Solution manual managerial accounting concept and applications by cabrera chapter 08 answer

MANAGEMENT ACCOUNTING - Solutions Manual

CHAPTER 8
COST CONCEPTS AND CLASSIFICATIONS
I.

Questions
1. The phrase “different costs for different purposes” refers to the fact that
the word “cost” can have different meanings depending on the context
in which it is used. Cost data that are classified and recorded in a
particular way for one purpose may be inappropriate for another use.
2. Fixed costs remain constant in total across changes in activity, whereas
variable costs change in proportion to the level of activity.
3. Examples of direct costs of the food and beverage department in a hotel
include the money spent on the food and beverages served, the wages
of table service personnel, and the costs of entertainment in the dining
room and lounge. Examples of indirect costs of the food and beverage
department include allocations of the costs of advertising for the entire
hotel, of the costs of the grounds and maintenance department, and of
the hotel general manager’s salary.
4. The cost of idle time is treated as manufacturing overhead because it is
a normal cost of the manufacturing operation that should be spread out
among all of the manufactured products. The alternative to this
treatment would be to charge the cost of idle time to a particular job
that happens to be in process when the idle time occurs. Idle time often
results from a random event, such as a power outage. Charging the
cost of the idle time resulting from such a random event to only the job
that happened to be in process at the time would overstate the cost of
that job.
5. a. Uncontrollable cost
b. Controllable cost

c. Uncontrollable cost
6. Product costs are costs that are associated with manufactured goods
until the time period during which the products are sold, when the
product costs become expenses. Period costs are expensed during the
time period in which they are incurred.
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Chapter 8 Cost Concepts and Classifications

7. The most important difference between a manufacturing firm and a
service industry firm, with regard to the classification of costs, is that
the goods produced by a manufacturing firm are inventoried, whereas
the services produced by a service industry firm are consumed as they
are produced. Thus, the costs incurred in manufacturing products are
treated as product costs until the period during which the goods are
sold. Most of the costs incurred in a service industry firm to produce
services are operating expenses that are treated as period costs.
8. Product costs are also called inventoriable costs because they are
assigned to manufactured goods that are inventoried until a later period,
when the products are sold. The product costs remain in the finished
goods inventory account until the time period when the goods are sold.
9. A sunk cost is a cost that was incurred in the past and cannot be altered
by any current or future decision. A differential cost is the difference in
a cost item under two decision alternatives.
10. a.
b.
c.
d.

Direct cost
Direct cost
Indirect cost
Indirect cost

11. The two properties of a relevant cost are:
1. it differs between the decision options
2. it will be incurred in the future
12. The three types of product costs are:
1. direct materials – the materials used in manufacturing the product,
which become a physical part of the finished product.
2. direct labor – the labor used in manufacturing the product.
3. factory overhead – the indirect costs for materials, labor, and
facilities used to support the manufacturing process, but not used
directly in manufacturing the product.
13. The three types of manufacturing inventories are:
1. materials inventory – the store of materials used in the
manufacturing process or in providing the service.

8-2


Cost Concepts and Classifications Chapter 8

2. work in process inventory – accounts for all costs put into the
manufacturing of products that are started but not complete at the
financial statement date.
3. finished goods inventory – the cost of goods that are ready for sale.
14. Direct materials include the materials in the product and a reasonable
allowance for scrap and defective units, while indirect materials are

materials used in manufacturing that are not physically part of the
finished product.
15. The income statement of a manufacturing company differs from the
income statement of a merchandising company in the cost of goods
sold section. A merchandising company sells finished goods that it has
purchased from a supplier. These goods are listed as “purchases” in the
cost of goods sold section. Since a manufacturing company produces its
goods rather than buying them from a supplier, it lists “cost of goods
manufactured” in place of “purchases.” Also, the manufacturing
company identifies its inventory in this section as Finished Goods
inventory, rather than as Merchandise Inventory.
16. Yes, costs such as salaries and depreciation can end up as part of assets
on the balance sheet if these are manufacturing costs. Manufacturing
costs are inventoried until the associated finished goods are sold. Thus,
if some units are still in inventory, such costs may be part of either
Work in Process inventory or Finished Goods inventory at the end of a
period.
17. No. A variable cost is a cost that varies, in total, in direct proportion to
changes in the level of activity. A variable cost is constant per unit of
product. A fixed cost is fixed in total, but the average cost per unit
changes with the level of activity.
18. Manufacturing overhead is an indirect cost since these costs cannot be
easily and conveniently traced to particular units of products.

