Chapter 1: Homework Q & A 1. Required: For each of the following cost incurred at Northwest Hospital, indicate whether it would most likely be a direct cost or an indirect cost of the specified cost object. Ex.__Catered food served to patients A particular patient Direct cost 1. The wages of pediatric nurses The pediatric department Direct cost 2. Prescription drugs Particular patient Direct cost 3. Heating the hospital The pediatric department Indirect cost 4. The salary of the head of pediatries The pediatric department’ ——_—Diirect cost 5. The salary of the head of pediatrics Particular pediatric patient Indirect cost 6. Hospital chaplain’s salary Particular patient Indirect cost 7. Lab tests by outside contractor Particular patient Direct cost 8. Lab tests by outside contractor Particular department Direct cost 2. The PC Works assembles custom computers from components supplied by various manufacturers. The company is very small, and its assembly shop aud 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 @ computer: Direct materials cost ‘Manufacturing overhead cost Marketing and selling cost Administrative cost 2. The cost of advertising in the Puget Sound Computer User newspaper. Direct labor cost Direct materials cost Manufacturing overhead cost Marketing and selling cost Administrative cost 3. The wages of empl Direct labor cost Direct materials cost Manufacturing overhead cost Marketing and selling cost Administrative cost yees who assemble computers from components, 4, Sales commissions paid to the company’s salespeople. Direct labor cost Direct materials cost ‘Manufacturing overhead cost Marketing and selling cost Administrative cost 5. The wages of the assembly shop’s supervisor. Direct labor cost Direct materials cost Manufacturing overhead cost Marketing and selling cost Administrative cost6, The wages of the company’s accountant. Direct labor cost Direct materials cost Manufacturing overhead cost Marketing and selling cost Administrative cost 7. Depreciation on equipment used to test assembled computers before release to customers Direct labor cost Direct materials cost Manufacturing ove head cost ‘Marketing and selling cost Administrative cost 3. Suppose that you have been given a summer job as an intern at Issac Aircams, a company that manufactures sophisticated spy cameras for remote-controlied 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, Required: Classify each cost listed below as either product costs or period costs for the purpose of preparing ‘the financial statements for the bank. Costs Product Cost / Period Cost 1. Depreciation on salespersons’ cars ‘Period cost 2. Rent on equipment used in the factory. Product cost 3. Lubricants used for machine maintenance. Product cost 4, Salaties of personne! who work in the finished goods warehouse. Period cost 5. Soap and paper towels used by factory workers atthe end of a shift, Product cost 6. Factory supervisors’ salaries. Product cost 7. Heat, water, and power consumed in the factory. Product cost 8. Materials used for boxing products for shipment overseas. (Units are not normally boxed.) Period cost 9. Advertising costs Period cost 10. Workers’ compensation insurance for factory employees. Product cost 11. Depreciation on chairs and tables in the factory lunchroom. Product cost 12. The wages of the receptionist in the administrative offices. Period cost 13. Cost of leasing the corporate jet used by the company’s executives Period cost 14. The cost of renting rooms at a Florida resort for the annual sales conference. Period cost 15. The cost of packaging the company’s product. Product cost 4. Espresso Express operates a number of espresso coffee stands in busy suburban malls. The fixed weekly ‘expense of a coffee stand is $500 and the variable cost per cup of coffee served is $0.27. Required: Fill in the following table with your estimates of total costs and cost per cup of coffee at the indicated. levels of activity for a coffee stand, (Round the Average cost per cup of coffee served to 3 decimal places.) Cups of Coffee Served ina Week Does the avg cost per cup of served increase, 2.400 2.500 2,600 