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									Problem 2-19 Schedule of COGM, Income Schedule, Cost Behavior

Given:
  Various cost and sales data for Medco, Inc., are given below for the just completed year

  MEDCO, INC.
  Purchases of raw materials                            $90,000
  Raw materials inventory, beginning                     10,000
  Raw materials inventory, ending                        17,000
  Depreciation, factory                                  42,000
  Insurance, factory                                      5,000
  Direct labor                                           60,000
  Maintenance, factory                                   30,000
  Administrative expenses                                70,000
  Sales                                                 450,000
  Utilities, factory                                     27,000
  Supplies, factory                                       1,000
  Selling expenses                                       80,000
  Indirect labor                                         65,000
  Work in process inventory, beginning                    7,000
  Work in process inventory, ending                      30,000
  Finished goods inventory, beginning                    10,000
  Finished goods inventory, ending                       40,000

Required:

1. Prepare a schedule of Cost of Goods Manufactured

  MEDCO, INC.
  Schedule of Cost of Goods Manufactured
  For the just completed year

  Direct materials used:
     Raw materials inventory, beginning                             $10,000
     Add: Purchases of raw materials                                 90,000
     Raw materials available for use                               $100,000
     Less: Raw materials inventory, ending                          (17,000)
        Direct materials used in production                                       $83,000
  Direct labor incurred:                                                           60,000
  Manufacturing overhead incurred:
     Depreciation, factory                                           $42,000
     Insurance, factory                                                5,000
     Maintenance, factory                                             30,000
     Utilities, factory                                               27,000
     Supplies, factory                                                 1,000
     Indirect labor                                                   65,000
        Total manufacturing overhead costs incurred                              170,000
  Total manufacturing costs adding during period                                $313,000
  Add: Work in process inventory, beginning                                        7,000
  Total work in process                                                         $320,000
  Less: Work in process inventory, ending                                        (30,000)
  Cost of goods manufactured                                                 $290,000

2. Prepare an income statement for the just completed year.

  MEDCO, INC.
  Income Statement
  For the just completed year

  Sales                                                                      $450,000
  Cost of goods sold:
     Finished goods inventory, beginning                          $10,000
     Add: Cost of goods manufactured                              290,000
     Cost of goods available for sale                            $300,000
     Less: Finished goods inventory, ending                       (40,000)
        Cost of goods sold                                                   (260,000)
  Gross margin                                                               $190,000
  Less: Selling & administrative expenses
     Selling expenses                                             $80,000
     Administrative expenses                                       70,000
        Selling & administrative expenses                                    (150,000)
  Net operating income                                                        $40,000

3. Assume that the company produced the equivalent of 10,000 units of product
   during the year. What was the average cost per unit for direct materials? What
   was the average cost per unit for factory depreciation?

  Average cost per unit :

     Direct materials --          $8.30
     Factory depreciation --      $4.20

4. Assume that the company expects to produce 15,000 units of production during
   the coming year. What average cost per unit and total cost would you expect the
   company to incur for direct materials at this level of activity? For factory
   depreciation?
                              Expected Expected
   Average cost per unit :    Average        Total
                              Cost/Unit      Cost
      Direct materials --        $8.30 $124,500 (Variable cost)
      Factory depreciation --    $2.80      $42,000 (Fixed cost)

5. As the manager responsible for production costs, explain to the president any
   differences in the average costs per unit between (3) and (4) above.

                                Average Cost / Unit
                                 Expected Volume
                                 10,000     15,000
     Direct materials --          $8.30       $8.30   Variable
     Factory depreciation --      $4.20       $2.80    Fixed
Since fixed costs do not change in total as activity levels change, fixed costs per
unit will change as total fixed costs are spread out over different levels of activity.
In this case, the rise in activity level from 10,000 units to 15,000 units caused the
depreciation cost per unit to dropped from $4.20 to $2.80. Fixed cost per unit is
inversely related to activity level.

Within reasonable limits, it is assumed that variable cost per unit remains constant
regardless of the direction of activity level changes. Hence the cost per unit for
direct materials remained constant at $8.30.
Exercise 2-6 Identifying Direct and Indirect Costs

Given:
    The Empire Hotel is a four-star hotel located in downtown Seattle.

Required:
   For each of the following costs incurred at the Empire Hotel, indicate whether it would most likely
   be a direct cost or an indirect cost of the specified cost object by placing an x in the appropriate
   column.

     Direct cost -- A cost that can be easily and conveniently traced to a specified cost object.

     Indirect cost -- A cost that cannot be easily and conveniently traced to a specified cost object.

                                                                                                      Type of Cost
                       Cost Item                                     Cost Object                    Direct    Indirect

          Room service beverages                         A particular hotel quest                     X

 1        The salary of the head chef                    The hotel's restaurant                       X

 2        The salary of the head chef                    A particular restaurant customer                        X

 3        Room cleaning supplies                         A particular hotel guest                                X

 4        Flowers for the reception desk                 A particular hotel guest                                X

 5        The wages of the doorman                       A particular hotel guest                                X

 6        Room cleaning supplies                         The housecleaning department                 X

 7        Fire Insurance on the hotel building           The hotel's gym                                         X

 8        Towels used in the gym                         The hotel's gym                              X
Exercise 2-6: Identifying Direct and Indirect Costs

Given:
   The Sorrento Hotel is a four-star hotel located in downtown Seattle. The hotel's operations
   vice president would like to replace the hotel's antiquated computer terminals at the
   registration desk with attractive state-of-the-art flat-panel displays. The new displays
   would take less space, would consume less power than the old computer terminals, and
   would provide additional security since they can only be viewed from a restrictive angle.
   The new computer displays would not require any new wiring. The hotel's chef believes
   the funds would be better spent on a new bulk freezer for the kitchen.