19.

Direct labor cost (34 hours  P15 per hour)..........................
Manufacturing overhead cost (6 hours  P15 per hour)........
Total wages earned..................................................................
8-3

P510
90
P600


Chapter 8 Cost Concepts and Classifications
20.

Direct labor cost (45 hours  P14 per hour)........................
Manufacturing overhead cost (5 hours  P7 per hour)........
Total wages earned..............................

P630
35
P665

II. Exercises
Exercise 1 (Schedule of Cost of Goods Manufactured and Sold; Income
Statement)
Requirement 1
Amazing Aluminum Company
Schedule of Cost of Goods Manufactured
For the Year Ended December 31, 2005
Direct material:
Raw-material inventory, January 1........................
Add: Purchases of raw material............................
Raw material available for use...............................
Deduct: Raw-material inventory, December 31

P 60,000
250,000
P310,000
70,000

Raw material used

P240,000

Direct labor..................................................................
Manufacturing overhead:
Indirect material

400,000
P 10,000

Indirect labor

25,000

Depreciation on plant and equipment
Utilities
........................................................................
........................................................................
Other
........................................................................
........................................................................
Total manufacturing overhead
Total manufacturing costs.............................................
Add: Work-in-process inventory, January 1................

Subtotal........................................................................
...............................................................................
Deduct: Work-in-process inventory, December 1.......
8-4

100,000
25,000
30,000
190,000
P830,000
120,000
P950,000
115,000


Cost Concepts and Classifications Chapter 8
Cost of goods manufactured.........................................

P835,000

Requirement 2
Amazing Aluminum Company
Schedule of Cost of Goods Sold
For the Year Ended December 31, 2005
Finished goods inventory, January 1................................................
Add: Cost of goods manufactured..................................................
Cost of goods available for sale.......................................................
Deduct: Finished goods inventory, December 31...........................
Cost of goods sold...........................................................................

P150,000
835,000
P985,000
165,000
P820,000

Requirement 3
Amazing Aluminum Company
Income Statement
For the Year Ended December 31, 2005
Sales revenue...................................................................................
Less: Cost of goods sold.................................................................
Gross margin....................................................................................
Selling and administrative expenses................................................
Income before taxes.........................................................................
Income tax expense.........................................................................
Net income ....................................................................................

P1,105,000
820,000
P 285,000
110,000
P 175,000
70,000
P 105,000

Exercise 2

a.
b.

c.
d.
e.
f.
g.
h.

Cost Item
Transportation-in costs on materials
purchased
Assembly-line workers’ wages
Property taxes on work in process
inventories
Salaries of top executives in the
company
Overtime premium for assembly
workers
Sales commissions
Sales personnel office rental
Production supervisory salaries
8-5

Fixed (F)
Variable (V)

Period (P)
Product (R)

V
V

R
R

V
F

R
P

V

R

V
F
F

P
P
R


Chapter 8 Cost Concepts and Classifications

i.
j.
k.
l.
m.

n.
o.
p.
q.
r.
s.
t.

Controller’s office supplies
Cost Item
Executive office heat and air
conditioning
Executive office security personnel
Supplies used in assembly work
Factory heat and air conditioning
Power to operate factory equipment
Depreciation on furniture for sales staff
Varnish used for finishing product
Marketing personnel health insurance
Packaging materials for finished product
Salary of the quality control manager
who checks work on the assembly line
Assembly-line workers’ dental
insurance

F
Fixed (F)
Variable (V)
F

P
Period (P)
Product (R)
P

F
V
F
V
F
V
F
V

P
R
R
R
P
R
P
R

F
F

R
R

Exercise 3 (Cost Classifications; Manufacturer)

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

a, d, g, i
a, d, g, j
b, f
b, d, g, k
a, d, g, k
a, d, g, j
b, c, f
b, d, g, k
b, c and d*, e and f and g*, k*
* The building is used for several purposes.

10.
11.
12.
13.
14.

b, c, f
b, c, h
b, c, f

b, c, e
b, c and d†, e and f and g†, k†
†

The building that the furnace heats is used for several purposes.

15. b, d, g, k

8-6


Cost Concepts and Classifications Chapter 8

Exercise 4 (Economic Characteristics of Costs)
1.
2.
3.
4.
5.
6.

marginal cost
sunk cost
average cost
opportunity cost
differential cost
out-of-pocket cost

Exercise 5 (Cost Classifications; Hotel)
1.