decrease, or remain the same as the cups of Fixed cost $300 $500 $500 coffee served in a week increases? Variable cost 648 675702 - Increases Total cost $1,148 $1,175 $1,202 - Decreases Avg cost cup served 50.478 $0.470 $0.462 ~ Remain the sameOccupaney- Month Days mary 2,640 Februai 2.860 March 980 ‘April 2420 May 2.090 June 4470 July 4,020 August 3,940 September 1,630 October 1,090 November 1390 December 2.910 Required: Using the high-low method, estimate the fixed Costs ‘cost of electricity per month and the variable cost of $ 13200 electricity per occupancy-day. (Do not round your S$ 14,300 intermediate calculations. Round your Variable cost 5 4900 answer to 2 decimal places and Fixed cost element SH12;100) answer to nearest whole dollar amount) S 10,450 S 183 s s High activity 4470[ $18,860 s Low activity 980[ 4,900 s Change 3,490] $13,960 ; Variable Cost S4.00|Per Day Fixed cost element $980) ‘What other factors other than occupan y-day’ are likely to affect the variation in electrical costs from month to mouth? (You may select more than one answer) = Income taxes paid on hotel income. = Seasonal factors like winter or summer. - Number of days present in a month. Systematic factors like guests, switching off fans and lights. 6. Cherokee Inc, is a merchandiser that provided the following information: Number of units sold Selling price per unit Variable selling expense per unit Variable administrative expense per unit Total fixed selling expense Total fixed administrative expense Beginning merchandise inventory Ending merchandise inventory Merchandise purchases Required: Prepare a traditional income statement. 13,000 S 17 Cherokee, Inc. Traditional Income Statement s 1 sales $221,000 s 3 Cost of Goods Sold $71,000 $ 19,000 Gross Margin $150,000 $ 16,000 Selling and administrative expenses: $ 9000 _ Selling Expenses $32,000 $ 23,000 Administrative Expenses $35,000 $ 85000 (Plank) so : (blank) So $87,000 Net Operating Income $63,000 Cherokee, Inc. Contribution Format Income Statement Sales $221,000 Variable expenses: ‘Administrative Expenses $39,000 Selling Expenses $13,000 Cost of Goods Sold $71,000 (blank) so (blank) SO $123,000 Contribution margin: $98,000 Fixed expenses: Selling Expenses $19,000 Administrative Expenses $16,000 (blank) so (blank) $0 $35,000 $63,000 Net Operating Income7. The hospital’s Radiology Department is considering replacing an old inefficient X-ray machine with a state-of. the-art digital X-ray machine. The new machine would provide higher quality X-rays in less time and at a lower cost per X-ray. It would also require less power and would use a color laser printer to produce easily readable \ ray images. Instead of investing the funds in the new X-ray machine, the Laboratory Department is lobbying the hospital’s management to buy a new DNA analyz Required: Classify each item as a differential cost, an opportunity cost, or a sunk cost in the decision to replace the old X-ray machine with a mew machine. If none of the categories apply for a particular item, select "None". Cost of X-ray film used in the old machine Differential cost (Cost of the old X-ray machine [Sunk cost ‘The salary of the head of the Radiology Department, None The salary of the head of the Pediatrics Department None (Cost of the new color laser printer Differential cost [Rent on the space occupied by Radiology None ‘The cost of maintaining the old machine Differential cost [Benefits from a new DNA analyzer [Opportunity cost Cost of electricity to run the X-ray machines Differential cost 8. Arden Company reported the following costs and expenses for the most recent month: What is the total amount of product costs? Direct Materials $88,000 $165,000 = (DM+DL+Mo ) Direct Labor $50,000 What is the total amount of period costs? Manufacturing Overhead $27,000 $73,000 ~ (Sell ~ Admin ) Selling Expenses $30,000 What is the total amount of conversion costs? Administrative Expenses $43,000 $77,000 -(DL+ MO) ‘What is the total amount of prime costs? $138,000 =(DM+ DL) 9. Required: A partially completed schedule of the company’s total and per unit costs over the relevant range of 65,000 to 105,000 units