COST TERMS, CONCEPTS, AND CLASSIFCATIONS

Sample Problems

Problem 1 - The Plastic Company began operations several years ago. The company purchased a building and, since only
half of the space was needed for operations, the remaining space was rented to another firm for rental revenue of ₱20,000
per year. The success of Plastic Company's product has resulted in the company needing more space. The renter's lease
will expire next month and Plastic will not renew the lease in order to use the space to expand operations and meet
demand.

The company's product requires materials that cost ₱25 per unit. The company employs a production supervisor whose
salary is ₱2,000 per month. Production line workers are paid ₱15 per hour to manufacture and assemble the product. The
company rents the equipment needed to produce the product at a rental cost of ₱1,500 per month. Additional equipment
will be needed as production is expanded and the monthly rental charge for this equipment will be ₱900 per month. The
building is depreciated on the straight-line basis at ₱9,000 per year.

The company spends ₱40,000 per year to market the product. Shipping costs for each unit are ₱20 per unit.

The company plans to liquidate several investments in order to expand production. These investments currently earn a
return of ₱8,000 per year.

Required:

Complete the answer sheet above by placing an "X" under each heading that identifies the cost involved. The "Xs" can be
placed under more than one heading for a single cost, e.g., a cost might be a sunk cost, an overhead cost, and a product
cost. An "X" can thus be placed under each of these headings opposite the cost.

Direc
Variable Fixed Direct t Manufacturing Period Opportunity Sunk
Cost Cost Materials Labor Overhead Cost Cost Cost
Rental
X
revenue
Materials
X X
costs
Production
supervisor X X
salary
Production
line workers’ X X
wages
Equipment
X X
rental
Building
X X
depreciation
Marketing
X X
costs
Shipping
X X
costs
Return on
present X
investments
Problem 2 - During the month of January, direct labor cost totaled $17,000 and direct labor cost was 60% of prime cost. If
total manufacturing costs during January were $82,000, the manufacturing overhead was:

SOLUTION:
Direct Material 11,333
Direct Labor 17,000
Overhead 53,667 (Total Manufacturing Cost - Prime Cost)
Total Manufacturing Cost: P82,000

Direct Material 11,333

Add: Direct Labor 17,000
Prime Cost 28,333

Problem 3 - The following data have been taken from the accounting records of Cloud Corporation for the just completed
year.

Sales.................................................................................. ₱880,000
Raw materials inventory, beginning................................. ₱20,000
Raw materials inventory, ending...................................... ₱30,000
Purchases of raw materials............................................... ₱150,000
Direct labor....................................................................... ₱180,000
Manufacturing overhead................................................... ₱230,000
Administrative expenses................................................... ₱100,000
Selling expenses............................................................... ₱130,000
Work in process inventory, beginning.............................. ₱80,000
Work in process inventory, ending................................... ₱30,000
Finished goods inventory, beginning............................... ₱120,000
Finished goods inventory, ending..................................... ₱100,000

1. The cost of the raw materials used in production during the year was:
2. The total manufacturing cost for the year was:
3. The cost of goods manufactured (finished) for the year was:
4. The cost of goods sold for the year was:
5. The net operating income for the year was:

SOLUTIONS:
RAW MATERIALS, BEG. 20,000
ADD: PURCHASES 150,000
LESS: RAW MATERIAL, END. (30,000)
RAW MATERIAL USED. 140,000
Add: DIRECT LABOR 180,000
OVERHEAD 230,000
TOTAL MANUFACTURING COST. 550,000
Add: WORK IN PROCESS, BEG. 80,000
Less: WORK IN PROCESS, END. (30,000)
COST OF GOODS MANUFACTURED 600, 000
FINISHED GOODS, BEG. 120,000
Add: COGM 600,000
TGAS 720,000
FINISHED GOODS, END. (100,000)
COGS. 720,000