2.
3.
4.
5.
6.
7.
8.

a, c, e, k
b, d, e, k
d, e, i
d, e, i
a, d, e, k
a, d, e, k
d, e, k
b, d†, e, k
†

Unless the dishwasher has been used improperly.

9. h
10. a, d, e*, j
* The hotel general manager may have some control over the total space
allocated to the kitchen.

11.
12.
13.
14.

i
j
a, c, e
e, k

Exercise 6
8-7


Chapter 8 Cost Concepts and Classifications
Pickup Truck Output
3,000 trucks
P 29,640,000
39,200,000
4,500,000
13,660,000
P 87,000,000

6,000 trucks
P 59,280,000
39,200,000
9,000,000
13,660,000
P121,140,000

9,000 trucks
P 88,920,000
39,200,000
13,500,000
13,660,000

P155,280,000

Selling price per truck

46,000

40,100

35,900

Unit cost

29,000

20,190

17,253

Profit per truck

17,000

19,910

18,647

Variable production costs
Fixed production costs
Variable selling costs
Fixed selling costs

Total costs

Exercise 7
(see next page)
Exercise 8
1. The wages of employees who build the sailboats: direct labor cost.
2. The cost of advertising in the local newspapers: marketing and selling
cost.
3. The cost of an aluminum mast installed in a sailboat: direct materials
cost.
4. The wages of the assembly shop’s supervisor: manufacturing overhead
cost.
5. Rent on the boathouse: a combination of manufacturing overhead,
administrative, and marketing and selling cost. The rent would most
likely be prorated on the basis of the amount of space occupied by
manufacturing, administrative, and marketing operations.
6. The wages of the company’s bookkeeper: administrative cost.
7. Sales commissions paid to the company’s salespeople: marketing and
selling cost.
8. Depreciation on power tools: manufacturing overhead cost.

8-8


Cost Concepts and Classifications Chapter 8

Exercise 7
Variable
Cost
1.

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

Wood used in a table (P200
per table)
Labor cost to assemble a
table (P80 per table)
Salary of the factory
supervisor (P76,000 per
year)
Cost of electricity to
produce tables (P4 per
machine-hour)
Depreciation of machines
used to produce tables
(P20,000 per year)
Salary of the company
president (P200,000 per
year)
Advertising expense
(P500,000 per year)
Commissions paid to

salespersons (P60 per table
sold)
Rental income forgone on
factory space

Fixed Cost

Period
(Selling and
Administrative) Cost

X

Product Cost
Direct
Manufacturing
Labor
Overhead

Sunk Cost

Opportunity
Cost

X

X

X
X

X

X

X
X

X

Direct
Materials

X

X

X

X

X

X*

X
X1

This is a sunk cost because the outlay for the equipment was made in a previous period.
This is an opportunity cost because it represents the potential benefit that is lost or sacrificed as a result of using the factory space to produce tables. Opportunity

cost is a special category of cost that is not ordinarily recorded in an organization’s accounting books. To avoid possible confusion with other costs, we will not
attempt to classify this cost in any other way except as an opportunity cost.

8-9


Chapter 8 Cost Concepts and Classifications

Exercise 9

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

Cost
The salary of the head chef
The salary of the head chef
Room cleaning supplies
Flowers for the reception
desk
The wages of the doorman
Room cleaning supplies
Fire insurance on the hotel
building
Towels used in the gym

Cost Object
The hotel’s restaurant
A particular restaurant
customer
A particular hotel guest
A particular hotel guest

Direc
t
Cost
X

A particular hotel guest
The housecleaning
department
The hotel’s gym
The hotel’s gym

Indirec
t
Cost
X
X
X
X

X
X
X

Note: The room cleaning supplies would most likely be considered an
indirect cost of a particular hotel guest because it would not be practical to
keep track of exactly how much of each cleaning supply was used in the
guest’s room.
III. Problems
Problem 1
The relevant costs for this decision are the differential costs. These are:
Opportunity cost or lost wages (take home)
[P1,500 x 70% x 12 months]........
P12,600
Tuition......................................................
2,200
Books and supplies..................................
300
Total differential costs...................... P15,100
Room and board, clothing, car, and incidentals are not relevant because
these are presumed to be the same whether or not Francis goes to school.
The possibility of part-time work, summer jobs, or scholarship assistance
could be considered as reductions to the cost of school. If students are
familiar with the time value of money, then they should recognize that the
analysis calls for a comparison of the present value of the differential aftertax cash inflows with the present value of differential costs of getting the
education (including the opportunity costs of lost income).
Problem 2
8-10


