Question 1:

Choose the cost term or terms that most appropriately describe the costs identified in each of the following situations. There may be more than one cost term associated with each blank space within a scenario; however, select the term that seems to fit the blank within the scenario BEST. A term can be used more than once but NOT within the same scenario.

a.       Period                e. Fixed                i. Direct materials       m. Committed

b.      Variable               f. Prime                j. Differential             n. Mixed

c.       Opportunity        g. Conversion       k. Overhead

d.      Product               h. Sunk               l. Loss

1. Crown Books, Inc., prints a small book titled The Pocket Speller that is popular with college students. The paper going into the manufacture of the book would be called ____________and classified as a ________________ cost. The paper could also be described as a ____________ cost, as the total cost increases with increased production.

2. Instead of compiling the words in the book, the author hired by the company could have spent many hours consulting with business organizations. The consulting fees would be called ________________ cost.

3. The paper and other materials used in the manufacture of the book, combined with direct labour cost involved, would be called __________________ cost.

4. The salary of Crown Books' president would be classified as a  _____________ cost.

5. Amortization on the equipment used to print the book would be classified by Crown Books as an______________ cost which is part of the ______________ cost . Amortization used by the printer by the executive assistant in the presidents' office would be classified as a _____________ cost. In terms of cost behaviour amortization is generally classified as a _______________ cost.

6. Costs that go into the work in process inventory account and then into Finished Goods inventory account before appearing on the income statement as part of cost of goods sold are classified as ______________ costs.

7. Crown Books is considering purchasing a new printing press. The cost of the ink for the new press is $125 more per gallon; however the printing press would reduce the maintenance cost by $1,200 monthly. These would both be classified as ______________ cost. Management is carefully considering the decision to purchase a new printer because this is a ­­­­­­­­­­­­­­­_____________ cost.

8. All printing costs that are not classified as direct materials or direct labour are ______________ costs.

9. Several hundred copies of the book were left over from the prior edition and are stored in the warehouse and can no longer be sold. The inventory amount invested in these books is $63,500 and would be classified as a ______________ cost. The leftover prior edition books will require an inventory write-down and this will be classified as a ___________.

10. Cost can be classified in several ways. For example Crown Books pays $4,000 rent each month on the building that houses its printing press. The rent would be included in ­­­­­­­­­­­­­­­­­­­­______________ cost when calculating Cost of Goods Manufactured. In terms of cost behaviour, it would be classified as a _________________ cost. The rent can also be classified as a ______________ cost for financial reporting purposes and as part of the ______________ cost.

11. Crown books sells the book through agents who are paid a commission on total sales. This would be classified as a ____________ cost in terms of behaviour. New sales agents in the three month probationary period are paid a base salary with a reduced commission on total sales. This would be classified as a ____________  cost.

Question 2

The Hobart Corporation has the following account balances (in millions):

1. Prepare a schedule of cost of goods manufactured for the year ended December 31.

2. Prepare an income statement by function for the year ended December 31.

3. Suppose that the direct materials used and the amortization on the plant building were for the manufacture of 1 million units of product. What is the unit cost for the direct materials assigned to those units? What is the unit cost for the amortization of the plant building? The amortization of the plant building is computed on a straight line basis.

4. Repeat the computations in requirement 3, assuming that the costs are being predicted for 1.2 million units of product. Calculate how the total cost (for the direct materials and amortization elements only) would be affected. Explain why the total cost changed.

5. As a manager, explain concisely to the president why the unit cost differed at the two levels of activity.