Sales. 880,000
Less: COGS (620,000)
Gross Profit. 260,000
Less: Sales Expense (130,000)
Administrative Expnse (100,000)
Net Income. 30,000

Problem 4. The manufacturing operations of Shadow Company had the following inventory balances for the month of
March:

Inventories March 1 March 31

Raw materials......................... ₱10,000 ₱12,000
Work in process..................... ₱6,000 ₱7,000
Finished goods....................... ₱30,000 ₱22,000

6. If the company purchased ₱18,000 of raw materials during March, what was the cost of raw materials used in
production?
7. If the company incurred ₱20,000 in labor and ₱30,000 in overhead, how much was the total cost of goods
manufactured?
8. If the company had total sales of ₱110,000 and total selling expenses of ₱48,000 for the month, how much was
the gross profit?

SOLUTIONS:
RAW MATERIALS, BEG. 10,000
ADD: PURCHASES 18,000
LESS: RAW MATERIAL, END. (12,000)
RAW MATERIAL USED. 16,000
Add: DIRECT LABOR 20,000
OVERHEAD 30,000
TOTAL MANUFACTURING COST. 6,000
Add: WORK IN PROCESS, BEG. 7, 000
Less: WORK IN PROCESS, END. 7,000
COST OF GOODS MANUFACTURED 65,000
FINISHED GOODS, BEG. 30,000
Add: COGM 65,000
TGAS 95,000
FINISHED GOODS, END. (22,000)
COGS. 73,000

Sales. 110,000
Less: COGS (73,000)
Gross Profit. 37,000
Less: Sales Expense (48,000)
Administrative Expnse ---
Net Income. (11,000)

Problem 5 - The following data (in thousands of dollars) have been taken from the accounting records of Lagario
Corporation for the just completed year.

Sales................................................................................... ₱9,500
Overhead............................................................................ ₱2,000
Direct labor........................................................................ ₱2,100
Cost of Goods Manufactured............................................. ₱5,800
Administrative expenses.................................................... ₱1,800
Selling expenses................................................................ ₱1,400
Raw materials inventory, beginning.................................. ₱700
Raw materials inventory, ending....................................... ₱800
Work in process inventory, beginning............................... ₱300
Work in process inventory, ending.................................... ₱200
Net Income........................................................................ ₱200
Finished goods inventory, ending...................................... ₱700

9. Prepare a Schedule of Cost of Goods Manufactured in good form.

10. Compute the Cost of Goods Sold.

SOLUTIONS:
RAW MATERIALS, BEG. 700
ADD: PURCHASES 1,700
LESS: RAW MATERIAL, END. (800)
RAW MATERIAL USED. 1,600
Add: DIRECT LABOR 2,100
OVERHEAD 2,000
TOTAL MANUFACTURING COST. 5,700
Add: WORK IN PROCESS, BEG. 300
Less: WORK IN PROCESS, END. ( 200)
COST OF GOODS MANUFACTURED. 5,800
FINISHED GOODS, BEG. 1,000
Add: COGM 5,800
TGAS 6,800
FINISHED GOODS, END. ( 700)
COGS. 6,100

Sales. 9,500
Less: COGS (6,100)
Gross Profit. 3,400
Less: Sales Expense (1,400)
Administrative Expnse (1,800)
Net Income. 200

Problem 6 - Summoner, Inc., produces water pumps. Each water pump contains a small valve that costs ₱5. During May,
600 valves were drawn from the supply room and installed in water pumps in the production process. Eighty percent of
these units were completed and transferred into finished goods warehouses. Of the units completed, thirty percent were
still unsold at the end of the month. There were no beginning inventories.
11.The cost of valves in work in process at the end of May would be:
12.The cost of valves in cost of goods sold for May would be:

SOLUTIONS:
600 x 5 = 3000
480 x .80 = 2400 .