Cost Concepts and Classifications Chapter 8

Requirement (a)

Only the differential outlay costs need be considered. The travel and other
variable expenses of P22 per hour would be the relevant costs. Any
amount received in excess would be a differential, positive return to Pat.
Requirement (b)
The opportunity cost of the hours given up would be considered in this
situation. Unless Pat receives more than the P100 normal consulting rate,
the contract would not be beneficial.
Requirement (c)
In this situation Pat would have to consider the present value of the
contract and compare that to the present value of the existing consulting
business. The final rate may be more or less than the normal P100 rate
depending on the outcome of Pat’s analysis.
Problem 3
Utilities for the bakery
Paper used in packaging product
Salaries and wages in the bakery
Cookie ingredients
Bakery labor and fringe benefits
Bakery equipment maintenance
Depreciation of bakery plant and equipment
Uniforms
Insurance for the bakery
Boxes, bags, and cups used in the bakery
Bakery overtime premiums
Bakery idle time
Total product costs in pesos

2,100
90
19,500

35,000
1,300
800
2,000
400
900
1,100
2,600
500
66,290

Problem 4
Administrative costs
Rent for administration offices
8-11

1,000
17,200


Chapter 8 Cost Concepts and Classifications

Advertising
Office manager’s salary
Total period costs in pesos

1,900
13,000
33,100

Problem 5
Requirement (a)
Sunk costs not shown could include lost book value on traded assets,
depreciation estimates for new investment, and interest costs on capital
needed during facilities construction.
Requirement (b)
The client might be used to differential cost as a decision tool, and believes
(correctly) that use of differential analyses has several advantages --- it is
quicker, requires less data, and tends to give a better focus to the decision.
The banker might suspect the client of hiding some material data in order to
make the proposal more acceptable to the financing agency.
Problem 6
Requirement (1)
EH Corporation
Schedule of Cost of Goods Manufactured
For the Year Ended December 31
Direct materials:
Raw materials, inventory, January 1
Add: Purchases of raw materials
Raw materials available for use
Deduct: Raw materials inventory,
December 31
Raw materials used in production
Direct labor
Manufacturing overhead:
Utilities, factory
Depreciation, factory
Insurance, factory
Supplies, factory
Indirect labor

Maintenance, factory
8-12

P 45,000
375,000
420,000
30,000
P 390,000
75,000
18,000
81,000
20,000
7,500
150,000
43,500


Cost Concepts and Classifications Chapter 8

Total manufacturing overhead cost
Total manufacturing cost
Add: Work in process inventory, January 1

320,000
785,000
90,000
875,000

Deduct: Work in process inventory,
December 31

Cost of goods manufactured

50,000
P825,000

Requirement (2)
The cost of goods sold would be computed as follows:
Finished goods inventory, January 1
Add: Cost of goods manufactured
Goods available for sale
Deduct: Finished goods inventory, December 31
Cost of goods sold

P130,000
825,000
955,000
105,000
P850,000

Requirement (3)
EH Corporation
Income Statement
For the Year Ended December 31
Sales
Cost of goods sold (above)
Gross margin
Selling and administrative expenses:
Selling expenses
Administrative expenses
Net operating income

P1,250,000
850,000
400,000
P 70,000
135,000
P

8-13

205,000
195,000


Chapter 8 Cost Concepts and Classifications

Problem 7
Note to the Instructor: Some of the answers below are debatable.

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.

12.
13.
14.
15.
16.
17.

Variable or
Cost Item
Fixed
Depreciation, executive jet.............................................................................
F
Costs of shipping finished goods to customers.............................................
V
Wood used in manufacturing furniture...........................................................
V
Sales manager’s salary....................................................................................
F
Electricity used in manufacturing furniture...................................................
V
Secretary to the company president...............................................................
F
Aerosol attachment placed on a spray can produced by the company........
V
Billing costs.....................................................................................................
V
Packing supplies for shipping products overseas..........................................
V
Sand used in manufacturing concrete............................................................
V

Supervisor’s salary, factory............................................................................
F
Executive life insurance..................................................................................
F
Sales commissions..........................................................................................
V
Fringe benefits, assembly line workers.........................................................
V
Advertising costs............................................................................................
F
Property taxes on finished goods warehouses..............................................
F
Lubricants for production equipment.............................................................
V

*Could be an administrative cost.
**Could be an indirect cost.

