Idle time: \$14 per hour 4 hours....................... \$ 56
Overtime premium: \$7 per hour 8 hours.........
56

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## Chapter 2 Cost Terms, Concepts, and Classifications

165. A direct labor worker at Chiarini Corporation is paid \$14 per hour for regular time and
time and a half for all work in excess of 40 hours per week. The company's fringe
benefits cost \$4 for each hour of employee time (both regular and overtime). Last
week this employee worked 45 hours but was idle for 3 hours due to material
shortages. The company treats all fringe benefits as part of manufacturing overhead.
Required:
Determine how much of the worker's wages for the week would be classified as direct
labor cost and how much would be classified as manufacturing overhead cost. Show
Ans:
Direct labor:
\$14 per hour 42 hours...................................... \$588
Idle time: \$14 per hour 3 hours....................... \$ 42
Overtime premium: \$7 per hour 5 hours.........
35
Fringe benefits: \$4 per hour 45 hours.............. 180
166. A direct labor worker at Kimmer Corporation is paid \$18 per hour for regular time and
time and a half for all work in excess of 40 hours per week. The company's fringe benefits
cost \$4 for each hour of employee time (both regular and overtime). Last week this employee
worked 42 hours but was idle for 4 hours due to material shortages. The company treats all
fringe benefits relating to direct labor as added direct labor cost and the remainder as part of
Required:
Determine how much of the worker's wages for the week would be classified as direct
labor cost and how much would be classified as manufacturing overhead cost. Show
Ans:
Direct labor:
Wages: \$18 per hour 38 hours......................... \$684
Fringe benefits: \$4 per hour 38 hours............... 152
Total direct labor.................................................... \$836
Idle time: \$18 per hour 4 hours........................ \$ 72
Overtime premium: \$9 per hour 2 hours.........
18
Fringe benefits: \$4 per hour 4 hours................
16

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## Chapter 2 Cost Terms, Concepts, and Classifications

167. Toole Manufacturing Company manufactures and sells ceiling fans. Toole incurred the
following costs related to quality for the year:
Cost of warranty repairs.............................
Cost of employee quality training..............
Cost incurred to rework fans......................
Spoilage cost (net)......................................
Cost of handling customer complaints.......
Depreciation cost of test equipment...........
Cost of quality circles................................
Maintenance cost of test equipment...........
Cost of retesting reworked fans.................
Cost of final testing of fans........................

\$35,000
\$27,000
\$18,000
\$15,000
\$11,000
\$6,000
\$5,000
\$3,000
\$2,000
\$1,000

Required:
Prepare a Quality Cost Report for Toole Manufacturing Company showing both
dollars and percents. Assume that sales were \$2,000,000.
Ans:
Toole Manufacturing Company
Quality Cost Report
Amount
Prevention costs:
Cost of employee quality training........... \$ 27,000
Cost of quality circles.............................
5,000
Total prevention cost..................................
32,000
Appraisal costs:
Depreciation cost of test equipment........
6,000
Maintenance cost of test equipment........
3,000
Cost of final testing of fans.....................
1,000
Total appraisal cost.....................................
10,000
Internal failure costs:
Cost incurred to rework fans...................
18,000
Spoilage cost (net)..................................
15,000
Cost of retesting reworked fans..............
2,000
Total internal failure cost...........................
35,000

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Percent
1.35
0.25
1.60
0.30
0.15
0.05
0.50
0.90
0.75
0.10
1.75

## Chapter 2 Cost Terms, Concepts, and Classifications

External failure costs:
Cost of warranty repairs..........................
35,000
Cost of handling customer complaints....
11,000
Total external failure cost...........................
46,000
Total quality cost........................................ \$123,000
168.

1.75
0.55
2.30
6.15

## Gad Company's quality cost report is to be based on the following data:

Re-entering data because of keying errors.............
Net cost of spoilage................................................
Supervision of testing and inspection activities.....
Lost sales due to poor quality................................
Warranty repairs and replacements........................
Depreciation of test equipment..............................
Maintenance of test equipment..............................
Systems development.............................................
Quality training......................................................

\$17,000
\$88,000
\$78,000
\$17,000
\$92,000
\$12,000
\$75,000
\$79,000
\$19,000

Required:
Prepare a Quality Cost Report in good form with separate sections for prevention
costs, appraisal costs, internal failure costs, and external failure costs.
Ans:
Prevention costs
Quality training............................................................. \$ 19,000
Systems development...................................................
79,000
Total prevention cost........................................................
98,000
Appraisal costs
Depreciation of test equipment.....................................
12,000
Supervision of testing and inspection activities...........
78,000
Maintenance of test equipment.....................................
75,000
Total appraisal cost.......................................................... 165,000
Internal failure costs
Re-entering data because of keying errors...................
17,000
Net cost of spoilage......................................................
88,000
Total internal failure cost................................................. 105,000

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## Chapter 2 Cost Terms, Concepts, and Classifications

External failure costs
Lost sales due to poor quality.......................................
17,000
Warranty repairs and replacements...............................
92,000
Total external failure cost................................................ 109,000
Total quality cost.............................................................. \$477,000
169. Hartz Company's quality cost report is to be based on the following data:
Lost sales due to poor quality..........................................
Net cost of spoilage.........................................................
Final product testing and inspection................................
Net cost of scrap..............................................................
Systems development......................................................
Supplies used in testing and inspection...........................
Quality data gathering, analysis, and reporting...............
Product recalls.................................................................

\$86,000
\$35,000
\$19,000
\$88,000
\$83,000
\$94,000
\$72,000
\$43,000
\$53,000

Required:
Prepare a Quality Cost Report in good form with separate sections for prevention
costs, appraisal costs, internal failure costs, and external failure costs.
Ans:
Prevention costs
Systems development...................................................
Quality data gathering, analysis, and reporting............
Total prevention cost........................................................
Appraisal costs
Final product testing and inspection.............................
Supplies used in testing and inspection........................
Total appraisal cost..........................................................
Internal failure costs
Net cost of scrap...........................................................
Net cost of spoilage......................................................
Total internal failure cost.................................................

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\$ 83,000
43,000
126,000
19,000
94,000
113,000
72,000
88,000
35,000
195,000

## Chapter 2 Cost Terms, Concepts, and Classifications

External failure costs
Lost sales due to poor quality.......................................
86,000
Product recalls..............................................................
53,000
Total external failure cost................................................ 139,000
Total quality cost.............................................................. \$573,000

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