Chapter Exercises: Managerial Accounting and Cost Concepts

Exercise 2-2 Classifying Manufacturing Costs

The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small and its assembly shop and retail sales store are housed in a single facility in a Redmond, Washington, industrial park. Listed below are some of the costs that are incurred at the company.

Required:

For each cost, indicate whether it would most likely be classified as direct labor, direct materials, manufacturing overhead, selling, or an administrative cost.

1. The cost of a hard drive installed in a computer.
2. The cost of advertising in the Puget Sound Computer User newspaper.
3. The wages of employees who assemble computers from components.
4. Sales commissions paid to the company's salespeople.
5. The wages of the assembly shop's supervisor.
6. The wages of the company's accountant.
7. Depreciation on equipment used to test assembled computers before release to customers.
8. Rent on the facility in the industrial park.

Exercise 2-3 Classification of Costs as Period or Product Cost

Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures sophisticated spy cameras for remote-controlled military reconnaissance aircraft. The company, which is privately owned, has approached a bank for a loan to help it finance its growth. The bank requires financial statements before approving such a loan. You have been asked to help prepare the financial statements and were given the following list of costs:

Required:

Classify the costs as either product costs or period costs for the purpose of preparing the financial statements for the bank.

1. Depreciation on salespersons' cars.
2. Rent on equipment used in the factory.
3. Lubricants used for machine maintenance.
4. Salaries of personnel who work in the finished goods warehouse.
5. Soap and paper towels used by factory workers at the end of a shift.
6. Factory supervisors' salaries.
7. Heat, water, and power consumed in the factory.
8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.)
9. Advertising costs.
10. Workers' compensation insurance for factory employees.
11. Depreciation on chairs and tables in the factory lunchroom.
12. The wages of the receptionist in the administrative offices.
13. Cost of leasing the corporate jet used by the company's executives.
14. The cost of renting rooms at a Florida resort for the annual sales conference.
15. The cost of packaging the company's product.

Exercise 2-4 Fixed and Variable Cost Behavior

Espresso Express Operates a number of espresso coffee stands in busy suburban malls. The fixed weekly expense of a coffee stand is $1,200 and the variable cost per cup of coffee served is $0.22

Required:

1. Fill in the following table with your estimated of total costs and cost per cup of coffee at the indicated levels of activity for a coffee stand. Round off the cost of a cup of coffee to the nearest tenth of a cent.
2. Does the average cost per cup of coffee served increase, decrease, or remain the same as the number of cups of coffee served in a week increases? Explain

Exercise 2-5 High-Low Method

The Cheyenne Hotel in Big Sky, Montana, has accumulated records of the total electrical costs of the hotel and the number of occupancy-days over the last year. An occupancy-day represents a room rented out for one day. The hotel's business is highly seasonal, with peaks occurring during the ski season and in the summer.

Required:

1. Using the high-low method, estimate the fixed costs of electricity per month and the variable cost of electricity per occupancy-day. Round off the fixed cost to the nearest whole dollar and the variable cost to the nearest whole cent.
2. What other factors other than occupancy-days are likely to affect the variation in electrical costs from month to month?

Exercise 2-10 Behavior, Contribution Format Income Statement

Harris Company manufactures and sells a single product. A partially completed schedule of the company's total and per unit costs over the relevant range of 30,000 to 50,000 units produced and sold annually is given below:

Required:

1. Complete the schedule of the company's total and units costs above.
2. Assume that the company produces and sells 45,000 units during the year at a selling price of $16 per unit. Prepare a contribution format income statement for the year.

Chapter 3 Exercises: Cost-Volume-Profits Relationships

Exercise 3-1 Preparing and Contribution Format Statement

Whirly Corporation's most recent income shown below:

Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently):

1. The sales volume increases by 100 units.
2. The sales volume decreases by 100 units.
3. The sales volume is 9,000 units.

Exercise 3-4 Computing and Using the CM Ratio

Last month when Holiday Creations, Inc., sold 50,000 units, total sales were $200,000, total variable expenses were $120,000, and fixed expenses were $65,000.

Required:

1. What is the company's contribution margin (CM) ratio?
2. Estimate the change in the company's new operating income if it were to increase its total sales by $1,000.

Exercise 3-5 Changes in Variable Costs, Fixed Costs, Selling Price, and volume.

Required:

1. The marketing manager argues that a $5,000 increase in the monthly advertising budget would increase monthly sales by $9,000. Should the advertising budget be increased?
2. Refer to the original data. Management is considering using higher-quality components that would increase the variable expense by $2 per unit. The marketing manager believes that the higher-quality product would increase sales by 10% per month. Should the higher quality components be used.

Data for Hermann Corporation are show below:

Fixed expenses are $30,000 per month and the company is selling 2,000 units per month

Exercise 3-7 Compute the Level of Sales Required to Attain a Target Profit

Lin Corporation has a single product whose selling price is $120 and whose variable expense is $80 per unit. The company monthly fixed expense is $50,000.

Required:

1. Using the equation method, solve for the unit sales that are required to earn a target profit of $10,000.
2. Using the formula method, solve for the unit sales that are required to earn a target profit of $15,000.

Exercise 3-8 Compute the Margin of Safety

Molander Corporation is a distributer or a sum umbrella used at resort hotels. Data concerning the next month's budget appear below:

Required:

1. Compute the company's margin of safety.
2. Compute the company's margin of safety as a percentage of its sales.

Exercise 3-13 Using a Contribution Format Income Statement

Miller Company's most recent contribution format income statement is shown below:

Required:

Prepare a new contribution format income statement under each of the following conditions (consider each case independently):

1. The number of units sold increases by 15%.
2. The selling price decreases by $1.50 per unit, and the number of units sold increases by 25%.
3. The selling price increases by $1.50 per unit, fixed expenses increase by $20,000, and the number of units sold decreases by 5%.
4. The selling price increase by 12%, variable expense by 60 cents per unit, and the number of units sold decreases by 10%.