Selling
Cost

Administrative
Cost
X

Manufacturing
(Product) Cost
Direct
Indirect

X
X
X
X
X
X
X*
X
X
X
X
X
  X**
X
X
X


Cost Concepts and Classifications Chapter 8

Problem 8
Requirement (1)

Variable
Cost

Name of the Cost
Ling’s present salary of P400,000 per
month..........................................................................
Rent on the garage, P15,000 per month...........................

Rent of production equipment, P50,000 per
month..........................................................................
Materials for producing flyswatters, at
P30.00 each.................................................................
X
Labor cost of producing flyswatters, at
P50.00 each.................................................................
X
Rent of room for a sales office, P7,500 per
month..........................................................................
Answering device attachment, P2,000 per
month..........................................................................
Interest lost on savings account, P100,000
per year........................................................................
Advertising cost, P40,000 per month..............................
Sales commission, at P10.00 per flyswatter....................
X
Legal and filing fees, P60,000.........................................

Fixed
Cost

Direct
Materials

Product Cost
Direct
Mfg.
Labor
Overhead

Period
(Selling
and
Admin.)
Cost

Opportunity
Cost

Sunk
Cost

X
X

X

X

X
X
X

X

X

X

X

X

X
X

X
X

8-15


Chapter 8 Cost Concepts and Classifications

Requirement (2)
The P60,000 legal and filing fees are not a differential cost. These legal and
filing fees have already been paid and are a sunk cost. Thus, the cost will
not differ depending on whether Ling decides to produce flyswatters or to
stay with the consulting firm. All other costs listed above are differential
costs since they will be incurred only if Ling leaves the consulting firm and
produces the flyswatters.
Problem 9
Requirement (1)
Ms. Rio’s first action was to direct that discretionary expenditures be
delayed until the first of the new year. Providing that these “discretionary
expenditures” can be delayed without hampering operations, this is a good
business decision. By delaying expenditures, the company can keep its cash
a bit longer and thereby earn a bit more interest. There is nothing unethical
about such an action. The second action was to ask that the order for the

parts be cancelled. Since the clerk’s order was a mistake, there is nothing
unethical about this action either.
The third action was to ask the accounting department to delay recognition
of the delivery until the bill is paid in January. This action is dubious.
Asking the accounting department to ignore transactions strikes at the heart
of the integrity of the accounting system. If the accounting system cannot
be trusted, it is very difficult to run a business or obtain funds from
outsiders. However, in Ms. Rio’s defense, the purchase of the raw materials
really shouldn’t be recorded as an expense. He has been placed in an
extremely awkward position because the company’s accounting policy is
flawed.
Requirement (2)
The company’s accounting policy with respect to raw materials is
incorrect. Raw materials should be recorded as an asset when delivered
rather than as an expense. If the correct accounting policy were followed,
there would be no reason for Ms. Rio to ask the accounting department to
delay recognition of the delivery of the raw materials. This flawed
accounting policy creates incentives for managers to delay deliveries of
raw materials until after the end of the fiscal year. This could lead to raw
materials shortages and poor relations with suppliers who would like to
8-16


Cost Concepts and Classifications Chapter 8

record their sales before the end of the year.
The company’s “manage-by-the-numbers” approach does not foster ethical
behavior—particularly when managers are told to “do anything so long as
you hit the target profits for the year.” Such “no excuses” pressure from the
top too often leads to unethical behavior when managers have difficulty

meeting target profits.
IV. Multiple Choice Questions
1.
2.
3.
4.
5.
6.

B
D
B
A
C
D

7.
8.
9.
10.
11.
12.

C
D
C
C
A
C

13. D
14. D †
15. B †
16. A †
17. C †
18. C

*

19.
20.
21.
22.
23.
24.

A
A*
B
B
C
C

25.
26.
27.
28.
29.
30.

C
B
B
A **
A
B

Controllable costs are those costs that can be influenced by a specified
manager within a given time period.
** The answer assumes absorption costing method is used.
†
Supporting Computations
14. P60 + P10 + P18 + P4 = P92
16. P60 + P10 + P18 + P32 = P120
15. P32 + P16 = P48
17. P4 + P16 = P20

8-17