11. 120 x 5 = 600 (3,000-2,400) x .30

12. 336 x 5 = 1680

600 x 5 = 3,000 x 2 = 600

300 units
X 0.8
X 0.7
=1,680

Problem 7 - At a sales volume of 30,000 units, Lunar Company's total fixed costs are ₱30,000 and total variable costs are
₱45,000. The relevant range is 20,000 to 40,000 units.

13.If Lunar Company were to sell 32,000 units, the total expected cost would be:
14.If Lunar Company were to sell 40,000 units, the total expected cost per unit would be:

Problem 8 - Marrell is employed on the assembly line of a manufacturing company where she assembles a component part
for one of the company's products. She is paid ₱160 per hour for regular time and time and a half for all work in excess of
40 hours per week.

15.Marrell works 45 hours during a week in which there was no idle time. The allocation of Marrell's wages for the
week as between direct labor cost and manufacturing overhead cost would be:
16.Marrell works 50 hours in a given week but is idle for 4 hours during the week due to equipment breakdowns.
The allocation of Marrell's wages for the week as between direct labor cost and manufacturing overhead cost
would be:
17.Marrell's employer offers fringe benefits that cost the company ₱40 for each hour of employee time (either
regular or overtime). During a given week, Marrell works 48 hours but is idle for 3 hours due to material
shortages. The company treats all fringe benefits as part of manufacturing overhead. The allocation of Marrell's
wages for the week between the direct labor cost and manufacturing overhead would be:
18.Marrell's employer offers fringe benefits that cost the company ₱40 for each hour of employee time (either
regular or overtime). During a given week, Marrell works 48 hours but is idle for 3 hours due to material
shortages. The company treats all fringe benefits relating to direct labor as added direct labor cost. The
allocation of Marrell's wages for the week between direct labor cost and manufacturing overhead would be:

Problem 9 - Light Company's quality cost report is to be based on the following data:

Supervision of testing and inspection activities...................... ₱29,000

Warranty repairs and replacements......................................... ₱12,000
Net cost of scrap...................................................................... ₱53,000
Test and inspection of incoming materials............................. ₱23,000
 Technical support provided to suppliers................................. ₱71,000
Disposal of defective products................................................ ₱94,000
Quality data gathering, analysis, and reporting....................... ₱47,000
Liability arising from defective products................................ ₱75,000
Depreciation of test equipment............................................... ₱22,000

19.What would be the total prevention cost appearing on the quality cost report?
20.What would be the total appraisal cost appearing on the quality cost report?
21.What would be the total internal failure cost appearing on the quality cost report?
22.What would be the total external failure cost appearing on the quality cost report?

Problem 10 - Twitch Company's quality cost report is to be based on the following data:

Maintenance of test equipment............................................... ₱95,000

Cost of field servicing and handling complaints..................... ₱17,000
Statistical process control activities........................................ ₱77,000
Net cost of scrap...................................................................... ₱62,000
Downtime caused by quality problems................................... ₱23,000
Technical support provided to suppliers................................. ₱93,000
Depreciation of test equipment............................................... ₱81,000
Supplies used in testing and inspection................................... ₱33,000
Warranty repairs and replacements......................................... ₱24,000
23.What would be the total prevention cost appearing on the quality cost report?
24.What would be the total appraisal cost appearing on the quality cost report?
25.What would be the total internal failure cost appearing on the quality cost report?
26.What would be the total external failure cost appearing on the quality cost report?

Problem 11 - Heart Company's quality cost report is to be based on the following data:

Depreciation of test equipment................................................ ₱75,000

Rework labor and overhead..................................................... ₱11,000
Quality circles.......................................................................... ₱46,000
Quality training........................................................................ ₱94,000
Test and inspection of incoming materials.............................. ₱64,000
Product recalls.......................................................................... ₱71,000
Net cost of scrap...................................................................... ₱12,000
Re-entering data because of keying errors............................... ₱52,000
Cost of field servicing and handling complaints..................... ₱25,000

27. Prepare a Quality Cost Report in good form with separate sections for prevention costs, appraisal costs, internal
failure costs, and external failure costs.