Chaper 2 Cost

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Chaper 2 Cost-Concepts and Classification

1. In what way does a typical manufacturing business differ from merchandising concern? In what
ways are they similar?
- A manufacturing company produces goods from raw materials, which is later sold as a finished
product. While a merchandising company resells goods that it purchases from its suppliers.

2. What are the basic elements of production cost?


-Direct Materials, Direct Labor, and Factory Overhead

3. Define the following costs:


a) Direct materials - are materials the become part of a finished product and can be conveniently and
economically traced to specific product unit.
b) Indirect materials - are minor materials and other production supplies that cannot be conveniently
or economically traced to specific products
c) Direct Labor - represent the amount paid as wages to those working directly on the product.
d) Indirect Labor - costs for production related activities that cannot be conveniently or economically
traced to end products.
e) Factory Overhead - are a varied collection of production-related costs that cannot be practically or
conveniently traced directly to end product.

4. Define Prime cost and Conversion cost:


Prime Cost - are all of the costs that are directly attributed to the production of each product.
Conversion Cost - are the total of direct labor and factory overhead costs.

5. Does prime cost plus conversion cost equal to the total manufacturing cost?
-No, the total manufacturing cost is equal to prime cost plus factory overhead.

6. In what way does the accounting treatment of factory overhead differ from that of direct materials
and direct labor costs?
-It is because factory overhead is untraceable in the finished goods that’s why it is harder to
determine and is more complex to compute than that of direct labor and direct labor costs.

7. Explain why the fixed cost per unit declines as volume increases. Give an example.
Fixed costs per unit decreases because the same total fixed cost is spread over more units. The more
the units produce the less the fixed per unit will be. For example total fixed cost is 50,000 from 100
units to 1000 units produced. If the company produces 100 units of product fixed cost per unit will be
500. But if the company produces 1000 units the fixed cost per unit will be 50.

8. Give examples of variable overhead costs and fixed overhead costs.


-Variable overhead costs examples are production supplies, utilities for the equipment, wages for
handling and shipping of the products. Fixed overhead costs examples are monthly rent, mortgage
payments, property taxes, depreciation of assets, annual salaries and so on and so forth.

9. How would you classify the monthly bill (plan) for Smart/Globe cellphone?
- Fixed overhead cost

10. Consider education as a product. What are the direct costs and the indirect costs to a university in
educating student?
-Direct costs would be the tuition fees and miscellaneous while indirect costs would be the
departmental fees, donations, fares and other small expenses.
Problem 1
1. A
2. C
3. A
4. B
5. C
6. C
7. A
8. C
9. C
10. C

Problem 2
1. Fixed
2. Variable
3. Fixed
4. Fixed
5. Fixed
6. Fixed
7. Mixed
8. Variable
9. Variable
10. Fixed

Problem 3
1. M
2. S
3. M
4. M
5. A

Problem 4
1. F , P
2. F , I
3. F , I
4. V , I
5. V , I
6. V , P
7. V , I
8. F , I
9. F , P
10. F , I

Problem 5
1. P102,000 (50,000 + 52,000)
2. P147,000 *(52,000 + 95,000)
3. P197,000 (52,000 + 95,000 + 50,000)
4. P21,200 (2,600 + 18,600)
5. P6,800 [(50x4,500)-(197,000+21,200)]
Problem 6
1. P530,000 (285,000 + 145,000)
2. P575,000 (245,000 + 175,000 + 155,000)
3. P860,000 (285,000 + 245,000 + 175,000 + 155,000)
4. P305,000 (160,000 + 145,000)

Problem 7
1. 99 (9 + 30 + 60)
2. 105 (6 + 9 + 30 + 60)
3. 124 [(30,000/1200) + 9 + 30 +60]
4. 150 [(24,000/1200) + (30,000/1200) + 6 + 9 + 30 + 60]

Problem 8
1. The variable cost per machine hour - 7 [(60,000-39,000)/(6,000-3,000)]
2. The monthly fixed electricity costs – 18,000 [60,000 - (6,000 x 7)]
3. The total electricity costs if 4,800 machine hours are projected to be used next month – 51,600

Problem 9
1. Compute the variable rate per machine hour. –> 7.8
2. Compute the fixed portion of Johnson’s electricity expense. –> 4,400
3. Compute the total manufacturing costs if Johnson’s actual machine hours used is 4,500. –> 50,000

Problem 10
1. 23.08 variable, 628 fixed
2.
3. 22.49 variable, 708 fixed

TRUE OR FALSE QUESTIONS


1. FALSE
2. FALSE
3. TRUE
4. FALSE
5. FALSE
6. TRUE
7. FALSE
8. TRUE
9. FALSE
10. TRUE
11. FALSE
12. FALSE
13. TRUE
14. FALSE
15. FALSE
16. TRUE
17. FALSE
18. TRUE
19. FALSE
20. TRUE
21. FALSE
22. FALSE
23. FALSE
24. FALSE
25. TRUE
MULTIPLE CHOICE
1. B
2. C
3. B
4. C
5. D
6. A
7. D
8. D
9. B
10. C
11. C
12. A
13. C
14. B
15. A
16. B
17. B
18. A
19. D
20. B

MULTIPLE CHOICE PROBLEMS


1. A
2. C
3. A
4. B
5. A
6. B
7. C
8. B
9. B
10. D
11. B
12. A
13. A
14. Answer needed
15. C
16. A
17. B
18. Answer needed
19. Answer needed
20. Answer needed

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