Required:

   For each of the items below, indicate by placing an X in the appropriate column whether it
   should be considered a differential cost, an opportunity cost, or a sunk cost in the decision
   to replace the old computer terminals with new flat-panel displays. If none of the categories
   apply for a particular item, leave all columns blank.

   Differential cost -- a difference in cost between two alternatives.

   Opportunity cost -- The potential benefit that is given up when one alternative is selected
                       over another.

   Sunk cost -- A cost that has already been incurred and that cannot be changed by any
                decision made now or in the future.

                                                                                 Type of Cost
                              Cost Item                              Differential Opportunity      Sunk

   Ex. Cost of electricity to run the terminals                          ?

    1 Cost of the new flat-panel displays                                X

    2 Cost of the old computer terminals                                                            X

    3 Rent on the space occupied by the registration desk                                           X

    4 Wages of the registration desk personnel

    5 Benefits from a new freezer                                                     X

    6 Costs of maintaining the old computer terminals                    X

    7 Cost of removing the old computer terminals                        X

    8 Cost of existing registration desk wiring                                                     X
Exercise 2-15: Classification of Labor Costs

Given:
   Lynn Bjorland is employed by Southern Laboratories and is directly involved in preparing
   the company's leading antibiotic drug. Lynn's basic wage rate is $24 per hour. The
   company pays its employees time and a half for any work in excess of 40 hours per
   week.

Required:

   1. Suppose that in a given week Lynn works 45 hours. Compute Lynn's total wages for
      the week. How much of this cost would the company allocate to direct labor cost? To
      manufacturing overhead?
                                      Hours       Rate      Total
             Direct labor costs            45       $24     $1,080
             MOH                             5      $12         60
                                                            $1,140

               Regular Pay                   40        $24       $960
               Overtime Pay                   5        $36        180
                                                               $1,140

   2. Suppose in another week that Lynn works 50 hours but is idle for 4 hours during the
      week due to equipment breakdowns. Compute Lynn's total wages for the week. How
      much of this amount would be allocated to direct labor cost? To manufacturing
      overhead?
                                                   Hours       Rate       Total
             Direct labor costs                          46       $24     $1,104
             MOH idle time                                4       $24         96
             MOH overtime premium                        10       $12        120
                                                                          $1,320

               Regular Pay                               40       $24       $960
               Overtime Pay                              10       $36        360
                                                                          $1,320

   3. Southern Laboratories has an attractive package of fringe benefits that costs the
      company $8 for each hour of employee time (either regular time or overtime).
      During a particular week Lynn works 48 hours but is idle for 3 hours due to
      material shortages. Compute Lynn's total wages and fringe benefits for the week.
      If the company treats all fringe benefits as part of manufacturing overhead cost,
      how much of Lynn's wages and fringe benefits for the week would be allocated
      to direct labor cost? To manufacturing costs?

                                                   Hours       Rate       Total
               Direct labor costs                       45       $24      $1,080      $1,080
               MOH idle time                             3       $24         $72
               MOH overtime premium                      8       $12         $96
               MOH fringe benefits                      48         $8        384
                  Total MOH                                                             $552
                                                                          $1,632      $1,632
           Regular pay                                40        $32     $1,280
           Overtime pay                                8        $44        352
                                                                        $1,632

4. Refer to the data in (3) above. If the company treats that part of fringe benefits
   relating to direct labor as added direct labor cost, how much of Lynn's wages and
   fringe benefits for the week will be allocated to direct labor cost? To MOH cost?

                                                Hours        Rate       Total
           Direct labor costs                        45        $32      $1,440      $1,440
           MOH idle time                              3        $24         $72
           MOH fringe benefits                        3          $8         24
           MOH overtime premium                       8        $12         $96
              Total MOH                                                               $192
                                                                        $1,536      $1,632

           Regular pay                                40        $32     $1,280
           Overtime pay                                8        $44        352
                                                                        $1,632
Exercise 2-9: Classification of Quality Costs

Given:
   Below are listed a number of activities that are part of a company's quality control systems.

Required:
   1. Classify the costs associated with each of these activities into one of the following
      categories:

       Prevention costs -- Costs that are incurred to keep defects from occurring.

       Appraisal costs -- Costs that are incurred to identify defective products before the
                          products are shipped to customers.

       Internal failure costs -- Costs that are incurred as a result of identifying defective
                                 products before they are shipped to customers.

       External failure costs -- Costs that are incurred when a product or service that is
                                 defective is delivered to a customer

                                                                                    Type of Quality Cost
                                                                          Prevention Appraisal Internal
                                   Cost Item                                 Cost       Cost      Failure

        a Repairs of goods still under warranty

        b Customer returns due to defects

        c Statistical process control                                          X

        d Disposal of spoiled goods                                                                 X

        e Maintaining testing equipment                                                       X

         f Inspecting finished goods                                                          X

        g Downtime caused by quality problems                                                       X

        h Debugging errors in software                                                              X

         i Recall of defective products

         j Training quality engineers                                          X

        k Re-entry data due to typing errors                                                        X

         l Inspecting materials received from suppliers                        X

        m Audits of the quality systems                                        X

        n Supervision of testing personnel                                                    X
    0 Rework labor                                                                          X


2. Which of the four types of quality costs listed in (1) above are incurred to keep poor
   quality of conformance from occurring? Which of the four types of costs are incurred
   because poor quality of conformance has occurred?

   Quality of conformance -- The degree to which a product or service meets or exceeds
                              its design specifications and is free of defects or other
                              problems that mar its appearance or degrade performance.

   Prevention costs & appraisal make up cost of conformance, while the costs associated
   with non-conformance are internal and external failure costs.
Quality Cost
               External
                Failure

                  X

                  X




                  X

								
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