produced and sold annually is given below: Complete the schedule of the company’s total and unit costs. (Round the variable cost aud fixed cost to 2 decimal places.) Assume that the company produces and sells, 95,000 units during the year at a selling price of $8.48 per unit. Prepare a contribution format [Total costs: income statement for the year. ‘Variable costs $234,000] $306,000] Fixed costs 330,000 $330,000) [Total costs $564,000] $636,000 (Cost per unit: Variable cost S3.60| $3.60] Fixed cost $5.08| 53.88 [Total cost per wait S8.68| $7.48 ve 234,000765,000, $330,000/105,00 95,000°S8.48 | VE = 95,0010. Sawaya Co., Ltd., of Japan is a manufacturing company whose total factory overhead costs fluctuate considerably from year to year according to increases and decreases in the number of direct labor-hours worked in the factory. Total factory overhead costs at high and low levels of activity for recent years are given below: Level of Activ Low High Direct labor-hours $66,000 $ 88,000 Total factory overhead costs $267,000 $304,400 The factory overhead costs above consist of indirect materials, rent, and maintenance. The company has analyzed these costs at the 66,000-hour level of activity as follows: Indirect materials (variable) 85,800 Rent (fixed) $127,000 Maintenance (mixed) $54,200 ‘Total factory overhead costs $267,000 To have data available for planning, the company wants to break down the maintenance cost into its variable and fixed cost elements. Required: Estimate how much of the $304,400 factory overhead cost at the high level of activity consists of maintenance cost. (Hint: To do this, it may be helpful to first determine how much of the $304.400 consists of indirect materials and rent. Think about the behavior of variable and fixed costs!) (Do not round intermediate calculations). Using the high-low method, estimate a cost formula for maintenance. (Do not round intermediate calculations. Round "Variable cost element" to 2 decimal places.) Fligh evel of activity Low level of activity $127,000 [Change He cost element Fixed cost element What total factory overhead costs would you expect the company to incur at an operating level of 72,600 direct Tabor-hours? (Do not round intermediate calculations) 11. Marwick’s Pianos, Tnc., purchases pianos from a large manufacturer and sells them at the retail level. The pianos cost, on the average, $1,484 each from the manufacturer. Marwick’s Pianos, Inc., sells the pianos to its customers at an average price of $3,100 each. The selling and administrative costs that the company incurs in a typical month are presented belo During August, Marwick’s Pianos, Inc., sold and delivered 56 pianosRequired: Prepare an income statement for Marwick’s Pianos, Inc., for August. Use the traditional format, with costs organized by function. (A "Net operating loss" should be entered as a neg number. Sales; $173,600) [Cost of goods sold $83,104 [Gross Margin $90,496 ‘Selling and administrative expenses: Selling expenses: ‘Advertising 331 ‘Sales salaries and commissions 13.468 Delivery of pianos 3.360] Uiilities 645 Depreciation of sales facilities 4935 0 0 Total selling expenses: 23,339 ‘Administrative expenses: Executive salaries 13,560) Tnsurance 8 Clerical S701 Depreciation of office equipment 870) 0 0 Total administrative expenses: 19,829) ‘Total selling and administrative expenses: 168 [Net operating income ‘$47,328 Prepare an income statement for Marwick’s Pianos, Inc., for August, this time using the contribution format, with costs organized by behavior. Show costs and revenues on both a total and a per unit basis dowa through contribution margin. (A "Net operating loss" should be entered as a negative number) Sales $173,600 (Variable expenses: ‘Clerical 2.240 Sales commissions 8.680 ‘Delivery of pianos 3,360) Cost of goods sold 83.104 0 0 |Total variable expenses: 97,384 (Contribution Margin: $76,216‘Advertsing 331 Uiilities 645] ‘Depreciation of sales facilities 4935 “Executive salaries 13,560] Insurance oR] ‘Depreciation of office equipment 870] Clerical 2461 Sales salaries S188 Ol 0 [Total fixed expenses 28,888) [Net operating income $47,328)